Critical care policies reach critical mass

Insurance carriers are offering new products that pay a lump sum to policyholders diagnosed with a serious health condition. (See Critical Care, the Insurance Industry’s Latest Push in the Wall Street Journal.) In the past such policies usually only covered cancer, but have expanded to include other serious illnesses that patients used to die from but which they are now more likely to survive.

One reason for the plans’ popularity is that medical expenses now contribute to about half of personal bankruptcies. Many of those affected actually had health insurance when they got sick. The problem are that insurance doesn’t cover every expense, patients may stop working and lose their employer based coverage, and premiums may become affordable for those with individual coverage.

Critical care plans serve a need but there are other solutions:

  • An expert quoted in the Journal suggested investing in a personal trainer instead to stay healthy. That may work in the aggregate but won’t help someone who gets heart disease or cancer anyway
  • Disability insurance is another alternative. A critical care policy holder quoted in the article was worried because his disability insurance only covered 60 percent of his salary, but he probably didn’t realize that unlike his salary the disability payout is non-taxable
  • Saving a higher percentage of income. That way you’re more prepared for whatever strikes, whether it’s on the list of covered conditions or not
July 14, 2005

2 thoughts on “Critical care policies reach critical mass”

  1. .
    Good post, and I think you hit the highlights. Coupla things that stand out for me tho, as one in the insurance biz:

    First, it is vitally important that one have adequate disability coverage. This should come before any specialty or critical illness plans. After all, if you fall off the roof (which just happened to a good friend of mine), you’re critical, but you aren’t “ill.”

    Second, be careful setting up the DI plan. You mentioned the tax implications, and you’re mostly right, but there are hoops:

    If you own and pay for your own coverage, and take no tax deduction on the premium, then there’s no tax on the benefit.

    But a lot of folks make the mistake of running their DI coverage thru their FSA or other qualified reimbursement account, and that puts benefits back in play, tax-wise.

    Finally, some employers pay for either part or all of the premiums for group DI coverage (usually Short Term). If that’s the case, then it’s considered “salary continuation,” and is taxable. Not necessarily bad, but different.

    Good post.

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