It’s estimated that more than 75% of healthy individuals over the age of 40 will become critically ill at some point during their lives.¹ While medical and disability insurance can help pay for the cost of care and potential loss of income, 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 can quickly add up when a medical crisis hits.

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.


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 how much benefit to offer and who is eligible for coverage. They can also choose whether or not to contribute toward the cost of premiums. Once the benefit is paid, insureds can use it any way they choose, and it’s paid regardless of any other coverage they may have.

Critical illness vs. disability insurance:

While disability insurance is intended to help individuals maintain their standard of living while recovering from a disabling 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 $50,000 of benefit before requiring a medical exam.2 Higher benefit amounts are available, but additional medical questionnaires are almost always needed.

Some employers choose to only offer the guaranteed issue amount while others will create a multiple option plan. This scenario gives employees the ability to buy more robust coverage if they wish to go through the medical underwriting process.

Are critical illness benefits taxable?

Yes, depending on who pays the premium and how it’s paid—with pre- or post-tax dollars. Generally, benefits will be considered taxable income if:

  • The employer pays 100% of the premium.
  • The employee pays 100% of the premium with pre-tax dollars.
  • The employer pays a portion of the premium and the employee pays the remainder with pre-tax dollars. (If the remainder is paid with post-tax dollars, only a portion of the benefits will be considered taxable.)

If an employee pays 100% of the premium with post-tax dollars, benefits are generally not considered taxable income to the employee. This is a high-level overview; for specific information about the taxation of critical illness benefits, consult your tax advisor.

Health screening benefit

Many critical illness insurance policies include a health screening benefit. This benefit provides an annual cash payment to the insured when they receive eligible wellness screenings.

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.

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

 

1Cortright, Dustin. “Critical Illness Plans: Addressing Your Client's ‘Needs.’” Health Care Reform Magazine, Dec. 11, 2018, www.healthcarereformmagazine.com/critical-illness-plans-addressing-your-clients-needs/.

2“What Is Critical Illness Insurance and What Does It Cover?” HealthMarkets, Nov. 20, 2018, www.healthmarkets.com/resources/supplemental-health-insurance/critical-illness-insurance/.