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Critical illness insurance pays out a lump sum benefit if you suffer a serious medical condition, which may ease your financial strain during an already stressful time. You can purchase a standalone policy or add a critical illness rider to your life insurance coverage — but it has its limitations.
What's in this guide?
What does critical illness insurance cover?
Critical illness insurance provides you with a lump sum benefit when you’re unable to work due to a listed condition. These conditions vary between insurers, but may include:
- Alzheimers disease
- Aortic surgery
- Aplastic anaemia
- Benign brain tumor
- Blindness
- Severe burns
- Cancer
- Cardiomyopathy
- Coma
- Coronary artery angiography
- Coronary bypass surgery
- Deafness
- Dementia
- Diplegia
- Encephalitis
- Hemiplegia
- Heart Attack
- HIV accidental infection
- HIV occupational acquired
- Kidney failure chronic
- Loss of limbs or eye
- Loss of speech
- Loss of independent existence
- Lung disease
- Major head trauma
- Major organ transplant
- Motor neurone disease
- Multiple sclerosis
- Out of hospital cardiac arrest
- Parkinson’s disease
- Peripheral neuropathy
- Pulmonary hypertension
- Quadriplegia
- Stroke
- Terminal illness
What doesn’t critical illness cover?
Your insurer won’t pay a benefit if you suffer from a condition that isn’t specified on your policy. For a full list of covered illnesses, read your policy documents and exclusions.
What are the key features of critical illness insurance?
Critical illness insurance is a policy that pays a lump sum in case of serious illness so that you can concentrate on recovery instead of finances. Common features include:
- Coverage for common critical conditions and illnesses. Some policies have coverage for over 40 different illnesses. If you receive a diagnosis, you can begin the claim process.
- Access to premium treatment. Some insurers will also provide access to medical specialists, as well as financial help for treatment and procedures.
- Lump sum payment. This can range from $20,000 to $500,000 (if fully underwritten) depending on the illness.
- Wider range of coverage. With higher premiums, the range of covered conditions increases to include things like organ failure, HIV, intensive care or loss of senses.
- Children can be insured. Some insurers bundle the policy with added coverage for your children.
Are critical illness premiums tax-deductible?
Premiums paid are not tax-deductible, however the benefits paid from the claim are tax-free.
When will a critical illness insurance policy pay out?
Your insurer will pay out the benefit if you meet these requirements:
- Diagnosis of a covered condition. The conditions covered are listed in the terms and conditions of your policy. Depending on the condition, you can either receive a full or partial pay-out.
- Your diagnosis occurs after the waiting period. This is typically after 30-90 days from when you first purchase your policy.
- You live through the survival period. This is typically set at two weeks to a month from when you’re diagnosed with an illness. The reason behind a survival period is because critical illness coverage is designed to pay if you survive a traumatic event and not in the event of death.
What can I use the money for?
There are no guidelines to govern how you can use the payout from a critical illness insurance policy. You might use it to cover your mortgage payments or medical expenses, repay your debt, or pay for rehabilitation.
When might my insurer reject my critical illness claim?
Some of the common reasons why a claim wouldn’t be paid out include:
- Pre-existing medical conditions. Many policies will not cover illnesses that arise from pre-existing medical conditions.
- The exact illness is not covered. Most critical illness policies will have a set list of what conditions are covered. If you don’t check the exclusions in your policy, you’ll be in the dark if it comes time to make a claim — always know what is and isn’t covered.
- Nondisclosure. Your claim can be declined if you failed to disclose a pre-existing medical condition, meaning if the sickness or injury started or was diagnosed before the insurance was purchased.
- Self-inflicted. Any injuries that were caused by the person insured from attempted suicide or any other situation would typically result in a rejected claim.
When would a critical illness policy be canceled?
Consult the terms and conditions for your plan for a full list of circumstances, but be aware that your policy will end if:
- You cancel your policy.
- You are paid out the full maximum benefit available on your plan.
- You failed to disclose important details — like a pre-existing medical condition — in your application
- Your premiums aren’t paid beyond the grace period.
- The termination date is reached — either as part of the policy or age of the insured.
- A fraudulent claim is made.
- You die while your policy is active.
Life insurance vs. critical illness insurance
Life insurance and critical illness insurance work differently, and many people use both to make sure they and their family are fully protected. You can purchase policies separately or bundle them together to save money.
| Life insurance | Critical illness insurance | |
|---|---|---|
| Definition | An insurance policy that pays out when someone dies. If the policyholder has an accelerated death benefit rider, they may be able to access part of the death benefit early if they’re diagnosed with a terminal or chronic illness. | An insurance policy that pays out when someone is diagnosed with a serious illness that isn’t terminal |
| Who gets paid? | The policyholder’s named beneficiary | The policyholder |
| When do they get paid? | After showing proof of a terminal illness, chronic illness or a death certificate | After being diagnosed with a serious illness |
| What is the money used for? | Final expenses, debts, supporting children and providing for loved ones | Replacing lost income, nursing care, home modifications for disabilities and medical copays |
What’s the difference between critical illness and disability insurance?
In the event of serious illness or injury, critical illness insurance pays out a lump sum that can be used to pay debts or medical bills, make home modifications or be used as an income.
A disability policy replaces a portion of your paycheck if you become ill or injured and can’t return to work. The money can be used for expenses or as an income.
Compare life insurance
Bottom line
Critical illness insurance is important to consider for multiple reasons. It can help you cover the costs of bills, childcare, groceries and other expenses like mortgage payments or rehabilitation while you’re incapacitated. It can also protect your assets and allow you to continue with your way of living if you’re ill and unable to work.
If you also want to leave your loved ones money when you pass away, compare life insurance companies.
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