When someone is diagnosed with or experiences a critical illness, such as a heart attack, stroke, or cancer, it can disrupt life for the whole family. Dealing with a potentially debilitating medical issue means that daily routines tend to go out the window — leading to all sorts of unplanned extra expenses for things like transportation, household help, additional childcare, pet care, and more.
And the chance is by no means remote: The Centers for Disease Control reports that in a given year, about 805,000 people in the US have a heart attack – that's one every 33 seconds.1 Thousands more have strokes or are diagnosed with cancer and other critical illnesses. A critical illness insurance plan can help protect your financial health by directly paying you a benefit payment that can be used for any purpose. But should you consider it?
Key takeaways
Critical illness insurance pays a lump-sum benefit payment directly to you if you’re diagnosed with a covered serious condition, such as a heart attack, stroke, or cancer, and you can use the money for any purpose.2
It is designed to complement your health insurance by helping cover out-of-pocket medical and non-medical costs like deductibles, travel for treatment, childcare, and everyday living expenses.
Because many households would need to dip into savings or take on debt after a major diagnosis, this coverage can help protect your financial health and provide stability during a stressful time.
Some policies also pay benefits for preventive care, diagnostic testing, or treatment of less severe conditions, not just the most serious critical illnesses.
Critical illness insurance can be especially beneficial if you’re concerned about higher deductibles, rising medical costs, or the impact of lost income while you focus on recovery.
What is critical illness insurance?
Critical illness insurance is a type of supplemental health insurance that pays you a lump-sum, benefit payment when a medical professional diagnoses you with a covered ailment. The benefit is paid directly to you — not your medical provider — so you can use it for out-of-pocket medical costs or other expenses that come up.
Critical illness insurance is not a substitute for traditional health insurance, which helps cover your medical bills. Instead, it’s designed to complement your coverage, since benefits are typically limited to a defined list of critical conditions.
How does critical illness insurance work?
If you or a covered family member receive a diagnosis of a condition or illness covered under your policy, you can contact the insurance company directly to file a claim. Usually, you’ll be asked to provide a doctor or hospital bill showing diagnosis or treatment for the covered condition. After a brief review period, they will send the benefit payment to you or deposit it directly into your bank account. Payout is typically a one-time lump sum, not ongoing support, and the money goes to you as the policyholder, not the medical provider.
How much will you get? Medical News Today estimates that payouts range from $15,000 to $30,000, but that varies by policy and the specific health condition.3
Is the money taxed? Tax treatment for a critical illness benefit varies depending on how the plan is funded. If your employer pays the premiums as part of a workplace benefits plan, benefits are typically treated as taxable income. However, if you pay policy premiums with after-tax dollars, the benefit typically isn’t taxable. Consult your plan documents for specifics.
Conditions commonly covered by critical illness plans
With a critical illness policy, you could be covered for a variety of serious health conditions. Specific coverage varies by plan, but here are some examples of critical illnesses and conditions your policy might cover:
Cardiac events
Heart attack
Coronary artery bypass surgery
Heart valve replacement
Cancer
Invasive cancer
Skin cancer
BRCA1 or BRCA2 mutation
Neurological conditions
Stroke
Multiple sclerosis
Parkinson’s disease
Mental health disorders
Major Depressive Disorder
Severe mental health disorder
Post-traumatic stress disorder (PTSD)
Organ-related conditions
Major organ failure (lungs, pancreas, liver)
Kidney failure (end-stage renal disease)
Major organ transplant
Other conditions and disorders
Coma
Loss of hearing, sight, or speech
Permanent paralysis
Pregnancy and childbirth conditions
Pregnancy complications
Delivery and birth complications
Surgical treatment of infertility
Childhood conditions
Cleft lip or palate
Cerebral palsy
Congenital heart defect
Note that each plan specifies its covered and non-covered conditions; typically, a critical illness policy does not cover chronic conditions, sudden injuries covered by accident insurance, or pre-existing conditions.
Reasons to consider critical illness insurance
Critical illnesses such as heart attack, stroke, and cancer are serious, stressful health conditions and events that can impact physical, emotional, and financial well-being. Critical illness insurance can be an affordable way to supplement and pay for the additional expenses that can come with serious illness. Plus, some of our policies pay out benefits for preventing, diagnosing, and treating less serious conditions. Plans may also offer mental wellness and even family planning benefits — such as support for infertility treatments.
That's why a growing number of employers are considering offering optional benefits like critical illness coverage to help support employee financial well-being. And when it's available through work, it's usually easy to get and pay for.
Critical illness insurance can be especially valuable for people with high-deductible health plans, limited emergency savings, or a family health history of covered conditions.
However, not all policies are the same, and some plans provide benefits for more health conditions than others. It's important to check what's covered before signing up.
