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What is critical illness insurance?

Critical illness insurance will pay you a lump sum if you become ill from--and then survive--certain illnesses or injuries. Some examples of covered illnesses are heart attack, life-threatening cancer, loss of a limb, and Alzheimer's disease. Also covered are loss of your sight, a major organ transplant, and paralysis. You can use the lump sum whatever way you want, whether it's related to your illness or not. The lump sum is tax free.

Ironically, the need for critical illness insurance came about because people are living longer, even with serious diseases. But it also means people have more medical expenses that can deplete their health insurance and personal savings. Critical illness insurance helps pay for uncovered medical bills and household bills. It can even provide capital to start a new home-based business.

If you are considering this type of insurance, it's vital that you understand exactly what is covered and what is not. The insurance will pay only if you contract the illnesses listed in the policy. Even then, further limitations will be defined in the policy. For example, what does the insurance company consider to be a life-threatening cancer? If you have a family history of a certain illness, will the policy exclude that illness? Are there pre-existing condition limitations? What are the age limitations? How much does it cost? Does the premium increase as you get older? When do you receive the lump sum? Is it really offering you more than your existing health plan? Finally, be aware that if you own one of these policies and never get sick, you won't get any money back.

Before you purchase critical illness insurance, consult your insurance agent or financial advisor.