In life, we have no way of knowing when or if we will be affected by a critical illness. Critical illness is impossible to expect, but it is possible to plan for. Having an up to date critical illness cover policy can make an enormous difference if you are diagnosed with some type of critical illness. But what is critical illness cover, and what illnesses does it cover?
Critical illness cover is a type of insurance you can apply for to help protect you if you are afflicted with a serious health condition. This policy covers medical conditions such as cancer, renal failure, paralysis or organ transplants. Different providers may have other conditions classed as critical illness.
Many people subscribe to the thought ‘health is wealth’. When you take care of your health, you are better equipped with the tools you need to face life’s challenges. But, in reality, maintaining our health is not always up to us.
Sometimes we are unlucky enough to be struck down with a critical illness through no fault of our own. That’s why personal risk management and insurance is so important.
This article will answer the top ten burning questions you may have about critical illness cover.
Table of Contents
What is Critical Illness Cover?
Critical illness cover, also called trauma insurance or recovery insurance, is a policy that offers financial protection if a medical condition is going to impact your life significantly. It may be bought as standalone insurance or as a rider to life insurance or total and permanent disability insurance.
The cost of critical illness cover depends on the cover amount you choose and other factors such as your age, medical history, and occupation. Your insurer will also ask about your hobbies, current health status, and lifestyle, including your smoking and drinking habits.
If you are predisposed or in the high-risk category to a certain medical condition, you may not be eligible to cover that medical condition, or you may be charged a higher premium. If this is the case, your insurer will offer two options for premium payments:
- Stepped premium – Stepped premium starts at a lower cost but may go up annually as you age, and your mortality risks increase.
- Level premium – Level premium costs are higher than stepped premiums because the premium doesn’t change as you get older.
Your critical illness insurance will pay you a lump sum payout if you suffer from a serious illness or injury that prevents you from working or completing everyday tasks while you recover. This sum aims to lessen the financial impact of your unforeseen health issues.
You can use the lump sum payment for treatment costs and other expenses such as home care services or rehabilitation services. The insurance amount can also be a replacement for income loss or be used to purchase assistive devices or mobility aids like wheelchairs, crutches, or hearing aids.
Additionally, the benefit can help pay for mortgages, credit card debts, or home modifications. However, for you to receive the lump sum payment, your illness must be included in the insurer’s list of covered critical illnesses and injuries.
Your critical illness cover will end once you receive the full benefit. Once your critical illness cover terminates, you can apply for a new policy. However, the cost of the premium and the cover amount will depend on your current health status.
How Can I Get Critical Illness Cover?
There are two primary ways to get critical illness cover. That is as a stand-alone cover or as an inclusion in your life insurance policy. The key difference between these options is that you are typically only eligible for one payout when your critical illness cover is integrated with your life insurance.
Depending on the option you choose, the price will vary. If you opt to buy critical illness cover as stand-alone insurance, you can expect to pay more. This is because you will receive a payout if you are diagnosed with a critical illness, but your life insurance will keep running. Hence, you will still be paying for your life insurance. This also means you will still receive your life insurance payout when you pass.
If you choose to integrate your critical illness cover with your life insurance, you will only receive one payout. This will either be a death payment or critical illness payout, depending on which comes first. As you are only entitled to one payout, this option tends to be more affordable.
Similar to life insurance, you can purchase critical illness cover as direct or retail (advised) insurance. This means you can purchase it straight from the insurer or through someone like your financial advisor.
It can be difficult to figure out which option is best for you. If you have any concerns or questions on your personal situation and which process you should use to get critical illness cover, it is best to speak to a professional financial advisor.
Is Critical Illness Cover the Same Thing as Trauma Insurance?
Yes, critical illness cover and trauma insurance are the same. These terms are often used interchangeably. So if your provider only provides critical illness cover or trauma insurance, no need to worry. You will be entitled to the same benefits for both.
Some insurance providers even refer to this cover as recovery insurance. Essentially, all three terms refer to the same style of insurance policy.
What Is the Difference Between Critical Illness Cover & Income Protection Insurance?
Critical illness cover and income protection insurance are financial backups should you experience a serious injury or illness, the difference being critical illness cover is provided as a lump sum, while income protection is paid monthly. Critical illness cover is also only paid out under certain medical conditions.
Below are the key differences between critical illness cover and income protection insurance.
|Critical Illness Cover
|Income Protection Insurance
|Covers critical medical conditions listed in your insurance policy
|Covers lost income if you need to take time off from work due to illness or injury
|One-time lump sum
|Monthly payments of up to 75% of your income before tax
|Release of Payment
|You can receive the lump sum after your claim is validated and approved
|You start receiving the monthly payments after the waiting period has elapsed
You typically choose the waiting period upon taking out the policy. Options of waiting periods could be as short as one week or as long as 52 weeks.
