Critical Illness Insurance Overview

Critical illness insurance provides a lump sum payment to policyholders who experience one of a few serious medical conditions, like a debilitating stroke or certain cancers, that are specified in the policy. These medical conditions often create significant financial burdens beyond the costs that traditional health insurance will cover. For this reason, critical illness insurance is typically complementary to traditional health insurance coverage.



Imagine a scenario in which a person is diagnosed with a potentially life-threatening illness. Even with the best possible health care coverage, that person is likely to experience additional financial strains that are well outside the scope of their traditional insurance policy.

For example, time away from work may lead to reduced or eliminated income. The illness itself may render the person incapable of taking care of dependents or even themselves, thereby requiring additional childcare and other assistance. Further, perhaps the treatment for the illness is not available locally and therefore requires extended travelling and accommodation expenses.

In the above scenario, critical illness insurance may serve as a crucial stopgap that enables a person who is experiencing unfortunate and often unfamiliar circumstances to maintain some semblance of financial security and normalcy, such as looking after their household and paying rent or a mortgage despite significant time away from their job or home.


How is Critical Illness Insurance Different from Traditional Health Insurance?

In some ways, critical illness insurance is similar to the traditional health insurance coverage that it supplements. For example, critical illness insurance policyholders will typically pay monthly premiums for coverage that extends to a finite list of conditions that are clearly outlined in the policy. 

However, this is essentially where the similarities with traditional health insurance end. In fact, there are substantial differences in terms of what critical illness insurance covers as well as when and how claims are paid out.



The premiums for critical illness insurance tend to be considerably smaller than the more expensive premiums that accompany traditional health insurance. 

Depending on the size of claims payment outlined in the policy, premiums for critical illness coverage may only cost 10% or less of what a policyholder's traditional health insurance coverage costs. 

Of course, the cost of the monthly premium is relative to the potential maximum claims pay out, with lower premiums earning lower maximum claims payouts while higher monthly premiums lead to larger maximum claims payouts. 


Term of Coverage

Critical Illness policies are more akin to term life insurance policies than traditional health insurance when it comes to the policy term. For critical illness insurance, many if not most policies will only remain active until the policyholder reaches a certain age, at which point the policy will expire. This is often 70 to 75 years old.


Scope of Coverage

The list of conditions that critical illness insurance will cover is significantly smaller than the range of ailments that traditional insurance will cover, sometimes only including a handful of conditions. 

Ailments and conditions that are commonly covered in critical illness insurance policies include:

  • Organ failure or replacement complications

  • Certain cancers

  • Cardiovascular problems

  • Strokes

  • Lou Gehrig’s disease 

  • Other serious though not chronic conditions

Chronic conditions are typically excluded from critical illness insurance policy coverage because the continuing nature of such maladies is better served by types of insurance with other claims payout structures beyond the capped, lump-sum payout structure of critical illness policies. 


People looking at tablet in medical setting


Payment on Claims

Capped Lump-Sum Payments

Unlike traditional health insurance which typically pays out claims directly to health care providers, critical illness insurance pays out claims directly to policyholders in a lump sum once the policyholder has been diagnosed with a covered condition and has met the policy requirements. 

Paying out critical illness insurance policies in lump sums allows policyholders to choose how best to allocate those financial resources to best meet their individual needs, which can include anything from paying a high deductible on their traditional insurance to taking a vacation if they deem rest and relaxation to be a prioritized step toward their recovery. 

How the lump sum is spent is entirely in the policyholder’s discretion.

The amount of the lump sum can vary significantly from one policy to the next depending on the cost of the monthly premiums (higher premiums = higher lump-sum claims payouts) and the specific conditions that are covered by the policy. The size of capped payouts may range from $10k up to $100k and possibly even more in some circumstances.

There is a maximum amount for each lump-sum payout per condition that is covered under the policy. For example, assume that a given critical illness policy has a maximum payout of $30k and covers 5 conditions including strokes and coronary bypass. If a policyholder has a stroke and receives the full 30k lump sum payout, and then the same policyholder has a heart attack and needs a coronary bypass, most critical illness policies will then payout an additional 30k lump sum for the heart condition and treatment. 

