When working on your insurance plan, it's important to understand the differences between types of coverage, especially those that sound similar. For example, a critical illness policy might sound like a type of health insurance — but in reality it plays a very different role.
Here we cover the difference between critical illness insurance and health insurance, as well as how to consider their usefulness to your health and financial goals.
What Is Health Insurance?
Health insurance helps pay for your medical treatments. Such treatments can include seeing your doctor, going to the emergency room, getting surgery or receiving prescription drugs.
Health insurance doesn't give you cash, but instead pays covered expenses when you need medical care. Depending on your insurer, they may pay the doctor or hospital directly or reimburse you for payments you've already made. But a health insurance plan will not just give you money to spend as you see fit. It only covers specific medical expenses, as defined by the terms of your plan. Some plans will only pay medical providers who are in the insurer's network, while some will help cover out-of-network services as well.
Most health insurance policies do not have a limit on how much they'll pay out. So long as you have medical bills that are covered by the policy, the insurer will continue to pay them. They do expire at some point, however, after which you'll need to renew — usually through your or your spouse's employer, but on your own if you're self-employed. The premium and coverage rules could change for the new policy.
What Is Critical Illness Insurance?
The goal of critical illness insurance is to assist with the financial costs of a major illness not paid for by regular health insurance. Remember, critical illness insurance does not replace the need for health insurance. When you sign up, your insurer will list conditions covered by the policy. These could include heart attacks, strokes, cancer, organ transplants, kidney failures and other serious and potentially costly problems.
These policies do not directly pay medical bills. Instead, you pick a set amount of coverage when you sign up, like $50,000. If you're ever diagnosed with one of the conditions listed by the policy, the insurer will send you a check for the agreed-upon amount.
You are then free to spend that money however you see fit. You can use it to pay for: out-of-pocket medical costs that comprehensive medical insurance may not cover, such as deductibles and copays; unexpected recovery costs, like extra childcare, rehab or other assistance you may need during your recovery; and everyday costs, such as mortgage payments, groceries and utility or credit-card bills.
When you sign up for critical illness insurance, the policy typically lasts for a lengthy period, like 20 years, until age 75 or possibly for your entire life. The coverage and premiums will stay the same and in-force this entire time, as long as you keep up with the premiums. Critical illness coverage is not comprehensive health insurance coverage (often referred to as "Major Medical Coverage"). It doesn't satisfy the individual mandate of the Patient Protection and Affordable Care Act, nor does it meet the requirements of minimum essential coverage as defined by federal law.
Who May Want to Use Each?
The majority of Americans, roughly 91 percent, have health insurance. It's a requirement under the Affordable Care Act, which states that if you don't have health insurance, you'll owe an extra tax penalty (although this penalty can be waived, depending on your income). Health insurance is a common form of coverage because of this penalty, as well as the high potential cost of medical bills.
Critical illness coverage is more of optional add-on. The government does not require you to sign up. It can be a beneficial perk if you have the budget to pay for it on top of your health insurance premiums. If you're worried about developing a critical illness, perhaps because of your family medical history, you might consider seeking this additional coverage.
Managing Coverage Restrictions
The amounts and ways they pay are key differences between critical illness and health insurance. Health insurance policies have a set list of what treatments they'll cover and what they won't. For example, they might not cover a new, experimental drug or a procedure from an out-of-network hospital. A critical illness policy could help pay for these treatments while you use your health insurance for other (covered) expenses.
On the other hand, critical illness policies have a set limit to how much they'll pay. While they pay the stated amount in cash, check or transfer, there's nothing else following that, even if you have more bills. These policies are also not a suitable replacement for regular health insurance, because if you receive just a single lump sum, even if it's for $100,000 or more, your medical bills could possibly exceed this for an expensive disease.
You should also keep in mind that while you're guaranteed to be able to buy health insurance, regardless of whether you have medical conditions, this isn't true for critical illness insurance. A provider can deny you coverage if you already have one of the qualifying conditions or a high risk of developing one. Buying coverage when you're young and healthy can help increase your chances of qualifying at a lower rate. Product availability, benefits, coverage, exclusions and limitations may also vary by state.
Using Both Types of Insurance Together
By combining critical illness coverage with your health insurance policy, there's a chance you might be able to potentially lower your health insurance premium. When you sign up for health insurance, you may be able to pick the size of your deductible. A policy with a larger deductible typically charges a lower premium, since you'll pay more out of pocket if you get sick.
You could sign up for a critical illness policy knowing that if you ever had a serious medical condition, you could use that payout to help cover the deductible, along with any other uncovered expenses. Until that point, you would pay a lower health insurance premium.
Because of these advantages, critical illness insurance can be a valuable complement to your health insurance, but it's definitely not a replacement. Understanding the strengths and limits of each type of coverage can help you find the right balance to deal with any future medical expenses — even the more serious ones.