Critical Illness vs. Life Insurance: The Underwriting Does Differ

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Critical illness insurance is the newest, and I think the most unique and innovative insurance product of the 21st century.

But although more and more people are discovering the product and its benefits, CI insurance still remains a mystery with many–both in the area of what it is and does, and also in such technical areas as how it is underwritten.

Regarding the what-it-is question: CI policies pay a lump sum benefit if the insured experiences one of the covered life-altering illnesses such as heart attack, stroke, cancer or paralysis.

The money can be used for any purpose. However, the product is typically positioned as a policy that pays benefits that will help the insured pay for living, medical and the myriad other expenses encountered in the months and years following onset of the medical event. (See sidebar for information about the likelihood of people suffering CI.)

Now, for the underwriting issues. Underwriting presents, for many agents who are pioneering in the sales of this product, a major concern and issue.

One of the biggest questions they have is: How can clients receive a preferred rating in life insurance, and yet be rated for CI insurance?

The answer lies in the fact that, when you are considering an applicant for life insurance and CI insurance, you are talking about underwriting two completely different risks.

In a nutshell, life insurance underwriting reviews any factor that would decrease life expectancy (mortality). By contrast, CI underwriting looks for any indication that the prospective insured may be at risk of having a heart attack, stroke, cancer or any of the other covered illnesses (incidence).

In the early 1900s the incidence rates and the mortality rates of serious medical conditions were close together. For example, if someone were diagnosed with cancer, they probably would die from it.

In 2001, however, because of more widespread screening and better treatment, the incidence (occurrence) rate of many cancers is rising as they are discovered at an early stage, but the mortality is falling as improved treatments prolong life.

Hence, the different approaches to evaluating the risks. (Again, see sidebar for more information.)

In determining risk, there are four legs of underwriting to consider. They are: current medical condition, personal history, family history, and actuarial trends.

When underwriting life or CI insurance, these four factors simply take on varying degrees of importance and focus.

A strong family history of early heart disease or cancer is very important in CI, as this indicates a probability of an applicant getting a disease that is common to the family. Serious family history alone can be the risk factor that leads to the occurrence of a CI.

Meanwhile, for life insurance, family history is a concern, but it rarely results in a rating alone–because the trends in treatment and improved mortality make this less likely to be a single mortality risk factor.

Build is an equal factor in CI and life underwriting, but the focus is at a different point on the weight scale for these two products.

For example, build is a stand-alone predictor of occurrence of heart disease. Therefore, a build that is outside norms is likely to be a factor in CI ratings. But, for build to be a mortality risk factor (for life insurance), the person has to have a very serious weight problem.

Consequently, you are apt to see a person applying for both life and CI insurance with a standard or preferred rating for life, and a substandard rating for CI.

Clearly, the two–CI and life insurance–are being underwritten with two different sets of criteria. Your clients current medical history coupled with any possible significant family history could cause a rating with CI. Underwriters for this product are not as much concerned with when a person is going to die, as they are with the chances of a diagnosis with a life threatening illness and surviving.

It is most important that agents communicate to their clients that life insurance and CI insurance are two different types of products.

Its imperative that you stress to the client that CI insurance will pay out upon diagnosis of a covered illnessi.e., the insured wont have to die to receive the benefit. This feature gives this coverage extraordinary appeal.

is product manager-critical illness insurance at Canada Life in Atlanta. Her email is robin_james@canadalifeus.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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