A New Role for Critical-Illness Insurance in the Coronavirus Era
Consider these issues regarding supplemental health coverage as a voluntary benefit
September 24, 2020
As the COVID-19 pandemic continues, employers and employees should consider the role critical-illness insurance can play in an effective employee benefits package.
Traditionally, this type of supplemental coverage provides a fixed, lump sum payout in specific sets of circumstances, often following a covered individual's heart attack, stroke or cancer diagnosis. "Critical-illness coverage is a hyper-specific benefit, meaning that a condition must be specified within the policy to be covered," said Theresa McConeghey, an assistant vice president in the specialty benefits division at Principal Financial Group, which provides group insurance products. Most insurers require people with critical-illness coverage to meet strict eligibility requirements, she said, and so critical-illness benefits "will only be paid in select situations."
For example, critical-illness policies issued before the pandemic struck may pay benefits for conditions the virus causes (e.g., major organ failure, heart attack or stroke) rather than for the virus itself—unless the policy specifically covers infectious diseases.
Sensing a need in the market that could make critical-illness coverage more attractive and relevant to employees, some insurers are amending their critical-illness policies to include coverage for infectious diseases so future policyholders will be covered should they receive a COVID-19 diagnosis or a diagnosis of another virus that poses a severe health threat.
"Some carriers that covered infectious diseases did press pause on offering those types of critical-illness policies for a month or so out of concern that they would face significant claims" as a result of the COVID-19 crisis, said Lydia Jilek, a senior consultant with Willis Towers Watson. "They have since determined that they are comfortable with their risks, and premiums have not increased significantly."
Among employees' top concerns were personal finance issues—including worries over financial security or losing income due to COVID-19–and rising health care costs.
"Workers understand that benefits play a vital role in achieving financial security and will use this year's enrollment to be more deliberate in how they use these offerings moving forward," said Meredith Ryan-Reid, senior vice president and head of financial wellness and engagement at MetLife.
According to Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute (EBRI), "newer benefits, including health wellness programs, critical illness or cancer insurance, and financial wellness programs are increasing in popularity," a July/August EBRI survey of more than 1,000 U.S. workers showed.
Issues to Consider
Below are issues employers should consider when deciding whether to add critical-illness coverage as part of a voluntary benefit program.
Is the Policy Ready for COVID-19?
While some insurers have started to amend their critical-illness policies to reflect the unique nature of the new coronavirus and the disease it causes, COVID-19, these policies may still have specific parameters that a covered individual must meet before the policy will pay benefits.
For example, the insured may have to be admitted to the hospital or intensive care unit for at least five consecutive days or placed on a ventilator before the critical-illness policy will pay benefits. Given these requirements, "it's important for employers and employees to communicate openly ahead of any purchasing decision to ensure the coverage is a fit based on their circumstances," McConeghey said.
How High Are Premiums Relative to Benefits?
Critical-illness premiums have remained steady and even decreased in some cases over the past 10 years. Rates in Ohio, for example, can be as low as $10 per month, according to Colleen Corrigan, an agent with Wallace & Turner Insurance in Springfield, Ohio. Experience in the market has helped to keep costs from climbing.
"Insurers have a better understanding of the actual likelihood of claims, making them more comfortable with their pricing," Jilek said. "Most will offer a three- to five-year guarantee, with premiums ranging from $250 to $350 annually."
If premiums are affordable for the employee base, the next step is to compare different policies according to the benefits that employees will receive relative to their premiums.
In general, employees elect an amount of coverage, typically a lump sum between $5,000 and $50,000, paid once the covered person has been diagnosed with a covered condition.
"Critical-illness insurance is one benefit that widely varies among carriers," said Jessica Du Bois, benefits advisor with the Business Benefits Group in Fairfax, Va. "Some carriers will only cover five major illnesses, while another may cover 30 or more, and a carrier may only pay 25 percent or 50 percent for specific illnesses or have restrictions on how many times it will pay a benefit in a 12-month period."
