Filling in the gaps.
By Grace S. Yung
While most people are familiar with traditional life, health, and disability insurance coverage, there is another type of insurance product that many do not think about. This is critical illness insurance.
With critical illness insurance, an insurance company is typically contracted to pay out a lump sum cash payment or stream of income if the policyholder is diagnosed with one or more specific illnesses that are listed in the insurance policy, or if the insured undergoes certain types of surgical procedures.
How Critical Illness Insurance Works
In many ways, critical illness insurance is similar to other types of insurance. Some of the conditions and procedures that will typically trigger benefits
include: stroke, cancer, liver failure, heart attack, dementia, paralysis, coma, lung failure, blindness, Parkinson’s disease, open-heart surgery, and lung or heart transplant.
The premium that is paid for critical illness insurance is based on the level
of coverage that is required, as well as how long the policyholder wants to keep the coverage in force. Other factors include the applicant’s age, occupation, gender, and whether or not they are a smoker.
Filling in the Income Gaps
Any type of critical illness can result in financial hardship. In fact, even those who are covered by a health insurance policy can still face difficulty in paying the rent or mortgage as well as other everyday living expenses. In addition, illness and the related medical procedures that are oftentimes necessary can place an additional—and substantial—burden on individuals and couples.
Critical illness coverage can help to keep your lifestyle—and your financial life—on track. Proceeds from a critical illness insurance policy can be used for any number of purposes, such as:
• Paying for the cost of treatment and care
• Paying for recuperative products and services
• Replacing lost income that can result from the policyholder’s decreased ability to work.
Advantages for LGBT Individuals and Couples
Critical illness coverage can be especially advantageous to those in the LGBT community. One reason for this is the inability of domestic partners to collect on federal benefits such as their partner’s Social Security disability income or survivor’s benefits.
With the advances in medical technology today, many critical illnesses are no longer a death sentence. However, they can still cause a serious depletion of your short- and long-term savings. The funds that are received from a critical illness insurance policy can help to protect your current financial situation, as well as your future retirement lifestyle.
Things to Consider before Purchasing
When shopping for critical illness insurance, there are several things to consider prior to signing on the dotted line. In doing so, you will help to ensure that the coverage best fits your particular situation and needs.
First, make sure that you have a good understanding of exactly what the policy covers. Critical illness plans will typically list the conditions that will qualify a policyholder to receive the coverage benefits.
Also, be sure that you consider placing an inflation protection rider on the policy. This will increase the benefits by a certain percentage over time. Inflation protection can be especially important for younger purchasers, as it could be many years before you file a claim, and your original amount of coverage may then be insufficient.
You will also want to consider your options in terms of how—and how long—benefits from the policy will pay out. For example, will the policy only pay benefits once upon diagnosis of a particular condition, or will you be eligible to receive additional benefits if a condition that has been successfully treated require further treatment in the future?
The Bottom Line
It is estimated that 90 percent of middle-income Americans do not feel prepared to handle the financial cost of a critical illness diagnosis. One study suggests that approximately 75 percent of Americans have less than $20,000 in savings*—an amount that could pale in comparison to the cost of a critical illness, various medical procedures, or even income replacement if one were suddenly unable to work.
Because of the serious gaps in many of today’s health insurance policies—such as no coverage for non-medical caregiving expenses—critical illness insurance can be a safety net to help protect savings and retirement funds that could quickly disappear in the event of a critical health-related situation.
When planning your insurance coverage and finances, it is essential to keep in mind that all situations call for a plan that fits with your specific needs and goals. Given this, all planning should be conducted using qualified professionals who are well versed in the areas of both tax and finance.
* “Insurance Service Center Discusses a Recent Health Study” PRWEB. PRWEB, 13 June 2013. Web. 13 June 2013.
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.
See other MoneySmart columns:
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How LGBTs can prepare.
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How LGBTs folks can prepare for living longer.
Staying on Top of the Fiscal Cliff (April 2013 OutSmart)
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Have You Made Your 2012 IRA Contribution Yet? (February 2013 OutSmart)
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Considerations for Texas and your future investments.
LGBT Partners… (December 2012 OutSmart)
Working around the denial of your government benefits
Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act
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Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
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Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?
Protecting the Things that Matter (July 2012 OutSmart)
How those in the LGBT community can use life insurance planning strategies
When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement
Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?
The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price
Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning
Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t