Critical Illness Insurance: What It Is and Whether Employees Need It

Written by: The Deerfield Team

sm emp benefit fixed120415Simply having health insurance does not guarantee that an emergency health situation won’t cripple an employee’s finances. A critical illness can cost an employee an average of $35,500, mostly in the form of lost wages.¹ 

In terms of U.S. individuals that file for bankruptcy each year, 60% involve medical illness issues, and over 75% were insured by traditional health insurance when the illness began.² Traditional health insurance is important but financial gaps still exist because of the co-insurance & deductible constraints embedded in these policies. Securing coverage through critical illness insurance is one way to fill those gaps. Its popularity is rising among employers and employees, but many still lack information about its purpose, benefits, and costs. In this article under title Critical Illness Insurance we’ll explore the important features of this type of coverage.

CI Insurance: An Overview

A South African cardiac surgeon introduced critical illness insurance in the 1980s, but it did not catch on in the U.S. until the late 1990s. Since then the voluntary offering has become almost mainstream. As of 2014, CI insurance sales exceeded $391 million, surpassing cancer insurance. The industry’s growth in the last ten years has been especially dramatic.

Group or workplace CI insurance covers an average of 19 conditions, including heart attack, heart transplant, stroke, bypass surgery, angioplasty, Alzheimer’s, paralysis, loss of sight, severe burns, benign brain tumor, and coma. CI insurance often offers cancer coverage as optional, along with such conditions as genetic disorders, congenital heart and structural defects, and cerebral palsy. Unlike cancer insurance, CI plans often charge lower premiums for younger policyholders and higher premiums for older policyholders.

The majority of plans offer a lump sum payment between $5,000 and $30,000 (some offer up to $1 million) when the insured is diagnosed with a covered condition. Policies are usually portable and the payouts are only taxed if employers pay part of the premium. The insured has full control over how to spend the payout, which isn’t tracked. Uses may include covering anything from experimental treatments and transportation to mortgage payments.

In recent years, CI plans have become more sophisticated. Some offer multiple payouts over several years rather than terminating the policy at the first payout. If the insured suffers a stroke and cancer a decade apart, they would benefit from the plan twice.

Educating Employees on CI Insurance

About a third of midsize and large businesses offer CI insurance. Most of the 30% of employers offering to partially fund those benefits make partial funding voluntary.³ Average participation in CI insurance correlates with participation in other voluntary benefits.

While the popularity of CI insurance is clearly on the rise, employers must often work hard to justify the value of their offerings as healthcare costs rise faster than inflation.⁴ Many people mistakenly assume that medical insurance will cover all the costs that come with critical illness. Of the 28% of full-time employees who have even heard of CI, many confuse it with other insurance products.

Unless employers explain this often-misunderstood, relatively new insurance product to employees, who are paying a higher percentage of their healthcare costs than ever before, fewer employees will opt in. Does someone with disability, life, and medical insurance really need it? The truth is, it depends.

Who Needs CI Insurance?

Almost 50% of American households do not have enough money saved to cover a major medical condition.⁵ In such cases, having critical illness insurance premiums automatically deducted each pay period from their salary could turn out to be the difference between bankruptcy and financial health. Individuals who are sole providers, recently paid off deep debts, or earn too little to save easily may also benefit from enrollment in a CI plan.

On the other hand, individuals with disciplined saving habits or disability coverage that replaces 60-70% of their salary may not need CI. A combination of a flexible spending account or health savings account to cover medical costs with an emergency fund to cover nonmedical costs can suffice to pay for critical illness costs. Opting for this more complicated alternative to CI insurance gives individuals the option to use these savings even if they don’t fall sick.

In this complex and quickly-evolving healthcare landscape, it’s more important for both employees and employers to stay informed. Critical illness insurance is becoming popular because it fills an important gap in insurance offerings that leaves many families and individuals in serious debt during an already traumatic time. Employers should consider offering voluntary CI insurance to employees and, more importantly, educate themselves and employees alike about both its benefits and costs.

The Deerfield Team
800.233.6428
info@deerfieldadvisors.com


References:

1.http://www.foxbusiness.com/personal-finance/2012/05/15/critical-illness-insurance-do-need-it/

2.http://www.criticalillnessinsuranceinfo.org/learning-center/individuals.php

3.http://www.marketwatch.com/story/is-critical-illness-insuranceworth-the-money-2013-08-08

4.http://www.marketwatch.com/story/is-critical-illness-insurance-worth-the-money-2013-08-08

5.http://ebn.benefitnews.com/news/voluntary/critical-illness-coverage-reaches-tipping-point-2747628-1.html?zkPrintable=1&nopagination=1

 

SOURCES:

“Critical Illness Insurance,” CancerInsurance.com. http://www.cancerinsurance.com/critical-illness-insurance

“Critical Illness Insurance for Individuals,” American Association for Critical Illness Insurance. http://www.criticalillnessinsuranceinfo.org/learning-center/individuals.php

