About 40 insurance companies offer critical illness insurance today, but advisors don’t always understand the coverage or even know about it, says Ralph Weber, president of Route Three Insurance and Financial Services, Paso Roles, Calif.
The danger is when they don’t know about it, advisors may jump to other solutions that may not be as appropriate, he says. Or they may do nothing at all.
“Before deciding how to handle the CI exposure, advisors should become knowledgeable about all the available options,” Weber maintains.
That can be a tall order. The options might include stand-alone CI insurance, CI riders, terminal illness accelerated benefit provisions on life policies, long term care insurance, disability insurance, life settlement or viatical arrangements, health savings accounts, and major medical coverage. Following are points to consider.
A critical illness is a serious medical condition such as a heart attack or cancer. Years ago, people often died shortly after diagnosis, Weber points out. But due to modern medical advances, many people now recover from such illnesses–only to face multiple expenses not covered by traditional insurance plans (installing wheelchair ramps, having special diets, traveling to out-of-state facilities, etc.).
CI insurance covers that exposure upon diagnosis. The benefit–typically a lump sum–can be used for any purpose. “That helps the person focus on recovery,” says Weber, because the money alleviates some of the financial stress.
Some advisors may assume the client’s disability policy will handle the exposure, he says. Or they’ll plan on recommending a life settlement or viatical arrangement if a critical illness should strike. If they understood all options, including CI coverage, he says, they might reach other conclusions.
Thomas J. Lawton, managing director of Critical Illness Benefit Group, Ltd., Hawthorne, N.Y., says he works with all the financial tools–LTC insurance, viaticals, accelerated benefits, stand-alone and worksite CI, etc.–but he has found that “nine out of 10 times, CI insurance is what bomb-proofs the financial plan.”
The payout “means the client can pay off the bills, afford to get the care and [be relieved that] the spouse is no longer in a fog [over finances],” Lawton says. This creates a “great sense of security. It is a sum certain–you know exactly what you’re going to get.”
Other financial products are not designed to cover this particular exposure, he adds.
MetLife did consider all the financial options for covering the CI exposure when it developed its CI policy last year, recalls Randall Stram, vice president-critical illness insurance in the Liberty Corner, N.J., office. But the company decided nothing addresses the CI exposure as effectively as does stand-alone CI (which it now offers on a group chassis, sold in the voluntary market).
For instance, people can’t rely on payouts from traditional accelerated benefit provisions for this exposure, he says. These provisions typically advance a portion of the life policy death benefits in event of terminal illness. If there is no terminal illness, acceleration won’t occur, Stram explains. Even if the person is terminal, he adds, acceleration has a drawback–it leaves the beneficiaries with fewer proceeds than originally intended.
(An advisor might recommend a larger life insurance face amount so more post-acceleration funds would be available to survivors, he allows. But Stram says that doesn’t address the first problem–that the person must be terminally ill, which many CI patients are not).
What about using CI riders that attach to life policies? About 20 carriers now offer such riders. A few pay a separate CI benefit, but many accelerate the life policy’s death benefit.
They can help, say many experts. But many CI riders attach to 10-year term policies, says Kenneth Smith, director of CI insurance at Assurity Life Insurance Company, a Lincoln, Neb., insurer that offers stand-alone CI. “That makes the riders inexpensive up front but very expensive at the 10-year renewal…Also, CI riders are more limited than stand-alone CI. For instance, the riders usually cover life-threatening cancer but not in-situ cancer, whereas stand-alone CI typically covers both.”
However, not all CI riders fall into the narrow category. For instance, Guardian Life Insurance Company of America, New York, has an “enhanced accelerated benefit rider,” which attaches to whole life policies for no extra premium and advances the death benefit in event of terminal illness or permanent chronic illness. The CI benefit is triggered by inability to perform two of six activities of daily living, not by specific disease, points out Robert Lehmert, vice president-life marketing services.
As a result, Guardian is positioning the rider as a “supplement” to LTC insurance, he says, or as “a financial resource for people who were too young to buy LTC before they fell ill.” (Where approved, Lehmert notes, the CI benefit passes tax-free under LTC tax laws.)
What about relying on health care policies? Stram doesn’t recommend it. A 2005 Harvard study on bankruptcies found that about half were the result of, or impacted by, a critical illness, he explains, “and 76% of those people had medical insurance at the onset” of the CI.
The Harvard study indicated it is the spike in expenses and reduction in income that causes the financial hardship, he adds.
What’s more, medical insurance doesn’t pick up ancillary expenses such as those for certain prescriptions and experimental treatments, points out Lawton. Nor do they cover the coinsurance and deductibles, he says.
Could disability insurance help? It’s certainly an important coverage, because it replaces income in event of disability, Stram says, “but it doesn’t replace the spike in expenses due to the illness.”
Furthermore, 57% of people surveyed in a 2005 MetLife consumer study on CI said they do not even have disability income insurance (through work or self-purchased). Also, even if they could collect disability benefits equaling 60% of gross salary, 25% said they would have to tap savings or other assets in less than four weeks, and 52% said they’d have to do so in less than six months.
Another problem is DI insurance often has a waiting period of 90-plus days, says Lawton, while CI pays right away.
Complicating matters is that many self-employed people can’t buy enough DI coverage, says Smith, explaining the self-employed “deduct so many things that their taxable income–on which the DI benefit is based–is very low.”
Therefore, Assurity and also MetLife position CI insurance as a complement to DI insurance, not a replacement for it.
What about using long term care insurance? Depending on options selected, LTC will pay for home care and institutional care, agree experts. However, if the person has, say, cancer but does not qualify for the benefit trigger (two of six activities of daily living), Lawton says the LTC won’t pay. And most LTC policies won’t pay for many extras that the illness requires. By contrast, the CI pays upon diagnosis.
What about relying on a life settlement or viaticating an existing life policy if the client has a CI need? Most experts agree this is a possibility.
However, Lawton cautions that “you don’t know what you’re going to get until the point of claim.” That’s when underwriters determine the condition’s severity and decide on an offer. “This is negotiated, and it’s the Wild Wild West for the client.” By contrast, he says, with CI insurance, “you know exactly what you’re going to get from the day you buy the policy,” and for what conditions.
In addition, says Lehmert, once a policy is settled or viaticated, the original beneficiaries will receive no benefit from the policy when the person dies.
Not everyone agrees that CI insurance is always the best choice. For instance, April L. Howard, principal and LTC specialist at Howard Insurance Agency Inc., Boise, Idaho, tells clients that if they have a good LTC policy, it will take care of most of their needs. “And, if the person gets well, the [remaining] benefits will still be there for future needs.”
She also encourages the purchase of a good health insurance plan–a “good HSA with a high-deductible medical policy.” That way, the person can use the HSA for any expenses, whether for LTC, dental, trips to out-of-state providers or other uses, she says.
CI policies do have good points, Howard concedes, and she does sell it if requested. “But I also show the LTC with a good HSA and a good life policy. And we put the focus on the total picture, not just the CI.”
Smith says the important thing, regarding the CI exposure, is that agents and clients both understand why CI insurance exists–”because people survive many critical illnesses; they don’t die shortly after diagnosis.”