In nearly 30 years of advising clients about their estates, we have not seen critical illness coverage very often in the clients insurance portfolio. There can be several reasons for this.
First, CI insurance is still adversely affected by its early reputation as dread disease insurance. In that form, the benefit was tied to reimbursement for medical expenses, such as for cancer or heart disease. The insurance was sold with the idea that major medical policies may not cover treatment that was advisable or desired. But, so the sales talk went, cancer or heart attack insurance would cover the treatmenteven if it might otherwise be considered as experimental, and not covered, by the major medical carrier.
In at least one situation about which we know, this turned out to be the case, and the client felt a great moral debt to the agent who sold this insurance to her. She told me that she would have been lost without that insurance.
The large majority of clients, however, do not have this insurance. The reason usually is that they believe their major medical insurance is sufficient. Stated another way, the clients believe it is unlikely that they will suffer from one of the dread diseases and that, if it does happen, they will have little or no uncovered medical expenses.
Much has been written about this type of reasoning, but in the final analysis, the decision is a personal one for the client. There is nothing inherently right or wrong about it. If the CI policy puts the client at ease, then the purchase makes sense.
Another reason clients may not purchase CI insurance is that they are comfortable with the thought that their assets are substantial. They believe they can provide for themselves, even if disabled. In fact, almost all of our estate planning clients own disability insurance.
A final reason why CI coverage has not been readily accepted may be the uncertain tax status. This coverage often provides a lump-sum payment upon diagnosis of the disease. A medical expense for the disease is not required. So, CI coverage does not fit nicely into the Internal Revenue Code, where deductions and exclusions may depend upon insurance being paid for medical expense reimbursement.
At present, the premiums for CI insurance do not appear eligible to be deducted as medical care insurance by an individual, since the coverage is not for a medical reimbursement. The benefits, though, should be received free of income tax. Similarly, the premiums for CI insurance for an employee should be deductible by an employer, and not included in an employees income, as CI insurance is considered accident or health insurance coverage. But, if the cost of the plan is not included in the employees income, then the benefits will be taxable to the employee.
(Note: Clients should consult their own tax advisors for personal advice and guidance.)
For clients wealthy enough to have estate planning worries, the tax aspects become very important. For example, usually such a client will pay the cost of long-term disability insurance, so that benefits will be received free of income tax. Later, the client may receive an apparently unrelated bonus to cover this cost, but ostensibly at least, the benefit is paid by the employee. While a similar arrangement can be initiated for CI insurance, our experience has been that the other aspects discussed above seem to negate the need for this insurance.
Having heard the foregoing comments in our practice many times, in writing this article I researched how this compares to trends in the marketplace. I was not surprised to find that CI coverage so far has been a middle market product in the United States, often sold at the worksite by salary deduction. The buyer there is more concerned with costs of maintaining a mortgage and other expenses that may become pressing in the case of disability, because there is no substantial nest egg. While long-term disability insurance will provide an income for these buyers, it wont pay off the mortgage or provide the lump sum that may be needed for other expenses. For these buyers, any unexpected expense can be devastating.
In addition, the coverage seems to be popular in foreign countries that provide medical care for their citizens. In that case, the CI coverage may help fill in coverage gaps perceived by the public.
While the need for CI insurance has been demonstrated for the middle market, it has not apparently penetrated the upper market as yet. Whether that will happen probably depends upon the tax treatment of premiums and benefits, and buyer perception as to whether the insurance is needed when compared to major medical coverage, and whether it makes sense financially.
Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is [email protected].
Reproduced from National Underwriter Edition, August 19, 2004. Copyright 2004 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.