Pros & Cons of Critical Illness Cover
Critical illness cover can provide a valuable safety net when you’re facing an already difficult diagnosis. However, like any insurance product, you’ll need to do your due diligence when deciding if it’s right for you.
Here are some of the advantages and drawbacks to consider when weighing up critical illness insurance.
Pros of Critical Illness Cover
Critical illness cover offers many benefits. Here are some:
- You can receive the lump sum immediately as long as your claim is valid.
- You can spend the cover amount however you want and don’t have to submit receipts as proof.
- You can invest a portion of the cover amount on another insurance policy or save some for your children’s education expenses.
- If you get a critical illness cover with dependent coverage, you can use the cover amount caring for a qualified dependent, like your child.
- You can hire a carer, nanny or house help to look after you or your children.
Cons of Critical Illness Cover
Just like other types of insurance policies, critical illness cover also has a few drawbacks, including:
- Your trauma insurance may not cover all types of critical illnesses.
- You can only claim once. Likewise, if your critical illness cover is combined with life insurance, you only get to claim once. Meaning if you make a claim and receive the lump sum benefit for a critical illness, you won’t get anything when you pass.
To make sure that your critical illness cover fits your needs, you can consult with a financial advisor or insurance broker. A professional financial planner can help you find a deal that best meets your budget and requirements. They also know insurance providers that allow more than one payout or can arrange multiple, smaller payout amounts for a single claim.
What Illnesses Are Covered by Critical Illness Cover?
Critical illness cover provides financial payouts for conditions that would significantly affect the quality and length of your life. The specific illnesses that will be covered differ among insurance providers and policies. The best way to check if your illness is covered is to refer directly to an insurance provider.
Critical illness insurance may provide payment for the following common conditions:
- Some types of cancer
- Heart attack
- Heart surgery
- Brain tumour
- Alzheimer’s disease
- Major organ transplant
- Multiple sclerosis
- Parkinson’s disease
- Permanent blindness
- Permanent loss of hearing or speech
- An illness that results in intensive care treatment
- An illness that results in coma
Is Covid-19 Covered by Critical Illness Cover?
At this stage, COVID-19 is still not commonly covered by critical illness insurance or trauma insurance. Whether coverage inclues COVID-19 related illness or complications will depend on the individual insurer and policy conditions.
Some insurers have processed COVID-19 related critical illness claims, while other insurance providers are amending their trauma insurance policies to include COVID-19. While other life insurance policies don’t explicitly cover COVID-19 in their Critical Illness Cover, they also don’t impose any exclusions for those who are suffering, or have suffered, from COVID-19.
Over time, we expect that more and more Critical Illness Cover policies will be updated to cover COVID-19. However, the best way to know if COVID is currently included in the list of covered critical illnesses is to talk to your insurance broker directly.
While a COVID-19 diagnosis is not commonly covered by critical illness cover, if your diagnosis leads to severe complications such as heart attack or kidney failure, these may be included as a critical illness in your policy.
Is Mental Illness Covered by Critical Illness Cover?
Most insurers do not consider mental health conditions, like depression and anxiety, as critical illnesses. Although mental illness may have the characteristics of an ailment that would be covered by critical illness cover, as of 2022, most critical illness plans do not cover mental health issues.
During the underwriting process, insurers review the medical background of a client to determine what type of insurance policy suits their needs. If a client has a history of mental illness, the insurance provider will assess the severity of the condition, its effect on your occupation and lifestyle, and the success of treatment and symptom management strategies before deciding on your cover.
What Illnesses are Not Covered by Critical Illness Cover?
Critical illness insurance generally only covers severe illnesses that require long-term treatment. Diseases or common illnesses that are highly treatable or manageable, like fractures and backaches, are not covered by critical illness cover.
Pre-existing medical conditions or any health condition you experience before getting critical illness insurance will not be covered by your trauma insurance policy either.
Is Critical Illness Cover Expensive?
Critical illness cover can cost less than $20 a month for someone young, healthy and in a low-risk job, and can be a few hundred dollars a month if your health is deemed high risk or if you are in an older age bracket.
The premium for your critical illness cover is calculated based on several factors. These include age, gender, smoking status, current health, nature of your job, and other factors that may affect your chances of being diagnosed with a critical illness. The cover amount and the policy term also affect the premium cost.
