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.)