WHAT'S HAPPENING IN THE MARKETPLACE

By Gordon Gladstone

February 2001

Critical Illness Insurance or the multiple benefit insurance plan, as it's sometimes called, is a revolutionary policy that's new to the United States. It has been tremendously successful overseas, and is being developed and marketed for the North American market by various life insurers.

Unfortunately, in their haste to bring the product to the marketplace, most domestic life insurance companies designed a hodge-podge of policies that were (and most still are) non-saleable, illogical, and unbelievably expensive in most cases. Because insurers did not do their homework correctly, there was and still is, a tremendous misdirection of resources. The bewildering array of products could confuse the best actuarial student.

Let us, therefore, try to simplify the type of necessary benefits of these policies and bring some sense of order to the product. The product is simple, and its definition in the workplace is also simple: Critical Illness insurance is defined as a policy that pays a lump sum to the insured upon diagnosis of a covered condition. The insured does not have to die to be paid. It is mostly a living benefit policy.

The idea of a Critical Illness policy is to help an insured financially who survives a major illness, such as a heart attack. A major illness usually causes a tremendous financial drain on the insured party because of their inability to earn income while recuperating. There is also the compounded effect of having to pay for items such as medical treatment, insurance deductibles, home alterations, durable medical equipment, car modifications, and other costly items not covered by medical or other insurance. These added expenses could cause additional emotional and physical trauma. A Critical Illness multi-benefit policy is designed to alleviate these problems.

Let's look at a typical cross-section of policies available in the North American Marketplace:

• Many policies do not have a death benefit.

  Imagine that someone who is insured suffers a heart attack and dies. It's critical illness we are talking about! People do die from heart attacks and the policy pays nothing - not even for getting premiums back! One of the biggest selling points of this kind of policy is that it pays out upon death or survival. Some companies' policies will pay back all premiums "on condition the policyholder dies of a covered condition."

• Many policies have a waiting period that insists that the policyholder survive 30, 60, 90, or 180 days after an ailment is diagnosed.

  This is not consistent with the fact that money is needed while the patient is incapacitated, not after recuperation.

• Some policies pay out partial amounts at different time periods for the same ongoing claim.

  Others pay a monthly indemnity instead of a lump sum - this is not a disability policy. What happened to the lump sum payment?

• There are policies that restrict claims and discriminate on how claims are paid.

  For example, one particular company will only pay claims upon proof of actual medical receipts, or will restrict payment to the amount of the receipts. There are many red herring clauses of covered conditions, such as blindness caused by illness or paraplegia - especially when partial paralysis is already covered elsewhere.

• Most policies do not guarantee premiums after the first year of the policy.

  Many policies end at age 70 or reduce benefits by 50% or more at age 65 or 70. Premiums do not reduce when this happens. Then there are policies that guarantee premiums for 10 or 15 years or more and allow re-entry at the new attained age of the insured with medical evidence. Another policy guarantees reentry after 20 years, regardless of health. In addition, some companies' products insist on a pre-existing condition clause, while others do not. Some require medicals for the application and others will do a non-medical or issue a policy with simplified underwriting - and so the confusion continues.

How Policies & Premiums Differ

To show how policies and premiums differ, we compare a Critical Illness policy from two companies marketing this product. The insured is a 40-year-old male non-smoker and a 45-year-old female nonsmoker The insured amount is $100,000.

As you can see here, two different companies have similar benefits, but vastly different premiums and guarantees. Added into these inconsistencies are different marketing strategies and inconsistent underwriting guidelines and procedures. Some companies are very strict, while others are very liberal. Some will decline on minor health variances, some will rate up, while others will give standard rates.

To make some sense of all this, the following is a guideline of the necessary ingredients for these types of policies, keeping in mind their original goal.

The Following Should be the Minimum Basis for a Critical Illness Policy:

• The policy should have a death benefit. Many policies are designed on a health insurance chassis. This results in higher premiums, as more money has to be placed into reserves. However, a health chassis policy is easier to file with the insurance commissioners of most states and can therefore be brought to market faster.
• There should be no waiting period after a claim is made.
• Premiums should be level and guaranteed preferably for 10, 15, or 20 years with a reentry provision similar to that of a term life policy. Reentry can be with or without medical evidence.
• The policy should continue with full benefits to age 70 with no increase of premiums or decrease of benefits. Age 70 is an ideal age for the policy to cease or be converted.
• Affordable premiums (make comparisons with different company products for benefits).
• Sensible underwriting.
• Agent compensation should be similar to a life policy.

The above guidelines should be used as a generic comparison to better understand what the policy should encompass. Like any new product, there will usually be a period of relative confusion until the dust settles and a certain amount of standardization evolves.

Most insurance companies are now starting to readjust their policies to fall in line with product goals. These actions will go a long way toward bringing this unique product into the life-industry spotlight. Additional education by carriers, and product publicity through advertising and word of mouth will rapidly bring this unique product into mainstream sales, where it deserves to be.

For the entrepreneurial agent, what better time is there to dramatically bolster sales with a consumer-friendly product that is needed by almost every working adult? Competition is negligible and there is still a huge untapped market.

Illustrating this point are two agents (who shall remain nameless) from Los Angeles. This year alone, the first agent placed more than $2 million of Critical Illness insurance premiums through the work-site. The second agent sold more than 200 individual policies in the past 10 months, and admits that, "this is easier than falling off a log."

If you are selling insurance, this product is a natural.