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.