Even healthy individuals may be diagnosed with a critical illness at some point in their lives. Medical or disability insurance can cover some of the associated medical expenses and potential loss of income, but additional out-of-pocket costs can add financial pressure to an already difficult situation. Unplanned expenses such as medical insurance copays, home modifications, transportation and child care are rarely considered when providing or purchasing health care benefits, but they can quickly add up when a medical crisis hits.

Employer-sponsored critical illness insurance is designed to help with these types of unexpected costs. Most policies provide a one-time, lump-sum benefit to insureds upon diagnosis of a covered medical condition. Benefits can be used to help with items not covered by medical insurance, to supplement existing disability coverage, or to pay daily expenses while waiting for disability insurance payments to start.

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How critical illness policies work

After a medical diagnosis has been confirmed, critical illness policies pay a lump-sum benefit to the covered employee or eligible dependent. Covered conditions typically include (but aren’t limited to):

  • Cancer
  • Heart attack
  • Stroke
  • Coronary artery disease
  • Coma
  • Occupational HIV infection
  • Loss of sight, hearing or speech
  • Major organ failure
  • End-stage renal disease
  • Paralysis
  • Severe burns

Employers decide benefit face amounts and who is eligible for coverage. They can also choose whether or not to contribute toward the cost of premiums. Covered individuals can use benefits any way they choose, and most policies pay benefits regardless of any other coverage they may have.

Enhancements to standard critical illness insurance

Critical illness policies continue to evolve to match the diverse needs of today's workforce. Some carriers offer additional coverage that can be applicable to a broader range of employees, and can cover conditions including but not limited to:

    • Autoimmune diseases
    • Dementia
    • Infectious diseases
    • Mini stroke
    • Sudden cardiac arrest
    • Type II diabetes

Critical illness vs. disability insurance:

Disability insurance helps replace lost income when employees are out of work due to an illness or injury. Critical illness insurance provides additional support to help cover expenses after the diagnosis of a serious condition. Critical illness insurance can supplement disability insurance or provide an added layer of financial protection if this coverage isn’t available.

How much coverage should employers offer?

The simple answer is whatever amount can be offered on a guaranteed issue basis. Many insurance carriers provide up to $30,000 of benefit before requiring a medical exam.1 Higher benefit amounts may be available, but additional medical questionnaires are almost always needed.

Some employers also choose to offer a multiple option plan with different benefit payouts up to the guaranteed issue amount.

Are critical illness benefits taxable?

Any critical illness benefits totaling more than the costs incurred for medical care are generally taxable if the employee or employer paid the premium on a pre-tax basis. It is also important to note that critical illness benefits may affect eligibility for public assistance like federal, state or local welfare programs. For specific information, please consult a tax professional.

Health screening benefit

Many critical illness insurance policies include a health screening benefit that provides an annual cash payment to the insured when they complete an eligible wellness screening. Some policies may extend health screening benefits to a covered spouse and/or dependents as well.

Multiple diagnosis or recurrence

The unfortunate reality is that some individuals are diagnosed with more than one critical illness condition during the same policy year. In this situation, some carriers provide an additional lump-sum benefit upon the second diagnosis of a covered condition. Carriers may also offer optional recurrence benefits to cover insureds if they are re-diagnosed after fully recovering from a previously covered condition. Waiting period requirements between diagnoses may vary from days to months depending on the carrier.

For more information about critical illness coverage, read our Inside Track educational paper.

1 May vary by state, carrier, employer industry and group demographics.