Life With Critical Illness Riders Catch On

By Linda Koco
InsuranceNewsNet

LAS VEGAS – Just when it seems that living benefits riders for life insurance policies are no longer in design hyper-drive, along comes a new trend. This time, it is the addition of critical illness benefits to the living benefit riders of individual level term and individual universal life policies sold through the brokerage market.

Brokerage general agent Michael Smith says policies with the riders included are “selling like crazy” among independent agents who have access to the products.

Providers in the employee benefits have offered critical illness riders to life policies for a number of years, and some insurers in the captive distribution side of the industry have been offering critical illness riders on individual life policies, he allows.

But having critical illness benefits available as a living benefit for life policies in the life brokerage distribution is a new trend, he says, noting that he started spotting the features last fall.

This is one of several insurance trends Smith will discuss in a presentation here today at the annual meeting of National Association of Insurance and Financial Advisors. The president of CPS Horizon Financial Group, Milwaukee, discussed some of the details with InsuranceNewsNet before giving his talk.

The riders

The critical illness provisions accelerate payout of life policy death benefits in event the insured is diagnosed with one of several critical illnesses (heart attack, stroke, cancer, etc.), he says. The policyholder can use the lump sum for any purpose.

Designs differ, but in general, the policy owner can accept all or a portion of the accelerated amount the insurer offers, Smith says. If the owner accepts the entire offer, the benefit is paid out and the life policy terminates; if the owner takes less than the offered amount, the remainder stays in the policy, which then continues in force with a reduced face amount.

Since critical illness living benefits became available in the brokerage market, he says his firm has been receiving apps daily with the critical illness benefit included.

He is predicting the trend will only increase in 2013. “About five life carriers are offering the riders right now through brokerage, and eight others are expected to come out with their own versions by next spring,” he says.

Many life policies in the brokerage market already offer other living benefit provisions. These accelerate the death benefit in event of diagnosis of a terminal illness and chronic illness and some do so in event of long-term care too. What is new is the addition of critical illness rider to those other living benefits.

Most carriers are bundling the critical illness provisions right into the living benefits offerings of the policy, Smith says. The difference in monthly premium between policies that include acceleration for critical illness and policies that don’t is fractional, he says.

Flexibility

Life policies that offer death benefit acceleration for critical illness and for long-term care offer some planning flexibility for advisors and clients, Smith points out.

For example, a 30-year-old man may buy a life policy that has both type of acceleration but be more interested in the critical illness component than the long-term care. “At that age, critical illness often hits home, especially if someone the client knows has experienced one of the specified diseases,” Smith says. But as the client ages, the long-term care feature may become more important to the insured, and it will already be there.

By comparison, a 50-year-old buyer might put equal value on having both features, Smith continues.  “In some cases, we might suggest that the person buy two policies — say a $250,000 permanent policy and a $250,000 term policy — that each has a critical illness and a long-term-care feature.”  Should a qualifying event occur, the person can then choose which policy to accelerate and know that the other continues intact, he says.

Permanent insurance policies with the critical illness feature include traditional universal life and indexed universal life, Smith notes. He hasn’t seen it on variable universal life as of yet. “It’s not on whole life either, but it’s coming to this market,” he adds.

Some agents have asked about what the insurance company’s acceleration offer will be should a triggering critical illness event occur. Smith says that this is difficult to say in advance, because the acceleration offers will depend on the severity of the impairment and the projected life expectancy of the person.

“If the client has a heart attack, it might be that 50 to 65 percent of the death benefit will be available for acceleration,” he says. The carrier typically contacts the client’s physician and then makes an acceleration offer based on the medical information obtained.

A carrier might offer 60 percent of the policy’s $250,000 death benefit, after which the policy would terminate. But the client remains “in control of whether to accept the offer or take less than the amount offered,” Smith stresses. The person can also choose not to accelerate.

Some people may not like the fact that the policy will terminate if the person takes the full offer amount, he concedes. But others might like that the money will ease the burden on the family right now. 

To avoid misunderstandings among clients, agents need to present the feature properly, Smith says.

The illnesses

Policies do differ in the critical illnesses that will trigger benefit acceleration. However, the most common illnesses are heart attack, stroke, invasive cancer, end-stage renal failure, major organ transplant, amyotrophic lateral sclerosis (ALS), and blindness, Smith says. Some other illnesses are starting to show up too, such as central nervous system tumors, central system disorders (Parkinson’s, multiple sclerosis, Lou Gehrig’s disease), major multi-system trauma, major burns, and so on.

The appeal for many customers is that the critical illness riders—like the other living benefit acceleration riders—makes individual life insurance a product “you don’t have to die to use,” Smith says.

Smith will discuss living benefits and several other insurance trends for 2012 and 2013 during his presentation this afternoon starting at 4:30 pm.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.