Plug Your Insurance Gaps With Critical Care Coverage

These policies pay lump sums to spend any way you like.
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A relatively new kind of insurance can help you withstand the financial blow of a serious illness. Insurers such as

MetLife

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,

American International Group

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and Mutual of Omaha have policies that will pay you a lump sum benefit if you are diagnosed with a heart attack, stroke or any of the illnesses they cover.

These payments, which can range anywhere from $10,000 to $500,000, can be used any way you see fit. You can put the funds toward domestic help, child care, allowing your spouse to stay at home to care for you, necessary modifications to your home or car, the cost of traveling to treatment centers, or drugs or alternative therapies not covered by your health insurance. You might even want to splurge a bit if you know your health is deteriorating.

This coverage comes as changes in traditional health insurance are leaving more consumers with gaps in their coverage. As a result of high deductibles, coinsurance and limited coverage on nontraditional treatments, you could incur a substantial amount of medical treatment costs not covered by your insurance.

The medical treatment and the recovery process for these illnesses are difficult enough; the associated financial costs can be a substantial and unexpected burden. Most of us would prefer not to tap into funds for our children's college tuition or our own retirement savings if we can avoid it.

Out-of-pocket medical costs are only one source of strain on your wallet. Your disability insurance might not kick in right away, or you might not receive 100% of your salary. Critical illness policies differ among the 40 carriers that offer them, but they typically cover life-threatening cancer, heart attack, stroke, organ transplant, coronary artery bypass surgery, advanced Alzheimer's paralysis, kidney failure, blindness, deafness and multiple sclerosis.

While most policies terminate upon payout of the lump sum, there are those that will allow additional payouts upon recurrence of an illness or the diagnosis of an illness in a different category.

These policies are relatively new in the U.S. -- most providers have only been actively marketing them for the past few years. In 2004, there were approximately 400,000 policies in force that covered at least three major illnesses, according to the latest data available from the National Association for Critical Illness Insurance. "Individuals are increasingly seeking to fill in the gaps of their insurance coverage and to protect their assets through the use of a critical illness policy," says Dan Pisetsky, the group's founder.

Critical illness insurance is usually sold as a supplement to other coverage. Colonial Supplement Insurance, a unit of

Unum Group

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, sells the plan through employers, either as a group policy or on an individual basis, but other insurers market them directly to consumers.

Group plans, which can usually be obtained without taking a medical exam, are attractive to people who wouldn't be able to obtain coverage elsewhere. However, group plans typically offer small benefit amounts, and you can't take them with you if you change jobs. It's worth considering purchasing a policy on your own, either directly or through your employer. Depending on the level of coverage you're seeking, you will have to answer a simple questionnaire or submit to a more-extensive medical review.

While policies are available to a wide range of ages, they typically appeal most to those in their late 30s to mid-40s who have significant financial obligations and recognize that their risks of suffering a critical illness are increasing.

The average benefit amount for a policy through Mutual of Omaha is $50,000, with an annual premium for a healthy 40-year-old male running at approximately $700. Rates for females typically come in about 20% lower. MetLife, which sells its critical illness policies through the group market at unisex rates, has an average size between $30,000 and $40,000 for annual premiums of $300 to $400. Do the math and figure you will be paying somewhere between $110 and $140 per $10,000 in benefit amount. If you're interested in a larger policy -- let's say $100,000 -- expect to pay a premium in the $1300 to $1500 range annually.

The policies are generally renewable for life at the same rate, although some insurers will reduce the benefit amount once policyholders reach 65.

As with life insurance, it may make sense to reduce the benefit amount (and therefore the premium) as you age and consider applying this money instead toward a long-term-care insurance policy.

You can look at all the statistics on the increase in critical illness and survival rates, but in the end, as with most insurance, it comes down to how much peace of mind is worth to you.

Donna O'Rourke joined Weiss Ratings, now TheStreet.com Ratings, Inc., in 1999, and is the senior analyst responsible for assigning financial safety ratings to health insurers and supporting other health care-related consumer products including Medicare supplement insurance, long-term care insurance and elder care information. She conducts industry analysis in these areas. She has more than 10 years experience in credit risk management and analyses. Previously she served as an assistant vice president at the Union Bank of Switzerland, where she analyzed hedge funds, insurance companies and structured products in support of the derivatives and foreign exchange businesses. She holds a bachelor of science in management from Binghamton University and a master's of science in health systems administration from the Rochester Institute of Technology.

While O'Rourke cannot provide investment advice or recommendations, she appreciates your feedback;

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