Once afflicted with a major illness, patients may find themselves responsible for bearing a portion of the costs. Fortunately, critical illness insurance can help alleviate this financial burden. Critical illness insurance is typically purchased as supplementary coverage to life insurance.
Its coverage extends beyond traditional health insurance, not only encompassing medical bills but also covering out-of-pocket expenses. But what exactly is critical illness insurance? How much are the premiums, and how does it operate?
According to the explanation from HealthInsurance.org, an independent health insurance information website in the United States, critical illness insurance falls under the category of supplemental insurance.
When the policyholder is diagnosed with a covered illness, the insurance company will provide them with a cash payout. Major expenses covered by certain critical illness insurances, including prominent insurance providers like UnitedHealthcare, may include:
– Heart Attack
– Stroke
– Organ Failure/Transplant
– Advanced Alzheimer’s Disease
– Renal Failure
– Internal Cancers
– Coma
– Loss of Hearing, Speech, or Vision
Critical illness insurance typically does not cover self-injury, substance abuse, illegal activities, or injuries resulting from wartime activities.
This type of insurance is designed to supplement major medical health coverage. Therefore, critical illness insurance cannot serve as the sole health protection.
According to the information from HealthInsurance.org, critical illness insurance offers various claim options, such as lump-sum payouts, monthly payouts, or per-treatment payouts.
Some single-payout critical illness policies may also offer additional clauses to increase the monthly and/or per-treatment payouts.
Upon a covered illness diagnosis, the insurance company will pay out according to the policy terms, providing the patient with the freedom to utilize the funds. UnitedHealthcare states that the payout can be used for purposes such as:
– Mortgage payments
– Medical bills
– Transportation to and from treatment
– Living expenses
– Prescriptions and other medication costs
In most states in the United States, there is typically a 30-day waiting period for critical illness claims. This means that the initial diagnosis must occur at least 30 days after the policy takes effect before a claim can be filed.
According to Anthem, a large health insurance company that has since been renamed Elevance Health, critical illness insurance requires monthly premium payments. The premium amount depends on factors such as the individual’s age, overall health condition and risk factors, the range of illnesses covered by the policy, whether it is an individual or family plan, and whether the policyholder uses tobacco products.
Taking Aflac’s critical illness insurance as an example, the cost of a policy increases with age and is typically paid in units of a $5,000 coverage amount at specific rates.
For instance, a 50-year-old Aflac customer pays $5.88 monthly for a $5,000 coverage amount. If the coverage amount is $25,000, the monthly premium would be $29.40.
Premiums increase with age. For example, a 65-year-old with a $5,000 coverage amount would pay $12.47 monthly. For a policy with a $25,000 coverage amount, the monthly premium would be $62.35.
The duration for which one should maintain critical illness insurance depends on the individual’s lifestyle and financial needs.
If an individual is still responsible for mortgage payments or childcare expenses, a critical illness could impact their ability to work, potentially affecting household income. In such scenarios, the claim money from critical illness insurance could be utilized for mortgage payments, living expenses, or childcare costs. Hence, having coverage during times when these expenses still exist may provide reassurance.
Similarly, if emergency reserves not earmarked for medical expenses are not in place, having critical illness insurance could prove beneficial for unexpected needs.
However, insurance companies set limits on policy tenure. Depending on the insurer, coverage is generally available up to age 70. After turning 65, some companies may decrease the maximum payout by half, while allowing renewal until age 70.
According to regulations from the Internal Revenue Service (IRS), from a tax perspective, critical illness insurance is classified as accident or health insurance. Per section 104(a)(3) of the U.S. tax code, if the premiums for critical illness insurance are paid with after-tax income, the claim money is typically not considered taxable income.
If premiums are of a pre-tax nature, such as those paid by employers or deducted before income tax, the claim money may be subject to taxation.
Additionally, there are other considerations to bear in mind, so it would be wise to consult with an accountant to understand the potential tax implications before purchasing critical illness insurance.
There are several benefits to purchasing critical illness insurance. Compared to the costs of health insurance, critical illness insurance is usually more cost-effective. This means policyholders do not have to pay high premiums to add an extra layer of protection to their existing health insurance.
The claim money from critical illness insurance can be used to cover expenses not included in traditional health insurance coverage.
In the unfortunate event of a critical illness diagnosis, this claim money can help maintain financial stability for the family and cover relevant expenses during the treatment period. At least, having critical illness insurance can provide some peace of mind for the policyholder during challenging times.
Before purchasing a policy, seeking advice from an accountant to understand the tax implications of the claim money would be a prudent move.