However, should that same policyholder then experience a second qualifying stroke or heart attack, the policy will no longer pay out a lump sum for those conditions. The policy would still pay out for the other 3 remaining conditions for which the policyholder had not yet made a claim.


Proportional Payouts Relative to the Severity of the Condition

Even when a patient experiences one of the handful of conditions that are covered by a critical illness insurance policy, full payment of the maximum lump sum requires that the condition in question meets a requisite degree of severity, as outlined in the policy.

For example, if cancer is covered in a critical illness policy that has a maximum lump-sum payout of $50k, that policy will likely stipulate that it will only pay out $10 to $15k if the cancer is stage 1 or stage 2, whereas stage 3 or stage 4 cancer might garner the maximum payout. 

If a proportional payout is made due to the limited severity of the condition experienced by a policyholder, the policy will still pay lump sums for that same condition up to the amount of the capped maximum lump sum. 

For example, assume a given policy has a $10k maximum capped lump sum for certain cancers, but will only pay out 10% of the maximum lump sum in cases where the cancer is in stage 1. In this instance, if a policyholder is diagnosed with stage 1 of a qualifying cancer, they would then be paid out $1k. However, if that same policyholder is later diagnosed with stage 4 cancer, they could then be paid out the remaining $9k to reach the amount of the maximum capped lump sum in accordance with the policy. 


Timing of Payouts

Even when a policyholder is diagnosed with or experiences one of the conditions explicitly covered in a critical illness insurance policy, the lump-sum payment, proportional to severity or otherwise, may not necessarily be immediately forthcoming. 

For example, some critical illness insurance policies have explicit delays in payment to make sure that the policyholder survives the initial onset of the condition (i.e. stroke victims may have to wait a period of several weeks as outlined by the policy to ensure they survive their stroke before their claim will be paid out).


Do I Need Critical Illness Insurance and Should I Offer it to My Employees?

A 2018 article from the Society of Human Resource Management states that 25% of employers offer some form of critical illness insurance as an opt-in benefit for their employees. This was 8% higher than the number of employers that offered critical illness insurance in 2017 and 10% higher than 2014. 

Given the trend, it’s likely that even more employers are offering CI benefits today.

There are many advantages to critical illness coverage, including relatively cheap premium payments for what can be a windfall of financial support when it’s needed most. Further, that financial support is flexible in terms of allowing the policyholder to focus those resources where they are most needed.  

The most obvious negative aspect of critical illness coverage, however, is that the small number of conditions that a given policy will cover means that there are a wide variety of significant and sometimes catastrophic medical issues that a policyholder may experience for which their critical illness insurance policy will be of absolutely no help whatsoever. 

That said, from the perspective of the employer, there is little downside to offering critical illness insurance on an opt-in, voluntary basis. 

Given the relatively low premiums, these policies are typically affordable both for the employer (in the somewhat rare event that employers are making contributions) and for the employees, even if they’re paying their own premiums entirely out-of-pocket.


People discussing insurance policy


Top Questions You Should Ask Your Broker about Critical Illness Insurance

  • What conditions does this policy cover?

  • How does the severity of each condition affect the lump sum claims pay out?

  • What are the monthly premiums? 

  • How much is the maximum capped lump-sum claims payout for each condition?

  • When does the critical illness insurance policy term expire?

  • What triggers the expiration?

  • How long after a covered condition is diagnosed or a claims-triggering event occurs before the claim can be filed and paid out?

  • Will higher maximum lump-sum claims payment policies require any additional family history or medical examination requirements for policyholders?


How to Get Critical Illness Insurance

To get critical illness insurance, you should start by talking to your insurance broker. Ask them the questions above to ensure you receive the policy that best fits your specific needs.

If you don’t have a broker already or need a broker who has experience and expertise with critical illness insurance, Mployer Advisor can help. We make it easy to find and compare top-rated insurance brokers in your area. 

Search for brokers with critical illness insurance expertise near you, and see reviews, ratings and more to help you find the best fit. Start your search now on Mployer Advisor.


About Mployer Advisor

At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.