Vol. 45, No. 10
Proponents say critical illness insurance fills a need not by other types of employer-sponsored insurance benefits.
The life of Jimmy Zee, corporate director for Edison, N.J.-based Joulé Industrial Contractors, was turned upside down in 1997 when his daughter Valari was diagnosed with an aggressive and rare form of leukemia that required an immediate bone marrow transplant.
“Every day, my wife and I had to make decisions affecting whether my daughter lived or died,” he recalls.
As it turns out, Zee had made one of the most important decisions months earlier, when he began offering a cancer expense insurance policy to Joulé employees as a voluntary benefit in the company’s flexible spending plan. That policy, which he purchased for his family, financed a three-month leave from work (and a six-month leave for his wife from her job) to tend to his daughter’s needs during chemotherapy and isolation. The time that it afforded Zee and his wife may have helped save Valari’s life.
The cancer-expense plan that Zee purchased is a forerunner of a new type of coverage—critical illness insurance (CII)—that only recently has been introduced in the United States. Nearly all CII plans cover cancer, heart attack, stroke, kidney failure and major organ transplant, although some policies cover far more.
The concept is simple: CII pays for extraneous, usually non-medical, expenses incurred during an episode of major illness, often in a single lump-sum payment. In Zee’s case, he received several payouts from his insurer totaling $48,000—money to spend as he saw fit with no strings attached. “I never needed to worry about how I would pay my mortgage if I took off the time from work,” he says, a financial reality that many unprotected people do not escape. According to the U.S. Department of Housing and Urban Development, half of all foreclosures on private homes are due to serious illness.
CII is commonly viewed as stopgap coverage to life, medical or disability plans. Due partly to the increasing frequency with which patients survive their illnesses, CII is rapidly gaining popularity in the United States, as it already has done in South Africa, the United Kingdom, Japan and Canada.
“People wanted to protect their family members in the event that they die, but they started to ask about how they would meet their bills in the event that they live,” says Warren Steele, vice president of marketing for AFLAC, through which Zee purchased his coverage.
Mortality tables justify this concern. For example, the first-year survival rates for heart attack patients increased from 45 percent in 1950 to 70 percent in 1992, from 30 percent to 54 percent for cancer sufferers, and from 24 percent to 73 percent for stroke victims.
But survival creates a financial hardship for families. Life insurance pays only upon death, disability insurance pays only a portion of income in case of total disability, and long-term care reimburses only custodial care services. Meanwhile, studies show that two-thirds of critical illness expenses are non-medical.
And because many health plans severely restrict payments for out-of-network health care, families can be left to foot huge medical bills, especially with conditions that require continuous care. “If someone wants to go to the Mayo Clinic or Sloan Kettering for treatment, their medical plans might fall short of covering the costs,” says Kenneth Smith, product manager of supplemental health insurance for Mutual of Omaha. “What’s more, when they make the trip, they are accompanied by family or friends in the vast majority of cases. Critical illness insurance helps to cushion the expenses.”
Finding Its Niche
CII is so new that health care consumers are hard pressed to find comparable insurance products. “If there is a direct analogy,” says Stacey L. Rollings, assistant vice president of marketing and product engineering for Pacific Life & Annuity in Fountain Valley, Calif., “it is accidental death and dismemberment coverage,” which pays out a lump sum for loss of use of eyes, limbs, etc. “The difference is, AD&D is more injury-focused, while CII is more disease-focused.”
The profusion in employee benefits also is abetting CII’s popularity. To HR managers, it can be an attractive option to the company benefit plan. “There are so many different employee interests and family situations today,” says Jerome Mattern, SPHR, HR manager for Quebecor World in St. Cloud, Minn., and chair of the Society for Human Resource Management’s Compensation and Benefits Committee. “HR managers are being very responsive to employees by providing them with more options.” CII might be particularly appealing to a young, two-career couple interested in protecting their assets for only a few premium dollars, he explains.
Built-in cost control is another incentive. “Compared with major medical insurance, you are getting a fixed benefit,” says Mutual of Omaha’s Smith. “You don’t have [medical] inflation to deal with”—a cost increase that has outpaced consumer inflation over the last 20 years. “I’m not aware of a single carrier that has raised rates so far.”
What Is a Critical Illness?
Two potential problems for CII policyholders are limits in the number of illnesses covered and restrictive definitions of individual illnesses, which potentially could preclude a payout. HR managers considering a CII policy for their employees should ensure that at least the five primary critical illnesses are covered. Additional illnesses or conditions may include coma, paralysis, coronary surgery bypass and others.
In the United Kingdom, some carriers cover as many as 30 illnesses and other conditions, greatly complicating the policies for both insurers and beneficiaries. In the 1980s, covered conditions were stacked upon one another by life insurers as customer enticements in a derby for new business. Among the conditions commonly covered are AIDS/HIV, bacterial meningitis, aplastic anemia, benign brain tumor, blindness and deafness.
According to Roger Edwards, product marketing manager for Scottish Provident UK, “One insurer would cover eight illnesses and the next would cover 10, and so forth, until everybody realized they were creating a lot of confusion, but not necessarily selling any more policies. Since then, we’ve turned our focus to education about the benefits of CII coverage and have found a more receptive audience.”