Employers can also shop around for the best coverage. Because brokers tend to negotiate their entire blocks of business with carriers, even smaller employers may have more leverage than they think.
"While shopping for carriers, an easy way to look for savings is to look at the carrier who does your life and disability insurance," Du Bois said, as some insurers will provide discounts if you add additional lines of coverage.
Have the Details Been Considered?
Any number of policy details can affect how well a critical-illness policy will serve employees' needs. The lump sum payment these policies provide for a covered diagnosis gives employees the freedom to use this money as they choose, such as to pay health plan deductibles and co-payments or make up for wages lost during any recovery or quarantine period.
But employees should be aware that policies may have waiting periods before benefits kick in. There also may be restrictions related to pre-existing conditions and limits on payouts should a covered person face a recurrence of a covered condition or an occurrence of a related condition, said Dani McCauley, senior vice president with HR consultancy Aon.
Jilek recommended that employers look for policies that provide a broad range of covered conditions. "Understand the definition of each diagnosis and what is included and what is excluded," she said.
Some carriers have added infectious diseases as a covered condition in response to the pandemic, while others cover conditions such as Alzheimer's disease and Parkinson's disease. "Employees don't always read the entire list of covered conditions, leading to disappointment when there is no payable claim," Jilek said.
Does the Coverage Fit into the Broader Benefits Program?
Ultimately, whether to offer critical-illness insurance depends on the employer's current health benefits and workforce demographics. For example, if the employees are trending older, critical-illness coverage may be more useful to that population.
Employers that are already offering a medical plan with lower out-of-pocket costs and a comprehensive disability plan may not see the need to offer this coverage. However, if an organization has many employees who choose a high-deductible health plan (HDHP) and less-robust disability benefits, critical-illness coverage can be a good way to help employees cover their related costs if they get sick.
Some argue that putting money into a health savings account (HSA) instead of purchasing critical-illness insurance that covers only specific diagnoses is a better use of employees' benefit spending. But this needn't be an either/or decision, given that critical-illness coverage is one of a handful of supplemental health insurance policies that workers covered by HDHPs linked with HSAs can purchase under IRS rules.
Jilek noted that the relatively low premiums for critical-illness insurance still make such coverage worth considering for many employees, and it can fit into an overall HSA strategy for some. For example, employees who are maximizing their HSA contributions each year and earmarking those HSA funds for retirement could see the value in having a critical-illness policy to cover out-of-pocket costs.
COVID-19 Puts Focus on Coverage Adequacy
About half of U.S.-based employees say the pandemic is a wake-up call to invest more time in researching and selecting the best coverage options for themselves and their families, according to a July survey of 2,000 employees by Aflac, a provider of supplemental insurance.
"COVID-19 has inspired important conversations taking place about the current health care crisis and growing concerns about financial security," said Matthew Owenby, chief HR officer at Aflac. These challenges will come to the forefront during open enrollment, as employees expect more from their benefits packages, he noted.
The survey findings, detailed in the 2020 Aflac WorkForces Report, show that 33 percent of employees either do not feel confident that, or are unsure if, their health benefits will protect them or their family in the event they are affected by COVID-19.
Among the 22 percent who reported that they or an immediate family member suffered a major health event or an accident in the past year, 92 percent experienced at least one surprise cost.
Other significant findings:
48 percent of workers said they couldn't pay $1,000 or more for out-of-pocket expenses without relying on debt or credit if a serious illness or accident occurred today.
46 percent of workers said they have delayed medical care because of cost concerns.
Further, many respondents expect their employer to offer additional benefits this year in response to the pandemic.
26 percent expect to be offered new telemedicine options.
23 percent expect to be offered additional critical-illness coverage.
"The one thing that human resources professionals should take from this information is that satisfying employees of the future will require sustained effort by employers to offer a variety of options that meet employee demand," Owenby said.
Joanne Sammer is a New Jersey-based business and financial writer.
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