While sales of critical illness insurance — a product that pays a lump sum in cash if the policyholder is diagnosed with a critical illness covered by the contract — are growing, the needs analysis underpinning a product recommendation (a key component of the sales process) remains a work in progress.
Should the policy size be $30,000 or $300,000? Beyond certain known figures, estimates often become guesstimates. one reason is the lack of industry data about expenses incurred by those diagnosed with a critical illness, be it heart attack, stroke, cancer or other life-threatening ailment. That information would be especially useful for individuals who have a family history dealing with one disease or another. The data might also help boost revenue for an industry that prides itself on the ability to leverage numbers to achieve financial objectives.
A look at potential expenses
Advisors, however, are not without a foundation to guide their planning recommendations. Among the main out-of-pocket expenses factored into a critical illness insurance (CII) needs analysis are costs not covered by an individual’s health insurance plan. These include deductibles, co-payments and limits on total plan payouts — expenses that could quickly place a family’s financial position in peril.
This assumes, of course, that there’s a health insurance plan to discuss. Since enactment of the Patient Protection and Affordable Care Act (PPACA), many Americans have had their insurance policies cancelled because the contracts (primarily bare-bones major medical plans) failed to meet the government’s new standards. Those who can’t afford, or elect not to purchase, qualifying health plans available through the federal or state exchanges will need to factor non-covered CI expenses into their calculations.
Steve Rowley, senior account executive and vice president of individual products, life/health division at Gen Re, observes that health care expenses will also vary substantially by benefit eligibility trigger (e.g., cancer vs. heart attack) as well as by the severity of the trigger (i.e. low stage prostate cancer vs. high stage lung cancer). And then there’s recovery time.
“Dying may not be the biggest threat to a family’s financial survival,” says Lloyd Lofton, a vice president and chief operating officer at American Eagle Financial Services, LLC, an independent marketing organization. “A long recovery from a critical illness can result in a lack of income to pay the mortgage. When you don’t pay the mortgage, you may end up losing the home.” Ken Smith, director of health product sales at Assurity Life Insurance Company, adds that CI policyholders should figure on covering between two and five years of mortgage payments.
Also to weigh are personal relationships that may be impacted by a critical illness. A spouse, adult children or other family members may need to take time off from work, potentially without pay, to care for someone with a critical illness.
Critically ill individuals who have disability income insurance can also depend on DI policy proceeds to cover a financial shortfall stemming from a loss of income. But DI policies come with often unhelpful restrictions.
Assuming a critically ill person has only a group policy through an employer, then the contract will pay up to 60 percent of income (usually defined as base salary). The group DI policy can be supplemented by an individual DI policy to cover most (though not all) of pre-disability income.
Regardless, the most popular DI policies have a 90-day elimination period before benefits kick in — a time frame that individuals with little in savings can’t easily afford. To boot, a DI policy may not pay out because of how disability is defined (e.g., an inability to perform one’s own occupation versus any other occupation for which the policyholder is qualified by education, training or experience).
In the event an individual with a CII policy is diagnosed with a covered critical illness, there’s no wait time: The policy pays out upon diagnosis of the illness. CII policies will also pay out, says Lofton, in the event that treatment of one covered critical illness leads to another.
A debilitating critical illness may also require home modifications (such as a wheelchair-accessible ramp) or a home attendant to provide certain services. The critical illness may also entail travel to “centers of excellence” to receive necessary treatment — a situation that can substantially boost out-of-pocket costs.
“Someone living in or near New York City has access to some of the best hospitals in the world and many would be in network,” says Gen Re’s Rowley. Contrast this scenario with “someone living in rural America who may have to travel substantially for treatment, incur hotel expenses and likely have to pay higher out-of-network costs.” Beyond the known variables, arriving at policy size requires a certain degree of guesswork. In many cases, the face amount will simply be decided by what an applicant can afford. Affordability should be less of an issue if critical illness insurance is purchased as a rider to a term life insurance policy. Hybrid life/CI solutions, like their long-term care insurance counterparts (life/LTCI), are growing in number to cater to middle market consumers for whom a single-purpose product is beyond reach.
But there’s a catch: If the critical illness rider is invoked, the policy death benefit will be reduced by the amount distributed to cover CI expenses. For those intent on passing on a legacy to policy beneficiaries, that has to be of concern. Also a potential issue is the limited duration of coverage. Whereas the critical illness rider lasts only as long as the term contract, stand-alone CI policies typically last to age 100.
Whatever the policy chassis, CI coverage is becoming increasingly prevalent within the individual, voluntary/worksite insurance markets and group/non-worksite markets.
A 2013 survey published by Gen Re, LIMRA and the National Association for Critical Illness Insurance (NACIII) pegged new business CII premiums in 2012 at $308 million. That’s up nearly double from the $162 million recorded in 2011 and up from $227 million in 2010.
Worksite/voluntary products continue to account for the lion’s share of these aggregate totals. But on a per contract basis, individual products take the lead. The average policy size for individual insurance in the 2013 survey is $27,458. This is followed by true group policies at $23,832 and worksite products at $19,550.
Getting on the bandwagon
The burgeoning CII market is prompting more carriers to join the fray. Of the NACII member companies polled in a 2011 survey, 87 percent indicated they are currently developing (or currently have) a critical illness product. Key reason: Doing so can help fulfill their “product diversification strategy” and meet agent/sales force demand.