Critical Illness Insurance Living Benefits Center

Critical Illness Insurance: Evolution or Revolution?

"Live Not Die" Product Revolution

By Michael K. Carroll, Basye, Virginia
and
By Roger J. Stalowicz, JD, CLU, ChFC
in
April, 1997, issue of Life Insurance Selling

Almost everyone knows someone who has died of a heart attack, cancer, or stroke. Unfortunately, those of us in the benefits business see it far too often. We know all too well the emotional and financial impact that deaths from these illnesses have on surviving members of the family. After all, isn't this why we have life insurance?

Worse still, we see far too many friends and clients who survive critical illnesses, only to lose their homes or jobs, or suffer a decline in their quality of life. Unfortunately, traditional life insurance coverage does not help in these circumstances.

And isn't it strange that the life insurance business in the United States---which in the past has shown great creativity and leadership in developing products to meet people's changing needs---has been slow to develop a product to meet the needs of those suffering from, and surviving, critical illnesses, especially at a time when the business is experiencing little sales growth and being challenged from many sides.

This policy represents new ground for the life insurance business in the United States. In some ways, it is a logical evolution of the life insurance product because it expands its utility to the consumer in light of the changes in insurance needs that have evolved.

On the other hand, it is revolutionary in that it combines elements of both life and health (and sometimes disability) insurance in a single product, thus obliterating the hard lines that have developed over the years to separate these kinds of coverages in terms of sales approaches, distribution, insurance carriers, and even regulations.

Critical Illness life insurance is simple to understand and its sales applications are vast. This kind of coverage provides benefits that are paid upon the diagnosis of a critical illness, such as cancer, heart attack, stroke, Alzheimer's disease, and others.

In other words, the coverage provides a living benefit that results in cash being paid directly to the affected person when a critical illness strikes. The payment of the critical illness benefit is not conditioned upon the illness being terminal, and the insured may, in fact, recover fully (as many do).

The benefit is not a viatical settlement that results in the insured receiving less than the full face amount. For example, if someone with a $100,000 critical illness life insurance policy were stricken with malignant cancer, he or she would receive a $100,000 lump-sum cash payment upon diagnosis. As might be expected, payment of the critical illness benefit reduced or eliminates the life benefit since the life benefit is, in effect, paid during lifetime.

It is important to note that critical illness benefits are not tied to other insurance plans. Benefits are fully paid even if the critical illness survivor has insurance that covers all or a portion of the treatment expenses.

This is a powerful statement when you realize that many of the expenses associated with critical illnesses normally are not covered by traditional insurance. In fact, about two-thirds of all cancer-related costs were indirect, non-medical, non-covered expenses according to the American Cancer Society's 1995 Cancer Facts and Figures. These expenses included:

Home health care needs.

Lost income and work time for spouse or care-givers.

Housekeeping or child care expenses.

Non-covered "experimental" treatments.

Expenses not covered by insurance, including co-pays and deductibles.

Home or automobile modifications.

Lost income for the critical illness survivor.

No wonder so many people are concerned about how they would survive financially if a critical illness were to strike them or a family member! Life insurance historically has not addressed this concern---but with the new critical illness life insurance policy, a giant step foward has been taken. We are now able to offer life insurance because the insured is going to live, not just because he or she may die!

So who needs critical illness life insurance? The answer is deceptively simple: virtually everyone! A married couple with children (especially if they have a mortgage) would represent an obvious need. Additionally, single heads of households would have an equally obvious need.

Business owners and those who are self-employed would have critical illness needs, including the need for cash to keep the business running or to buy out a business associate. In fact, the latter represents an excellent application for critical illness insurance because it expands the number of situations covered that could give rise to a buy-out need.

Although we have not focused on disability in this article, some critical illness policies do have disability provisions so that benefits are payable on the occurrenace of the defined disability. This feature is especially attractive to business owners unable to obtain disability insurance to professionals who may have reached their maximum on disability coverage.

The disability coverage in critical illness policies is not tied directly to income such as with the traditional individual disability policy, so professionals can increase their coverage while simultaneously adding life insurance and protection in case of cancer, stroke, heart attack, and so on. This has been an appealing aspect to the professional market and tremendous interest has been uncovered.

Because critical illness life insurance probably is new to the vast majority of readers, the question that could arise is whether the agent should become involved with this kind of product, or simply use the stable of existing products, such as individual life, disability, and specified disease policies.

Our answer to this is two-fold: First, if the agent wishes to be on the cutting edge of a product that meets multiple needs in a way that no product before it ever has, then it is natural that he or she learn about, and sell, critical illness life insurance. It is a highly consumer-oriented product that is much less confusing to the consumer than the purchase of multiple products. Additionally, because it covers several needs, there is less opportunity for potential competition to enter the picture.

Second, although new to the United States, the product has been available for years in other countries and has shown remarkable sales growth. For example:

After a 1987 introduction in the United Kingdom, today more than 70 U.K. insurers sell critical illness, and it is the only form of life coverage showing positive sales growth over the past four years.

In 1990, critical illness insurance was introduced in Australia. Today 31 of 33 Australian life insurance companies offer it.

In Japan, a policy that covers only heart attack, cancer, and stroke was introduced only four years ago and more than 500,000 policies were sold in the first 10 months. Today, more than six million policies are in force.
These are eye-popping statistics that underscore the acceptance of critical illness insurance by the public worldwide even in countries with sophisticated life insurance products, like the United Kingdom. If these results are any indication of the reception this product will receive in the United States, we may be looking at the birth of a product that will be as "big" as universal life.

To date, the major hurdles we have encountered with critical illness insurance center on the tendency of producers (and regulators) to try to put the product into a more traditional, pre-defined "box". Although critical illness often is structured as a life policy (and at least one carrier has a universal life version with premium flexibility, cash value accumulation, and direct cash value access!), it also has some elements of health and disability policies.

In fact, it is its own "box". For this reason, inaccurate apples-to-oranges comparisons sometimes are made with these other forms of protection. This underscores the need for education of producers (and, again, regulators) to this dynamic form of insurance new in the United States.

Coincidentally, customers do not seem to have any difficulty in understanding critical illness life insurance. Could it be that they do not have a preconceived notion as to the way insurance has to be?

A massive market is waiting for this product, especially as the baby boomer generation begins to feel the aches and pains of age. With 11,000 boomers turning 50 each day for the next 18 years, we are now entering the golden age for critical illness life!

Michael K. Carroll is Chairman and Chief Executive Officer of The Briarwood Companies, which he founded. Mr. Carroll has been in the life insurance business since 1980, working as a producer, an assistant district manager, and a regional director of agencies for a life insurance company.

Roger J. Stalowicz, JD, CLU, ChFC, is vice president of marketing and customer services for Circle Investors, Inc. He has more than 25 years of marketing and management experience with national financial services firms, including life insurance company home office experience. He is a member of the Connecticut and United States Supreme Court Bars, the Association for Advanced Life Underwriting, and the National Association of Life Underwriters.

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