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Producer's Corner: Putting a Critical Spotlight on Critical Illness Coverage

By Warren S. Hersch

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If you’re like a still substantial number of advisors, then you don’t market critical illness insurance. And that would be no surprise: In the insurance marketplace, CI is a relative newcomer. Many financial services professionals remain oblivious of the product’s benefits and role in insurance planning. Or they simply haven’t taken the product seriously enough.

That needs to change. CI insurance can fulfill financial needs not covered by other policy types. Consider a common scenario: 50-year-old woman, the breadwinner of her family, is diagnosed with breast cancer. Assuming the cancer is treatable, she may require a combination of chemotherapy, radiation and hormonal therapy, plus time for rest and recovery over a period of many months—or longer.

 The doctors may restore this woman to full physical health, but the financial cost can be devastating. Absent CI coverage, she will, for example, have to pay out-of-pocket for deductibles, specialists, procedures or medications not covered by her health care policy. If she has a disability income policy, then only a portion of her pre-disability income will be covered.

CI insurance, which generally pays a lump sum once the insured is diagnosed with a covered condition, can make up for cash shortfalls stemming from these gaps in coverage. And because no strong strings are attached on how policy distributions are used, the insurance can meet financial needs resulting from other eventualities.

CI insurance can, for instance, compensate for a reduction in spousal income because of time needed to care for the spouse with the critical illness. If the insured is a key person in a business, then the insurance may also be used to hire a temporary replacement; or, if she doesn’t intend to return to work, the coverage can buy out her share of the business or fund a search for a permanent replacement.

CI can also be used to conserve savings that otherwise might need to be drawn down during the period of the critical illness. Policy proceeds may be tapped, for instance, to pay down credit card balances, auto loans or mortgage loans.

The insurance thus serves as an emergency cash reserve for a range of contingencies. And as such, advisors who sell CI policies generally recommend face amounts to provide at least six months to a year to cover emergency expenses.

The market for CI insurance is growing. CI sales in 2010 rose by 89% over the year prior, according to the annual U.S. CI sales report of LIMRA, Windsor Conn. Eastbridge Consulting Group, Avon, Conn., reported in 2010 that CI sales also doubled since 2007. Yet, the American Association for Critical Illness Insurance Westlake Village, Calif., pegs the number of Americans covered by a CI policy at just one million, a small fraction of people who, over a 20-year period, are likely to suffer a critical illness, such as a heart attack, stroke or cancer.

For advisors these numbers spell opportunity, a point that was brought home during a panel discussion held on June 11 at the 2012 annual meeting of the Million Dollar Round Table in Anaheim, Calif. The three panelists—Nadia Chun Yueh Chen of CANA Financial Services, Auckland, New Zealand; Corry Collins of Maritime Wealth Management, Nova Scotia, Canada; and Chris MacKay of Chris MacKay Financial Planning, Lower Hutt, New Zealand—discussed how CI products have proven to be a big value-add for their practices; and, essential for many of their clients.

MacKay observed that his practice has sold “well over a thousand policies” since adding CI insurance to the firm’s portfolio in the early 1990s. Of the total written, there have been some 37 “trauma” (critical illness) claims within the last 20 years.

Often among the claimants are advisors themselves. This was true of Chen, who at age 50 was diagnosed with third-stage endometrial cancer. CI coverage, she said, enabled her to pay for the needed medical treatment and caregiver. The policy also allowed both her and her husband to keep their separate businesses running.

For U.S. advisors, particularly those that sell employer-sponsored health or voluntary benefits plans, there are two additional positives to consider: (1) The product complements health care plans by offering employees additional benefits without adding to employers’ benefit costs; and (2) CI policy sales can compensate for commissions reduced by the medical loss ratio of the 2010 Patient Protection and Affordable Care Act.

There are, in sum, reasons aplenty to make critical illness insurance a part of your practice. If you’re still on the fence about CI coverage, then it’s high time to get off.

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