TheStreet

At a certain point in life, you begin collecting things that you hope to never use. Fire extinguishers, the phone number of a good lawyer, Rogaine (sorry guys, it happens to many of us).

Health insurance and disability insurance belong on that list. No one wants to need the doctor, and the idea of getting so sick that you can't work is terrifying. Scarier, though, is the thought of needing that kind of coverage and not having it. This is the pitch that critical illness insurers make: Pay now in case you need it later.

Be careful before listing the number of your insurer next to a great mechanic or plumber. Critical illness insurance seems like a good thing to have, but it may not be the bargain it appears to be.

What Is Critical Illness Insurance?

This insurance covers the financial risk of coming down with a serious medical condition. While not formally bundled as such, you can consider this as companion coverage to disability insurance. Both forms of coverage protect you from the losses associated with being sick.

In the case of critical illness insurance, if you come down with a covered medical condition, your policy will pay you a single lump sum. The purpose of this payment is to help you cover medical bills not covered by insurance, costs associated with your care and daily costs of living while ill.

How Does Critical Illness Insurance Work?

The purpose of critical illness insurance is to help someone with the bills and costs associated with a major, typically life threatening condition. In these situations a patient faces costs beyond what their health insurance pays, including deductible payments, uncovered treatments, costs associated with treatment and personal bills.

That last one is a particular concern, because serious medical conditions can cause someone to miss work or even lose his or her job.

A critical illness policy will cover you in the event of a major, typically catastrophic or life-threatening event. If you have one of those conditions, the policy will issue a single, lump sum payment up front. For example, say you took out a critical illness policy for $50,000, then had a heart attack. In this situation, the policy would issue a $50,000 payment.

Readers should note that while formally a critical illness policy issues a single, lump sum payment, but in practice, payment schedules may vary. However, the nature of these policies is that they pay up front rather than over the duration of your illness.

It's important to understand that, while critical illness insurance overlaps with disability insurance in design, it is not the same thing. Disability insurance protects you if you get sick and can't work. The coverage is typically expansive, meaning that most plans cover you as long as you have a legitimate medical issue. Break your leg and disability insurance kicks in; get the sniffles and not so much.

Disability insurance pays out steadily over time, covering you for lost income and work for the duration of your illness (up to your coverage limit). Critical illness insurance issues a payment all at once. They are two different forms of protection, intended for two different things.

What Does Critical Illness Insurance Cover?

Critical illness covers you in case of a critical medical condition. While this generally includes life-threatening situations, not all plans limit their coverage to just emergencies. For example, a United Health Care plan includes coverage for the following situations:

• Heart attack;

• life-threatening cancer;

• loss of hearing;

• loss of speech;

• loss of vision;

• major organ transplant;

• paralysis;

• coma;

• renal failure;

• stroke;

• carcinoma in situ; 

• and coronary artery bypass graft.

The common theme is that all conditions are either emergencies or have potentially significant, permanent consequences for the patient. Other typically covered conditions include Alzheimer's, tumors, complications of diabetes and organ failure.

A typical critical illness plan does not limit how you can spend your money. A patient may use the payment to cover several potential concerns, most often including:

Costs of medical care and treatment that their insurance doesn't pay for. This might include prescription medicine, treatments not covered by their insurance, and co-payments or deductibles.

Costs associated with receiving medical care. For many families, this can involve day care for small children, transportation and lodging near the hospital, and any special needs they have to meet during the patient's care.

Costs associated with personal expenses. A critical illness will typically disrupt someone's work life and can often mean lost income. The money from critical illness insurance can be used in the same way as disability insurance, helping to supplement this lost income for expenses like housing, food and bill payments.

How Much Does Critical Illness Insurance Cost?

Critical illness insurance is advertised as an inexpensive way to bolster your health insurance, and it costs relatively little. Monthly premiums can average between $25 and $70 depending on your specific circumstances for coverage, which can range from several thousand dollars to more than $50,000. Typically premiums cost around $30 to $40 per month for a healthy adult.

Factors that can influence your specific premiums include:

• Medical history;

• current medical condition;

• age;

• gender;

• and amount of coverage you're seeking.

However, there are several issues to consider when pricing and purchasing a critical illness plan. Despite the "get sick, get paid" image broadcast by critical illness insurers, the reality is often far more complicated than that. Specific issues can include:

• Coverage Exclusions

Critical illness insurance typically only covers a very narrow range of conditions, and in fact, may have very specific areas of coverage even within commonly understood issues. For example, a given policy might not cover all forms of cancer -- only life-threatening or types of it. Or a policy might reduce, or even eliminate, payments for repeat illnesses.

Even if your diagnosis disrupts your life, work and finances, there's a decent chance it won't be covered.

• Coverage Restrictions

Critical illness policies may also have coverage restrictions that limit or even eliminate your coverage based on your condition or your medical history. For example, even if your policy covers heart attacks, it may deny payment if you had a previous heart condition. Or a policy may cover your illness only if hospitalization lasts for a certain amount of time, or if the illness becomes life threatening.

Once again, it's quite possible to think that you're covered for a given condition only to discover that your particular tumor didn't quite tick all the boxes.

• Partial Payment

Critical illness policies typically include a wide variety of options for giving you a partial payment. Your diagnosis might not qualify you for a full payout, not being considered quite serious enough for full coverage. Your age might disqualify you, as many insurance companies reduce the full payment for senior citizens. The company might even decide that it hasn't collected enough in premiums to justify the full payment.

All of these things can leave you with a fraction of the money you counted on and paid for.

Is Critical Illness Insurance Worth It?

Increasingly, consumer advocates take a dim view of critical illness policies.

These policies are particularly advertised to people who have high deductible health insurance plans. They're billed as a way to cover the expenses that can come with paying for health care when you owe thousands of dollars before insurance kicks in. For someone who is young and healthy, in particular, this may seem appealing. Be certain to do that math, though. Depending on your circumstances, the added cost of critical illness insurance may well have you spending almost as much per month as you would pay for better overall coverage.

Insurers design critical illness policies to limit coverage as much as possible. They have narrowed the scope of these policies to only the worst medical emergencies someone can face. While, it's true, that this policy may help in the event of a qualifying, life-threatening condition, that's not the real financial risk you're likely to face. As the New York Times wrote on the subject, this insurance "exploits a cognitive bias" in the consumers: We are all far more afraid of sudden, catastrophic events than day-to-day illness.

The real costs of health insurance are chronic issues, long-term care and daily needs. You are far more likely to need coverage that protects you if you break your leg or come down with an infection, none of which critical illness plans cover.

Critical illness insurance may not sound very expensive, but even $30 per month adds up to hundreds of dollars per year. The truth is, you're probably better off putting that into HSA or FSA, a rainy day mutual fund or even just your 401(k).