Critical Illness Insurance: What is it and How Does it Work?

Critical illness insurance is one of many supplemental insurance products that can be sold to individuals or groups. The global critical illness insurance market was valued at $124.7 billion in 2021 and is projected to reach $354 billion by 2031. A critical illness policy is a type of health insurance that pays for medical costs if severe illnesses are discovered.

At Davies, we work with clients to provide product design and pricing and filing for these policies. We also have experience in general reporting, financial reporting, and reserve certification.

For those that are unfamiliar with critical illness insurance, here are some of the most frequently asked questions our team receives from someone entering the market for the first time. Our experts have worked with many of the top insurers to develop these products and can provide more information or answer any additional questions.

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 a lump sum payment upon proof of loss.

What are the typical benefits?

Core benefit coverage may include Cancer, Cancer in situ, Heart Attack, Stroke, Coronary Artery Bypass, Kidney Failure and Major Organ Transplant.

Additional benefit coverage may include Skin Cancer (a lower flat amount), Blindness, Coma, Deafness, Paralysis, Burns, Alzheimer’s Disease, ALS, Multiple Sclerosis, or 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 to apply generally 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 type 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 it’s important to review the options carefully when considering these products.

How are these policies sold?

Policies are sold to individuals by agents/brokers or in the worksite market, sold to individuals on a voluntary or employer paid basis.

What type of underwriting is performed?

Individual policies are underwritten on a simplified basis using health related questions to inform the decision. 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, stepchildren, 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:

• Participation or attempt to participate in a felony or illegal activity.
• Alcoholism, drug abuse, or misuse of alcohol or taking of drugs other than at the 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 will be filed.

Our team of experts has worked with numerous clients over the years to launch a successful product, assist with pricing, monitoring, and re-rating. Outside of traditional actuarial roles, we have also helped our clients find available options for reinsurance, third-party administration, and sales partners.

Learn more about the Davies Life & Health actuarial services at https://davies-group.com/northamerica/insurance-services/actuarial-solutions/life-health/.