Fuscaldo, Donna. “Critical Illness Insurance: Do You Need It?” Fox Business, May 15 2012. http://www.foxbusiness.com/personal-finance/2012/05/15/critical-illness-insurance-do-need-it/

O’Brien, Elizabeth. “Is critical-illness insurance worth the money?” Market Watch, Aug 8 2013. http://www.marketwatch.com/story/is-critical-illness-insurance-worth-the-money-2013-08-08

Shutan, Bruce.”Critical illness coverage reaches tipping point,” Employee Benefit News, Nov 5 2015. http://ebn.benefitnews.com/news/voluntary/critical-illness-coverage-reaches-tipping-point-2747628-1.html?zkPrintable=1&nopagination=1

 

DISCLAIMER

This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015

 

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A Practical Guide to HSAs

Last of a three-part series: The Benefits of a Health Savings Account

Written by: The Deerfield Team 

private-client-people-by-paIf you’ve been following our series, you know that a Health Savings Account is a tax-advantaged, IRA-like creation designed for people covered under a High-Deductible Health Plan. If you also found out that you are eligible for an HSA and like its many benefits, it may be time to open an account. But how do you go about it?

In this third and final segment of our series, we explain the basics of starting an HSA, making contributions, and withdrawing funds.

How do I start an HSA?

You don’t need authorization from the IRS, your employer, or your health plan provider to open an HSA. Any qualified trustee, including a bank, credit union, or insurance company approved to be a trustee of IRAs or Archer MSAs, can set up an HSA for you. Your employer may be able to help you set up a plan or offer information on local HSA trustees.

Before opening an HSA, shop around. Features from investment options to fees vary widely.¹ Some HSAs can be set up online, and many offer access to online tools that can help you make good decisions about healthcare, including a customer service center for HSA account holders. Compare these features and weigh your priorities before deciding on a particular HSA account.

How do I contribute to an HSA?

HSA contributions must be made in cash, not stock or property. You or anyone else, usually an employer or a family member, may contribute to an HSA. Wherever the contributions come from, they become yours immediately.

Some employers make contributions or allow you to make contributions on a pre-tax basis. While this benefit may only extend to employer-sponsored HSA plans, you are under no obligation to contribute to it. You and your employer may contribute in the same year without a problem. If you make post-tax contributions, you may use the contributions to decrease your gross taxable income in the next year.

Rollovers

Every year, you are able to make one rollover contribution to your HSA. If you already have an Archer MSA, or have an existing HSA, you can generally roll funds over into your new HSA without being taxed.² Rollovers do not count toward your annual contribution limits.

Note that funds from an HSA cannot be rolled into an IRA or a 401(k), and vice versa, except for a one-time funding distribution from an IRA.

Funding from your IRA

During your lifetime, you may make one qualified HSA funding distribution from a traditional IRA or Roth IRA. This distribution cannot come from an ongoing SEP IRA or SIMPLE IRA, and it goes toward your annual contribution limits.

How do I make withdrawals?

Just like you don’t need permission from anyone to start an HSA, you don’t need permission from anyone to withdraw funds. You can use these funds without paying any fees or income taxes when you pay for qualified medical expenses, including deductibles, coinsurance, co-payments, dental, vision, chiropractic services, glasses and hearing aids, and medical care-related transportation. Since 2011, over-the-counter medications do not count as qualified medical expenses unless prescribed by a doctor.

Withdrawal methods vary according to your particular HSA. Many supply you with a debit card and a checkbook. Some also offer to reimburse your expenses. While you can make a withdrawal for any reason, using it for anything but qualified medical expenses makes it subject to income taxes and a 20% penalty. It’s up to you to document your expenses and prove that the funds were used appropriately; otherwise the IRS may subject you to penalties. Once you turn 65, the penalty is waived but income taxes still apply if you use the funds for non-qualified expenses.

Where can I get more information?

IRS Publication 969 has information and tips about health savings accounts side-by-side with information about MSAs, FSA, and HRAs. There are also free help lines available for individuals (1-800-829-1040) and businesses (1-800-829-4933).

And, as always, we are here to help you any way we can. Please don’t hesitate to call or email if you have questions about your health plan or savings account.

The Deerfield Team
800.233.6428
info@deerfieldadvisors.com


References:

1.http://www.health401k.com/2011/09/health-savings-accounts-an-introduction/

2.http://www.irs.gov/publications/p969/ar02.html#en_US_2014_publink1000204020

SOURCES:

Folger, Jean. Investopedia. “Pros And Cons Of A Health Savings Account (HSA).” Accessed August 14, 2015. http://www.investopedia.com/articles/personal-finance/090814/pros-and-cons-health-savings-account-hsa.asp

IRS. Publication 969: “Health Savings Accounts and Other Tax-Favored Health Plans.” March 10, 2015. http://www.irs.gov/pub/irs-pdf/p969.pdf

“Health Savings Accounts: An Introduction.” Health 401k. http://www.health401k.com/2011/09/health-savings-accounts-an-introduction/

 

DISCLAIMER

This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015

 

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