You can expect to pay a higher premium if you:
- Work in high-risk industries like oil and gas, chemical manufacturing, construction, or the military
- Participate in extreme sports and hobbies such as scuba diving, mountain-climbing, and motorsports
- Are a heavy smoker, overweight, or have high blood pressure
- Your family has a history of diseases
Insurers have different ways of calculating their premium cost, so it is better to consider multiple insurance providers before you commit to one.
For example, the monthly premium for a 35-year-old non-smoking male ranges from $11- $27. If he chooses to bundle the critical illness cover with life insurance, the monthly premium amount goes up to about $16 – $47.
For a 35-year-old smoking male, the monthly premium for trauma insurance alone ranges between $26 – $58. If combined with life insurance, the monthly premium can be $29 – $100.
How Much Should I Spend on Critical Illness Cover?
You should only spend enough money on your critical illness cover to provide you with the amount you need to survive. Anywhere between $50 and $200 per month can make for a considerable amount of critical illness cover, should you need it.
The amount of cover typically ranges from $50,000 to $500,000. Remember, the cover amount you choose impacts the premium you have to pay. Before selecting the cover amount, check the costs you have to cover should you undergo treatment for a critical illness. Here are some of the costs you can consider:
- Loans or mortgages you have to pay off and the remaining term for each
- Regular bills including rent, utilities, credit card, streaming services, and car insurance
- Living expenses including meals, petrol, personal care
- Home renovations needed while recovering from critical illness
- Private medical care
Also keep in mind that your needs may change over time, so you also need to factor in future expenses like school fees for your children.
When Can I Claim on Critical Illness Cover?
You will be able to claim on your critical illness cover in the event that you are diagnosed with a serious illness that is covered under your policy by the provider. You will only be eligible to claim if you meet the criteria of your policy and if your illness is listed by your insurer.
As soon as you receive the diagnosis from your doctor, you should get in touch with your insurer and discuss your options. Be sure to have your critical illness cover policy and policy number with you when you contact them.
Your healthcare provider will let you know what forms and documents you need to prepare for lodging a claim. Typically, you will need to submit details of your insurance policy, proof of identity, and supporting medical documents from your doctor. You may also need to provide details like your duties at work, the number of days you have missed at work due to the illness, or the activities you have done while off duty.
How Long Will My Critical Illness Claim Take to Process?
You should expect to see your critical illness claim to be processed in around eight weeks. This time allows for the claim to be properly processed, but the process can be much faster if you provide the right information about your claim upfront. Again, the exact timeline will depend on your insurance provider.
The time frame involved in settling your critical illness claim depends on the documents that you submit and whether more information is required by your insurer. To make sure there are no delays in processing your claim, you need to disclose all the information related to your medical condition. Also, ask your claims processor what the next steps are and the expected completion time for each step.
Do note that insurers may have different criteria, (e.g. nature and severity of the critical illness) for accepting and validating claims. It is essential to read the Product Disclosure Statement (PDS), so you are aware of what conditions are required for paying out the cover amount. A claim could be denied due to the following:
- If the illness is caused by a pre-existing medical condition
- The exact illness is not included in the list of covered critical illnesses
- If you fail to disclose a pre-existing medical condition when you first applied for the insurance
If your claim is denied, you can appeal to your insurer and request them to review your claim again. Should your claim be denied a second time, you can bring your concern to the attention of the Australian Financial Complaints Authority.
Is Critical Illness Cover a Taxable Benefit?
The lump-sum benefit you receive when your critical illness claim is approved is not considered income, which is why the critical illness payout is tax-free. However, critical illness cover premiums are not tax deductible, according to the ATO.
Is Critical Illness Insurance Worth It?
If you are diagnosed with a critical illness or suffering from a serious injury, your medical bills can easily add up. It’s reassuring to have a safety net that can help cover financial obligations while you focus on getting back to full health. That’s why getting a critical illness cover can be worth it.
A critical illness may be worth getting if:
- The salary you receive from your job is your sole source of income
- The benefits you receive from your employer won’t be sufficient to cover sick days
- You don’t have an emergency fund to cover living expenses
- You are a business owner or self-employed
If you are still unsure if getting critical illness cover is right for you and your situation, consider getting expert advice on which insurance products are best for you.
If you need a trusted financial planner to help you navigate critical illness cover, the experts at WealthVisory Private Clients can help. We specialise in risk management and insurance policies to ensure our clients are always well looked after. When it comes to critical illness cover, we can outline the pros and cons of various policies to ensure you find a product that is right for you and your family.
Contact our team of financial planners at WealthVisory Private Clients today to get started!
This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory Private Clients makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.
Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).
Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.