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Critical-illness plans are not for everyone

Each year, 700,000 people experience a stroke, 340,000 have a heart attack and 1 million are diagnosed with cancer.

If any of these unfortunate events happened to you, would you have enough money to cover lost wages, pay for medications not covered by a traditional health plan, or other incidentals?

Insurance companies hope these statistics scare you straight into purchasing a critical-illness insurance policy. But other financial experts say it's a waste of money to pay for a policy that only insures you for specific illnesses.

Critical-illness insurance is not medical or life insurance, but a policy that covers the financial gaps when you suffer a heart attack or stroke or are diagnosed with a major illness, such as cancer, or you need a transplant. Once known as 'cancer' insurance, many companies are now expanding their policies to include several diseases or conditions, including but not limited to renal failure, blindness, paralysis, Alzheimer's disease, and terminal illness.

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What it is -- and is not
'Cancer' policies are still available, but understand it's not medical insurance. Most people are covered for cancer and other illnesses under a major medical insurance policy. Critical-illness insurance provides extra funds to pay any costs not covered under your traditional health insurance policy or whatever else you want to spend the money on. It's also not a life insurance policy; you will be the one to receive the money after you are diagnosed or ill. Life insurance takes care of your beneficiaries and funeral expenses.

Critical-illness policies can be purchased in various increments from $5,000 to $200,000. You pay monthly premiums (a $50,000 policy may have a monthly premium of approximately $35, depending on the insured's age) that can increase as you age.

The policy works like this: Let's say you purchase a $100,000 comprehensive illness insurance policy that covers heart attacks, stroke, invasive cancer or organ transplant. If you have a heart attack or stroke or are diagnosed with one of these illnesses, you will typically receive a lump sum payment of $100,000. This payment can be helpful if you need to pay off debts, are losing income while receiving treatment, need to pay for uncovered medical expenses or for whatever reason you want.

Lori Suggs has had two kidney transplants and is now on disability. She knows how hard a medical illness can be -- not only physically, but also financially. "It is very stressful wondering where you are going to find the money for bills, medications, etc.," says Suggs, who lives in Connecticut and has medical insurance, but disability funds only stretch so far for other expenses.

If Suggs had known about critical-illness insurance before she had gotten sick, she may have purchased it, saving herself from some of this financial heartache.

Feeding off fear
But financial experts agree that these policies feed off fear while urging you to invest money in a plan where the odds are against your ever using it. "Comprehensive illness insurance is extra profitable for the insurance companies," says Jordan Goodman, author of "Everyone's Money Book."

And, he adds, there are limitations and restrictions and it can be difficult to collect. Some restrictions include:

  • a waiting period after diagnosis to receive payment
  • specific criteria to meet to receive payment
  • the amount paid for each covered illness
  • riders that must be purchased
  • limitations on pre-existing conditions.

You cannot purchase insurance for a condition that you already have and, in most cases, if you are at high risk for, say, a heart attack, you will be turned down.

Some reject it flatly
"You don't want critical-illness insurance," says Grace Weinstein, a financial expert and author of "The Procrastinator's Guide To Taxes Made Easy."

"There's very little point in insuring against one specific illness when you don't know what illness you're going to get. These critical-illness insurance policies create an unreasoning fear of cancer when there are so many other illnesses that can be emotionally, financially and physically catastrophic."

But Steve Farish, partner at Palmer & Cay brokerage and consulting firm in Columbia, S.C., disagrees. "Critics can't make a decision on the product," says Farish. "Every situation for every person is different; it fills a need for a lot of people."

Farish says his firm started selling the product about five years ago as part of group insurance policies for associations or businesses. Typically, the prices for the group policies range from $2 a week for smaller policies on up. For individual policies, the more comprehensive your coverage and the older you are, the more expensive the policy can be. His company does not work with groups of less than 15 people and he admits that individuals will have a harder time getting a critical-insurance policy.

"For group policies it all depends on the underwriting, but restrictions on individual policies are much more strict," says Farish. "You may or may not get a policy. Every carrier has a different questionnaire and one wrong answer can get you turned down."

Sales of critical-illness insurance have been booming in the United Kingdom and Canada, but so far U.S. sales have been sluggish. According to an article written by Daniel Pisetsky, founder of the National Association of Critical Illness Insurance, only 40 American individual, worksite and group insurers are selling the insurance.

Whether or not you decide to purchase the insurance, and how much, should depend on your current health insurance plan, your assets, your existing expenses and what you might receive from disability insurance or other financial resources. Remember, however, that the odds are against your ever using it.

Lisa Iannucci is a freelance writer based in New York.

-- Posted: July 28, 2004

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