Critical Illness Coverage: An Alternative To Clients’ Most Pressing Concerns

By Lloyd Lofton

With the implementation of the health insurance exchanges, critical illness coverage can provide a supplement to consumers who are insured under a basic bronze level plan which will cover 60 percent of the costs of essential health benefits.

Individuals on the bronze plan may consider supplemental critical illness plans as an inexpensive opportunity to fill gaps in their coverage. Critical illness is an insurance product that originated in South Africa in the early 1980s. It provides for a lump sum benefit upon the diagnosis of a contractually specified insured condition. The premium and benefit structure resembles life insurance. The insured uses the money any way they want to in order to take care of their needs. Typical insured conditions include but are not limited to cancer, paralysis, kidney failure, coronary artery bypass surgery, major organ transplant, multiple sclerosis, blindness, deafness and the loss of one or more extremities.

Popular optional benefits include return of premium and recurrence benefits on a full or partial basis. Recurrence benefits are usually structured to allow for 50-100 percent of the original coverage to be paid for a recurrence of a covered benefit trigger. A distinction is usually made between the same diagnosis or a different diagnosis and the length of time between occurrences. Also, some benefits such as coverage for cancer in situ (early stage cancer that is still confined) may be excluded or limited to one occurrence under the policy. According to a 2012 Buyer & Claimant Study conducted by the American Association for Critical Illness (AACII), 47 percent of new critical illness insurance claims in 2011 were for illnesses that struck the claimant prior to age 55.

Critical illness insurance addresses the economic loss or expense that the insured persons and their families experience as a result of suffering or surviving a critical illness, and is not addressed by other forms of insurance. Economic loss or expense primarily consists of loss of income, insufficient income and uncertainty of income.

So when an insured is diagnosed with cancer or multiple sclerosis, suffers a heart attack or stroke, critical illness insurance helps the insured in the following ways:

1. Although critical illness insurance is not a good solution for the loss of partial or total income for the insured, it can address the lost income for the family when the insured is recovering or for the insured’s spouse’s needs while caring for the insured during a recovery period.
2. It covers additional expenses related to drugs and therapies not covered by medical insurance.
3. It covers the additional expense related to the modification of an insured’s home and lifestyle, enabling them to cope with their condition. Critical illness insurance provides the funds to modify their home and car to make their quality of life more comfortable.
4. It covers additional expenses related with paying for others to do things the insured may no longer be able to do, such as child care, or with paying for home health care assistance not covered by insurance.
5. A critical illness diagnosis often results in fear, anxiety and insecurity related to a shortened life expectancy and its impact on the insured’s family. Critical illness insurance provides the cash that can relieve some stresses related to the suffering of a diagnosed condition. Lump sum benefits paid out from a critical illness insurance plan can pay the insured’s mortgage or business debts while the insured is recovering.
6. Finally, critical illness benefits could provide the funds to address the issue of opportunity loss for the insured. Surviving a critical illness often leaves the insured reluctant to return 100 percent to their career or business. Critical illness insurance is the only insurance that can provide this benefit.

So what is the market for critical illness insurance?

1. Mortgage market: Packaging critical illness with term life insurance as a mortgage plan. With advances in medicine, a heart attack or cancer diagnosis does not always result in death. However, even though the insured person could recover, they could lose their home due to a lack of income during their recovery. So the question to ask a prospect is: If you suffered a heart attack, would you rather lose your home or your mortgage?
2. Family market: After an insured suffers a diagnosis of a covered critical illness, the benefits from a critical illness plan can provide cash to pay the family debts, modify the home, and pay for child care and home care while giving the insured choice and flexibility to solve their related problems. For example, in a two-income family in which one person suffers from a covered condition, the combination of one spouse needing time to recover and the other spouse staying home to provide care could result in the loss of both incomes.  
3. Singles market: Critical illness insurance is one of the only insurance plans singles see as having value to provide them independence, choices and freedom. Single adults often don’t have caregivers at home while older people who have accumulated assets for retirement may want to ensure that they won’t need to draw down their assets while recovering from illness. This product is of particular interest among single women, because women tend to be more conscious than men of health-related issues.
4. Self-employed market: Small business owners, contract workers and professionals have debts. They often don’t have the insurance necessary to provide the critical cash to keep creditors at bay and their businesses afloat.
5. Small business market: Critical illness insurance can be addressed in a buy-and-sell agreement among partners. If one of the partners suffers a critical illness, it is agreed in advance that their ownership is bought out. Moreover, critical illness insurance can be used to provide the cash to compensate and/or replace a key employee who is diagnosed with a covered condition.
6. Large business market: Critical illness insurance can be used as an executive perk. The lump sum benefit provided upon the diagnosis of a covered condition can be used for the executive to retire if their condition affects their ability to work.
7. Group market: For industries that are not eligible for long-term disability policies, critical illness is an alternate plan. Additionally, critical illness insurance can be offered as part of a cafeteria plan which could be more attractive to younger workers than life insurance.

Why should advisors consider marketing critical illness insurance?

There are several reasons to consider representing the critical illness market:

1. To replace income from declining sales of life insurance or to enhance sales of life insurance with companion benefits to enhance the value of life insurance.
2. To reach a cross-generational market.
3. To earn more wallet share in markets and in policyholders’ homes.
4. To position your service as offering “living” benefits.
5. To retain multiple policy in-force business in the home.

The National Association for Critical Illness (NACII) and Gen Re conducted a 2013 survey among participant companies about the sales of critical illness insurance and reported $308 million in new premium sales for the year 2012. This represents an astounding 90 percent increase over reported 2011 sales figures.

Premiums are more affordable when packaged as part of a financial program such as a health insurance program, mortgage program or an alternative to health insurance for young singles.

For most people, the best strategy is to purchase the best health insurance policy that they can comfortably afford. They can pay out of pocket what they can afford to fix or replace, then insure what they can't, and they want to do so in the most cost-efficient way possible.

Health insurance premiums are tax-deductible and, under the Affordable Care Act, may be subsidized according to their household income. Critical illness insurance policies are not eligible for federal subsidies, and people who receive benefits may also be required to pay tax on their benefit. However, the policy cost and benefits of critical illness insurance can provide an alternative solution to a prospect’s most pressing concerns, health care.

Lloyd Lofton, CSA, LUTCF, is the chief operating officer of American Eagle Financial Services, Smyrna, Ga. Lloyd may be reached at [email protected].