Another potential problem as more conditions are added is the increased potential for disputes over whether a policyholder’s particular illness meets the insurer’s criteria. Having the benefit of overseas markets as pilot sites, U.S. insurers are taking steps to limit their coverage to definable illnesses. “We don’t cover blindness because there are varying degrees of impairment, such as 70 percent versus 100 percent,” says AFLAC’s Steele. “The degree for other conditions such as coma is based on time. An insurer may define coma based on a vegetative state lasting at least seven days, while another may define it as at least 14.”
In the United Kingdom, CII has been growing since the mid-1980s as supplemental life insurance. According to Swiss Re Life, which conducts an annual survey of life and pension plans, new policy sales exceeded 750,000 in 1999, a 12.8 percent increase over 1998. Sales of new individual CII policies as a percentage of regular premium life policy sales have steadily increased from 4.9 percent of sales in 1992 to 24.5 percent last year. (No such industry statistics are yet available in the U.S.)
By contrast, in the United States, CII is sold more often as a standalone supplemental health insurance product than as a life insurance rider, according to Tony Boston, a Devon, U.K.-based actuarial consultant to both U.S. and British companies. This is the likely result of consumer angst over restrictive managed care practices that limit treatment options and payments, which may leave the patient to foot more of the bill for expensive medical treatment.
Additionally, “a payment from a stand-alone CII policy is universally agreed to be tax-free, while the IRS has not yet ruled on the tax status of a payment from a rider which ‘accelerates’ part of the underlying face amount,” explains Boston.
Employers and policyholders will find CII to be a modest additional expense compared to medical insurance, whether it is purchased as a standalone health product or as a life insurance rider. However, premiums will vary depending on the illnesses covered, dollar value of the plan, and policyholder age and health habits, especially smoking.
“CII premiums run about two to two-and-a-half times as much as life insurance, although there’s no hard-and-fast formula,” says Pacific Life & Annuity’s Rollings. “For the average worker, coverage might be $20 to $25 a month.”
CII premiums vary widely, though. For example, a non-smoking 25-year-old may pay less than $50 per year on a $5,000 policy, while a 60-year-old smoker can expect to pay almost $4,000 a year on a $100,000 policy. With respect to the amount of CII coverage to purchase, Smith offers this rule of thumb: “a person should be able to replace 12 months of income.”
Many plans provide a lump-sum payout, then terminate. Others pay out incrementally based on initial diagnosis, first treatment and recurrences. There may be a 30-day waiting period following initial diagnosis, the rationale being that if the person does not survive the 30 days, their life insurance plan will be activated for survivors. In the meantime, though, it can create financial instability during a period of personal turmoil.
Read the Fine Print
Critics variously cite CII as a needless frill or a money-making scheme for insurers. According to Gail Shearer, director of health policy analysis for the Consumers Union, “the bottom line here is ‘let the buyer beware.’ If a critical illness occurs, you might get some cash. At worst, focusing on critical illness coverage can divert consumers’ attention from badly needed comprehensive [health care] coverage.”
Before offering CII coverage for employees, an HR manager should consider:
- Whether the money could be better spent improving the company’s medical policy by lowering deductibles, lowering coinsurance, reducing employee-paid premiums or providing a greater choice of providers.
- What the definitions of the illnesses are. This is pivotal in determining whether a person with a health condition qualifies for a payout.
- Whether family members can be added, and what the costs are.
- Whether the policy terminates after it is cashed out following first occurrence of a critical illness.
- Whether the CII policy qualifies as a Section 125 benefit, which enables the beneficiary to pay for the plan using pre-tax dollars. Currently, CII plans that pay a lump sum based on diagnosis instead of treatment are not eligible, since they are not considered a medical benefit.
- Whether state departments of insurance have issued a cautionary statement about a particular company or CII policy.
- What an insurer’s ratio of payouts to total premiums, or loss ratio, is.
- Whether the policy terminates at a certain age, such as 65 or 70.
An inherent risk of CII coverage, admit both proponents and opponents, is the temptation to view it as a lottery: get sick, quit work and be financially independent. One way that a policy can preclude such a loser-take-all scheme is by stretching out the payments, rather than issuing a single lump sum. Another may be to link CII with wellness plans intended to prevent the very illnesses that trigger the coverage’s payouts. In this way, by detecting a minor health condition for which there is no CII benefit, a major, payable condition could be averted later on.
“With hypertension or angina, for example, a policyholder diagnosed with one of these will be given a treatment plan of diet and exercise. This may well mean that the patient will not suffer from a heart attack later,” says Boston. Although this theory remains to be proven, he predicts that it will break new ground for insurance actuaries in the coming years.
When the pros and cons are considered, it is hard to deny that CII can be a life raft when critical illness disrupts a family’s life.
In Jimmy Zee’s case, the critical illness insurance bought another commodity for him and his wife: time. Valari was treated as part of a bone marrow transplant group at a children’s hospital. The Zees were the only parents with the luxury of staying with their daughter—the only member of her patient group to survive—throughout her intensive care.
All of the other children’s parents had work duties to attend to, and often were unable to see their children in their final moments. Says Zee, “As I have talked since then with the other parents, that is the one thing they tell me they wish they had: more time at the end.”
Rudy Yandrick is a Mechanicsburg, Pa., freelance writer specializing in behavioral health.