It’s also important to know what may not be covered
These plans aren't designed to pay medical bills and shouldn't be considered as an alternative to traditional health insurance. Critical illness plans typically don't pay benefits for injuries like broken bones, which are usually covered by accident insurance.
Policies may exclude pre-existing conditions, and many common chronic conditions, like asthma, aren't usually covered. They also may not cover early-stage diagnoses that don’t meet severity thresholds.
Coverage specifics will vary by plan. The schedule of benefits defines what the plan covers — if a health condition isn't listed, you can assume it isn't covered.
How critical illness insurance compares to other supplemental benefits
Every health and medical condition is unique and can impact household finances. That's why there are different types of supplemental health insurance that cover different types of issues, including hospital indemnity insurance, cancer insurance, and accident insurance. These benefits may be offered by your employer and can be purchased alongside or in place of critical illness insurance, depending on your needs.
Hospital indemnity insurance: Can be best for hospital stays regardless of cause. Benefits are triggered by hospital admission, not a covered diagnosis. Your benefit is paid directly to you and is typically based on days hospitalized. You can use the benefit to help pay for out-of-pocket costs and other expenses that arise, like extra childcare, help with housework, or transportation to and from the hospital
Cancer insurance: Specialized support for people with cancer. Benefits are triggered by a cancer diagnosis and are paid directly to you. This coverage provides targeted financial support to help pay for treatments, medications, and screenings. Many plans pay benefits for each chemotherapy or radiation treatment session, providing a valuable source of ongoing support at a stressful time.
Accident insurance: Financial protection in case of debilitating accidents. Benefits are triggered by a specific covered accident and are paid directly to you. Benefits could help you pay for costs like ambulance rides, diagnostic testing, physical therapy and other costs that arise as you are healing.
Supplemental coverage options can complement each other, letting you choose which types of protection suit your needs best. Some employees opt for multiple supplemental policies to help ensure that they don't have to choose between taking care of their health and taking care of everyday expenses.
Take the next step
Ask your supervisor or HR department whether critical illness insurance is available as part of your employee benefits. And if you'd like more information about how to decide which employee benefits are right for you, here's a guide that can help.
Frequently asked questions about critical illness insurance
Not everyone may need this, especially if they have enough savings to deal with the financial stress that tends to accompany severe health issues. However, if you think you'll need extra financial support if you or a family member is ever diagnosed with a covered critical illness then you may want to consider critical illness insurance. Severe illnesses often require specialized treatments, extended hospital stays, and long recovery periods, which can be financially draining. This type of coverage provides a lump sum payment directly to you, and you can use the money as you see fit, even for living expenses such as groceries, rent, or mortgage payments.
According to Investopedia, some plans can cost less than $25 per month, but premium costs vary depending on the policy's specifics.4 Plans that cover more conditions and offer higher benefit levels will generally cost more than more basic plans. On the other hand, if you purchase benefits through your employer at group rates, the cost is typically lower than if you purchased a comparable plan on your own. Also keep in mind that the premiums may vary by age. Younger individuals typically pay less than older individuals.
When an unexpected health issue strikes, the out-of-pocket medical expenses — and non-medical — costs can be substantial, so many people have to dip into savings or even go into debt to cover those expenses. Critical illness insurance can be particularly helpful for people looking to supplement their existing health insurance because they’re concerned about these out-of-pocket expenses. The benefit payment can provide financial confidence if you become critically ill.
However, not everyone needs or should get critical illness insurance. Typically, the younger and healthier you are, the less likely you are to take advantage of it in the immediate future. On the other hand, you may not want to put off getting it for too long because if you develop a health issue, it may be considered a pre-existing condition that won't be covered. Those struggling to afford traditional health insurance coverage should prioritize that before considering a supplemental plan like critical illness insurance. And people on the other end of the financial spectrum with significant savings and assets may not need this added layer of financial protection.
Along with their advantages, critical illness policies can have drawbacks. There’s the cost to buy critical illness insurance, which may or may not work within your budget. Policies may have waiting periods before benefits are paid out. Payments are one-time, so they don’t provide ongoing income support like disability insurance, and the premium could increase as you age. Also, you may have some overlapping protection from another source.
Before purchasing critical illness insurance – whether through work or on your own – you should always read through the schedule of benefits to understand what’s covered and how benefits are paid.
A critical illness policy provides financial support following the diagnosis of a covered critical illness. The benefit is paid to you so that you can focus more on recovery and less on expenses, such as added childcare, specialized equipment or home modifications. Plus, some policies pay out benefits for preventing, diagnosing, and treating less serious conditions. The financial support it provides can help keep you from depleting your savings or going into debt while you are dealing with a serious health issue.
Tax treatment of a critical illness insurance benefit varies. If an employer pays for the premiums as part of a group workplace plan, benefit payments are typically treated as income. For policyholders who pay their premiums with after-tax dollars, benefits are often not taxable. Consult your plan documents for specifics.
