Critical Illness Fills a Benefits Gap

Sales of critical illness insurance grew 90 percent (in premiums) between 2011 and 2012. Yes, 90 percent. Perhaps it’s time to consider adding critical illness insurance to your benefits portfolio.

Critical illness plans have only been available in the U.S. since the mid-1990s. They were rather slow to take off at first, but the growth of high-deductible health plans (HDHPs) and increasing medical costs have changed that.

Medical technology background conceptWhy Your Employees Need Critical Illness Insurance

People of working age experience critical illnesses. In fact, people age 55 and under filed nearly half (47 percent) of critical illness claims in 2011. The study, by the American Association for Critical Illness Insurance (AACII) and General Re Life Corporation, also found that roughly 13 percent of policyholders who received critical illness benefits were younger than 45.

Having medical insurance can protect your employees from some of the costs of a major medical problem or serious accident. However, it doesn’t eliminate the problem. Deductibles and copayments may apply when an insured becomes ill. After a critical illness, many individuals face huge out-of-pocket health costs.

More employees today are living paycheck to paycheck. This makes any emergency a potential financial disaster. While most major medical plans limit what a member must pay for out-of-pocket medical expenses every year, HDHPs place these limits relatively high. In 2014, a family in an HDHP can pay as much as $12,700 for covered medical expenses before their health plan will pay 100 percent.

What does this mean, in real terms, for a family with health coverage through an HDHP? In a bad year, health expenses could look something like this:

Annual deductible: $2,500*
+ Balance of coinsurance paid at 50-90%, + copays, up to $10,200
= Annual out-of-pocket expenses: $12,700 (family plan)**

Of course, this doesn’t include other costs related to illness, such as payments for uncovered medical and alternative medicine treatments, transportation to and from medical appointments and income lost due to lost work time. It also doesn’t cover any employee contribution to premiums, which would have to continue while the employee recuperates.

High Deductibles + Copayments + Lack of Emergency Funds = Financial Stress.

In a recent survey, 86 percent of employers said that financial stress among employees led to absenteeism, decreased productivity and increased distraction in the past year.

Critical illness policies can help employees bridge the gap between their health care bills and what their health plan pays. These policies typically pay benefits in a lump sum, per diagnosis. When an employee receives a diagnosis of a covered illness, he or she can use policy benefits to:

  • Cover deductibles.
  • Cover copayments before the health plan’s out-of-pocket maximum kicks in.
  • Cover out-of-pocket expenses.
  • Pay for uncovered medical expenses, including experimental and alternative treatments.
  • Cover medical transportation costs.
  • Replace income lost due to illness.
  • Pay for home health care, or replace the income a family member loses to provide care.
  • Pay for modifications to living space, such as widening doors to accommodate a wheelchair, etc.

Critical Illness Insurance vs. Health Insurance

Critical illness policies differ from health insurance in several important ways.

  • First, they pay benefits only when the insured is diagnosed with a critical illness specifically listed in the policy. Health plans, on the other hand, cover all illnesses and injuries unless the policy explicitly excludes them.
  • Most policies will pay a lump sum benefit. When insured employees receive a diagnosis or treatment for one of the covered diseases or “benefit triggers” specified in the policy, they can file a claim. Depending on the particular benefit trigger, the payment could range from 50 to 100 percent of the policy’s face value.
  • Critical illness insurance pays benefits directly to the insured. This differs from a health or major medical policy, which will reimburse health care providers when an insured obtains covered services. Policyholders can decide how they use their critical illness benefits themselves.
  • Critical illness insurance cannot substitute for a major medical plan. It does not provide comprehensive medical coverage. Rather, it gives insureds the extra financial assistance they need when they suffer a serious illness.

The conditions covered by critical illness insurance vary by policy. The vast majority of policies cover heart attack, stroke and cancer. Some also cover coronary artery (bypass) surgery, kidney failure, major organ transplant, paralysis, blindness, multiple sclerosis, heart valve replacement and surgery of the aorta, according to the American Association of Critical Illness Insurance (AACII).

Like major medical policies, critical illness policies usually have exclusions or waiting periods on pre-existing conditions. Employers can offer coverage on an employer-paid basis to cover gaps in their group health plan. However, many employers offer critical illness insurance on a voluntary (employee-paid) basis.

*minimum deductible under a Health Savings Account-qualified high-deductible health plan, 2014
**The out-of-pocket limit includes deductibles, coinsurance and copayments.

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