High-deductible health plans can be something of a double-edged sword: Consumers benefit from relatively affordable monthly premiums, but could find themselves in a real pinch if a serious illness were to strike. (Read How High-Deductible Health Plans Work for more on costs and coverage.)
In recent years, the industry has tried to allay those fears by offering something called critical illness insurance. Basically, it amounts to an added layer of protection for those who would otherwise face hefty out-of-pocket expenses.
Should you experience a specific acute illness like cancer or a heart attack, the carrier cuts you a check that you can use however you see fit, whether it’s paying the medical bill or taking care of your mortgage payment while you’re out of work. Coverage limits vary – you could be eligible for a few thousand dollars all the way up to $100,000, depending on your policy.
Part of what makes these policies appealing is that they generally don’t cost a lot, especially when you get them through an employer. Some smaller plans run as little as $25 a month, which looks like a bargain compared to the cost of a typical, low-deductible health insurance policy.
Growing Popularity
Forty-four percent of employers now offer critical illness coverage, according to the consulting firm Willis Towers Watson, and that number has been steadily growing over the past several years. By 2018, the firm estimates that more than 70% of businesses will make these plans available to their workforce.
One of the reasons that companies have been keen to add these plans is that they recognize employees are worried about high out-of-pocket expenses with a high-deductible plan. Unlike other healthcare benefits, workers generally bear the entire cost of critical illness plans. That makes it a money saver for companies as well as workers.
Consumers can also buy these policies on the individual market, although they won’t benefit from the discounted “group rate” that is available to employees. It’s likely you’ll have to pay a little more for similar coverage, and, in contrast to most workplace plans, you may have to go through medical underwriting.
Limited Coverage
Despite these plans’ low price tag, some healthcare experts are skeptical as to whether they really are a good deal for consumers. One overarching concern is that they’ll only reimburse you for a somewhat narrow range of illnesses. Some plans only cover cancer; others include additional conditions like heart attacks, organ transplants and strokes. If the illness you’re diagnosed with doesn’t fit the definition of a covered illness, you’re out of luck.
The more illnesses that are covered on your plan, the more you’ll pay in premiums. A 45-year-old female with an individual, cancer-only plan from Humana, for example, will pay roughly $37 a month for $25,000 of coverage, according to a sample quote on the company’s website. That same woman would pay about $79 if she expanded the coverage to include coronary illnesses, organ transplants and certain other conditions.
Seniors should be particularly careful about these policies, some of which include so-called “age reduction schedules.” That means your potential insurance payout shrinks as you get older.
3 Smart Alternatives
Insiders point out that there are alternative forms of coverage without all these restrictions. Disability insurance, for example, provides income when you can’t work for medical reasons and the financial protection isn’t limited to a narrow set of illnesses. (Get additional details from Intro to Insurance: Disability Insurance.)
Consumers with a high-deductible plan can also make contributions to either a health savings account (HSA) or flexible spending account (FSA), both of which offer tax benefits when used for qualified expenses. (See Comparing Health Savings and Flexible Spending Accounts for more.) You can simultaneously build a separate savings account to cover nonmedical outlays that could arise if you have cancer, for example, and have take leave from your job. (For more on the topic, see Why You Absolutely Need an Emergency Fund.)
The Bottom Line
If you picked out a high-deductible plan for cost reasons, it’s important to plan for a worst-case scenario. Before you decide to purchase critical illness coverage, consider its restrictions. You may decide that there is a better way to handle those out-of-pocket costs – such as a health savings or flexible spending account and/or your own rainy day fund.
You may also be interested in Critical Illness Insurance: Who Needs It? and Critical Illness Insurance: Get Paid If You Get Sick.
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