LIFE INSURANCE OR LIVING INSURANCE?

WHY CRITICAL ILLNESS PLANS?

By Gordon Gladstone

August 1999

The life insurance industry is far from being in the doldrums as many pessimists have been saying. In fact, it is alive, healthy and about to jump into the 21st century with a host of new ideas and wonderful products.

The evolution of our industry over the past 50 years has been mind baffling. Fifty years ago the average insurance agent sold whole life, limited payment life and a few term products.

Now let's look at today. We have universal life, in many forms (single premium, limited premiums, indexed variable, high cash values, low cash values, non-guaranteed and guaranteed cash values, guaranteed death values and non-guaranteed - not to mention the absence of presence of riders) with each policy having various variation on a theme. It's mind boggling and it's going to get better (or should I say more interesting?). Like other industries, the life insurance industry is getting more sophisticated. As the products become more complicated, the average insurance agent is getting more confused.

So, where do we go from here? Let's look at the foreseeable future and try to visualize.

The good news is that, believe it or not, there are few products on the horizon that will not only change our industry forever but are easy to understand and market. They may remind us of the halcyon days of the '60's and '70's. They may rejuvenate our sales to the degree of the average agent being able to serve the customer and make a good living once again without being a financial genius. Our industry will be transformed from the life insurance industry to the living insurance industry.

What am I talking about here is the evolution of life insurance products into a living insurance product, where you can claim your insurance benefits without dying. Revolutionary? Maybe. Evolutionary? Definitely!

Today, there is a product that has been developed and successfully sold in places such as the UK, Australia, New Zealand, South Africa and Japan. It's a product that does exactly what we all wish an insurance policy would do. It's called a Critical Illness policy and will shortly hit the U.S. like a tidal wave. It is predicted that sales by the year 2002 will be $70 billion plus.

Why is this product so startling? Because it pays out one lump-sum benefit whilst the insured is still alive and /or also when the insured dies. There is no necessity to be terminally ill in order to make a claim while living. The official description of a Critical Illness policy is as follows: The payment of the policy benefit to the insured upon the diagnosis of a specified Critical Illness, without any restrictions or death.

Let's look at the actual application. Assume a Critical Illness policy is issued in the amount of $200,000 (issue ranges from $10,000 - $500,000) and six months later the insured suffers a heart attack, survives the heart attack, but cannot go back to work for a period of time (usually a few months) due to the seriousness of the ailment. When the insured does go back to work, his capacity to produce efficiently is reduced dramatically due to the convalescing process. The question then arises: How will the individual financially survive the first two to four months without working and creating income? There is always disability insurance, assuming the insured has it. However, D.I. usually pays an income (in most cases maxing out at 66% of income) after an elimination period of 90 days or more. The income from DI is only paid while the insured is "incapacitated from working in his occupation or any occupation." For at least three months, there is no disability payment.

However, living expenses continue for the insured - mortgage payments, car installments, home and auto insurance, school fees, food, electricity, credit cards, other debts, etc. Where do they get the money to pay for all the expenses? Well, there is savings (assuming they have it), investments to cash in (one hopes the stock market is on a high), bank loans (these have to be repaid with interest) and family and friends (perhaps not possible). The majority of working Americans do not have the financial resources to survive two or three months. One interesting statistic: in 1996, 1.5 million people in the US filed for personal bankruptcy. The most common reason given was illness. Wouldn't it be nice if the necessary money needed to financially survive a critical illness came from your life insurance policy, paying out the full benefit? This type of policy has arrived and it is no more expensive than an average term policy.

The question then arises as to what would happen upon death. Well, upon death and assuming there have been no prior claims against the policy, the full death benefit would be paid.

There are a number of companies in the US already selling this policy. Generally, these policies pay a lump-sum benefit equal to 100% of the policy in the event one of the following illnesses is diagnosed (not whether the policyholder lives or dies): heart attack, life threatening cancer, Alzheimer's disease and loss of independent existence (three out of five ADLs defined as continence, mobility, dressing, toileting and eating.) This clause alone expands the covered illness tremendously (add muscular dystrophy, multiple sclerosis, stroke and paralysis). Plus, there are benefits for coronary artery bypass and for angioplasty, renal failure, organ transplant, blindness, deafness, etc. As an example, the premium for a 40-year old male non-smoker for $100,000 is approximately $300 per year. Female nonsmoker is $250 per year. Plus, a $75 fully commissionable policy fee. Premiums are guaranteed for one to 20 years and usually these policies can be converted to a permanent life policy without proof of insurability. Interesting enough, for a policy amount of less than $100,000, no medical is required - although a non-medical form and in some cases blood and HOS are necessary with most companies.

As you can see, the commencement of these types of living insurance policies is that they are ideal for small and large groups, payroll deduction, mass marketing and for individual sales.

In fact, I believe that the evolution of these "new" living insurance policies will cause a revolution to take place in the way we buy life insurance. We will no longer look at the lowest "premiums" for the policy. We will shortly be able to ascertain what benefits we require and pay a premium commensurate with these benefits. As an example, a company would have a policy with a nucleus of benefits at a given price. If the client wishes to, he/she may add extra benefits at a slightly higher price or a multitude of benefits from a menu with each benefit having an additional premium. The policy could then be "tailor made" for the client. Additionally, the social benefits to the average person from these policies are tremendous. The financial survival of the individual and their families is secure, allowing them to live with dignity.

I look forward with great anticipation and pride as our industry takes these evolutionary strides that will service our clients honorably. There will never be a reason to purchase a stand alone term life insurance policy again!