Critical Illness Insurance Living Benefits Center
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Security for the Terminally Ill
By Lee Jernstadt
"Contingencies", May/June 1997
The American Academy of Actuaries
Modern medical technology performs miracles by treating and often curing patients who, a few decades ago, had no chance of survival. But at the same time, health care costs are escalating, and it is increasingly difficult for people to afford serious illnesses or injuries. Critical diagnosis coverage, a new type of insurance that has proved tremendously popular overseas and is on the verge of breaking into the market in the United States, may be the solution for financially strapped patients, but it also presents new challenges for risk assessment and underwriting---challenges tailor-made for actuaries who specialize in life and health problems.
Critical diagnosis insurance is designed to cover the nebulous territory where health insurance leaves off but life insurance doesn't yet pick up. With this coverage, an advanced benefit is paid upon diagnosis of morbidity, not the actual occurence of death.
This means that as soon as a policyholder is diagnosed as terminally ill, he or she receives 100 percent of the benefit in force at the time, whether death is likely to occur within a few months or many years.
The coverage is designed to pay medical bills or help with any other expenses for people diagnosed with serious illnesses like heart attacks, cancer, strokes, Alzheimer's, and AIDS, so that they will not have to cash in early on life insurance plans or declare bankruptcy.
Critical diagnosis coverage is not the same as brokering a life policy with a viatical insurance company. A policy does not have to be purchased by a third party before the terminally ill person can take advantage of it.
So, while a terminally ill person who purchases life insurance and then turns around and sells the policy may be paid only half of what his or her policy is worth, critical diagnosis insurance offers a full benefit payout, often giving policyholders more for their insurance dollars.
Since critical diagnosis insurance was introduced in Europe and Asia, the policies have generated astonishing sales figures. Roughly 6 million policies have been purchased in Japan since the insurance became available there four years ago, and $32 million in critical diagnosis coverage was sold in the United Kingdom during 1995 alone.
Industry experts predict that the policies will ring up similar sales figures in the United States when critical diagnosis insurance catches on here.
Leading the charge to bring the product to American soil is Michael K. Carroll, Chairman of Briarwood International, and a specialist in critical illness coverage. Carroll, who is working with insurance companies to develop different versions of the product and help agents and underwriters learn more about it, expects the insurance to be a $70 billion business in this country in just three years, and says it will be offered by 85 percent of insurance companies by 2015.
"This is not the life insurance of yesteryear," Carroll says. "This is a 'Star Trek' product." Critical diagnosis insurance was born in 1983, when Dr. Marius Barnard---brother of Christian Barnard, the doctor who performed the first successful heart transplant---observed that even when people survived serious illnesses, the cost of their health care, in Carroll's words, "financially killed them".
To deal with the unexpected and often unbearable financial burdens of such incidents, Barnard developed the idea of critical care insurance. Experience in countries that already offer the policies shows that it may be an intelligent buy for consumers. With today's medical technology, Americans are living longer and are far more likely to survive serious illnesses.
Statistics show that nearly 40 percent of Americans will develop some form of cancer at some point in their lives, and of the 1.5 million Americans who will suffer a heart attack this year, 73 percent will survive.
Carroll predicts that ". . . when critical diagnosis coverage becomes widely available in the United States, 1 in 4 policyholders will file a claim, 90 percent of which will result from heart attacks, strokes, or cancer." Benefits received from a critical diagnosis policy can be used in whatever way the policyholder sees fit. They can pay medical expenses for policyholders whose health insurance plans have benefit caps, or, for example, help those who would like to take time off from work for treatment, get home health care, or pay any other expenses.
Benefits are fully paid even if other insurance covers all or part of the policyholder's medical costs, and if the policyholder doesn't make a claim, the coverage can be structured so that it can be either annuitized to use for anything from retirement funds to a second lien on a home, or to be paid to beneficiaries if the policyholder dies without using the benefits.
The concept may sound great, especially in today's medically and technologically advanced climate, but this new breed of coverage could present endless challenges to those in the insurance industry.
"Underwriters do not yet know how to underwrite critical illness coverage," Carroll says, "and the high incidence of claim means the underwriting will have to be especially strict and tight. With so little room for error, actuaries will be especially important to the success of the product," he says.
"Actuaries will drive the underwriters, so there is a domino effect." Carroll says. "Actuaries know what things have a tendency to strike more often as a claim and what don't. Actuaries understand you just can't sell a few policies and fall off, because you're bound to get a claim. Actuaries are critical to this."
However, he says .."it is important that actuaries learn more about the product before they attempt to deal with it. Many in the profession see critical diagnosis coverage as a distant cousin to terminal illness or death benefit riders, but it isn't," Carroll says.
"It is crucial that everyone in the insurance industry become more educated about the product," Carroll says. "Unless companies are fully committed to the product---before making it available to their customers," he says, "it is bound to fail miserably. England and Japan owe much of the product's success in those countries to heavy investments in training and development before critical diagnosis insurance was introduced there." "I've seen a lot of companies try this in the last four or five years, but they didn't offer training and people didn't know what it was."
Carroll says. "Without a commitment to training and product awareness and development, this will go nowhere." But if critical diagnosis coverage is doing such booming business overseas, why did it take 15 years to bring it to the United States? For the same reason Carroll says the product may still be difficult to launch in the United States--- "because U.S. companies are risk avoiders, not risk managers. In addition, the unfamiliarity of the product" (Carroll says many state insurance commissioners are not even aware that it exists) "makes critical diagnosis insurance uncomfortable territory for many in the industry." "This is comparable to back at the end of the '70's, when universal life came out," Carroll said.
"No one knew what universal life was. Critical diagnosis insurance is the first product in a long time that doesn't just have new ribbons and bows on it. It's a whole new form. We're finally selling for the living, not for the dead." And Carroll promises that "...the effect of critical diagnosis coverage on the insurance industry will be just as beneficial as was the introduction of universal life." "It will grow and evolve the industry," he says. "It will make the industry more responsive to consumers' changing needs."