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Critical Illness Insurance: What Is It and How Does It Work?

Young pretty girl giving the sick woman glass of water

January 21, 2019 / by Ben Cohen, FSA, MAAA

Critical illness insurance is one of many supplemental insurance products that can be sold to individuals or groups. We work with clients to provide product design, pricing, and filing for these policies, as well as experience reporting, financial reporting, and reserve certification.

If you’re unfamiliar with critical illness insurance, here are some of the most frequently asked questions we receive from someone entering the market for the first time. We've worked with many top insurers to develop these products and can provide more information or answer any additional questions you have.

What is a critical illness policy?

A critical illness policy is a supplemental insurance policy that pays benefits when a policyholder is diagnosed with a specific illness, disease, or condition covered under the policy. Benefits are paid in the form of lump sum payment upon proof of loss.

What are the typical benefits?

Core benefits of critical insurance may include:

  • Cancer
  • Cancer in situ
  • Heart Attack
  • Stroke
  • Coronary Artery Bypass
  • Kidney Failure
  • Major Organ Transplant

Additional benefits may include:

  • Skin Cancer (a lower flat amount)
  • Blindness
  • Coma
  • Deafness
  • Paralysis
  • Burns
  • Alzheimer’s Disease
  • ALS
  • Multiple Sclerosis
  • Parkinson’s Disease

Are benefits paid for more than one condition or for the recurrence of the same condition?

Many companies provide an option for multiple critical illnesses to be paid, or for the same condition to be paid if there is a recurrence of that condition. A common example of recurrence applies to cancer benefits. If an insured goes into remission and is cancer free for a specified period (6-12 months), then they would be eligible for benefits if diagnosed with a new or the same cancer again. As another example, if the insured had a heart attack and then was later diagnosed with cancer, they could be eligible for benefits for both conditions.  

Each company has variations on the type, frequency and maximum benefits payable in these cases, so be sure to review the options carefully when considering these products.

How are these policies sold?

Policies are sold in the following ways:

  • To individuals by agents/brokers.
  • In the worksite market, sold to individuals on voluntary basis or employer paid basis.

What type of underwriting is performed?

Individual policies are underwritten on a simplified basis using health questions. Phone interviews and drug screens may also be performed.

In group settings, companies may offer a guaranteed issue option with limited benefits and any additional benefits can be purchased with simplified underwriting.

Are dependents covered?

Depending on the product design, usually dependents are covered. Dependents include spouses, domestic partners, children, step-children and other relationships as recognized by the government. Additional premiums will apply.

What are the typical limitations and exclusions?

The typical limitations and exclusions for this type of product are listed below:

  • Participation or attempt to participate in a felony or illegal activity.
  • Alcoholism, drug abuse or misuse of alcohol or taking of drugs, other than direction of a doctor.
  • War or act or war, whether declared or undeclared.
  • Intentionally self inflicting bodily injury or attempting suicide, while sane or insane.

Are pre-existing conditions covered?

Critical Illness insurance typically has a pre-existing limitation. During the first 6 (or 12) months after the effective date of the coverage, benefits are not payable for any condition or illness that is the result of a pre-existing condition. This limitation is to avoid policy sales immediately before known claims.

Final Thoughts…

What we find is that each market has its own challenges, and here at Wakely Actuarial not only do we help clients with pricing such products, but we also help with all aspects of launching a successful product by:

  • Finding the right balance of benefit combinations for the target market.
  • Packaging the benefits to minimize anti-selective behaviors.

We've worked with many clients over the years to assist with pricing, experience monitoring, and re-rating. Outside of traditional actuarial roles, we've also helped our clients find available options for reinsurance, third party administration, and sales partners.


Topics: Insurance

Ben Cohen, FSA, MAAA

Written by Ben Cohen, FSA, MAAA

Ben serves as Wakely Actuarial’s President & Consulting Actuary. He joined Wakely in 2002 and enjoys the variety in the day-to-day of his current role.

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