Benefits Business

Critical illness insurance: Ready for prime time?

Popular in overseas markets, the concept is gaining interest in the U.S.

By Len Strazewski

Critical illness insurance, which pays cash benefits to policyholders upon diagnosis of specific diseases and conditions, is gaining renewed interest in the United States, according to underwriters and other industry experts. Some may remember the cancer insurance coverage sold in the 1970s and 1980s that paid non-medical benefits to persons receiving treatment for cancer.

As critical illness coverage starts to attract employer attention, it may be opening the doors to other voluntary benefits that have been languishing—such as long term care insurance and supplementary disability coverages.

The number of U.S. insurers marketing critical illness coverage has more than doubled from a handful in 2000 to 10 or more in 2007, according to a survey conducted by the National Association for Critical Illness Insurance (NACII). In-force premium is still relatively small at about $150 million, but growing.

Barry Eagle, vice president of marketing at Gen Re Life and Health and a director of NACII, says critical illness coverage has been available in the United States since the mid-1990s. Gen Re has been promoting the coverage in the U.S. for the past five years and has been a leading reinsurer of the product worldwide for more than 20 years—pioneering the coverage in South Africa and other overseas markets.

Critical illness insurance has become popular in the United Kingdom and other countries, where it is sold by banks and mortgage companies as an additional layer of mortgage insurance. In the U.K., the coverage is promoted as protection against foreclosure due to a loss of income from illness.

The coverage pays out cash benefits when an insured is diagnosed with cancer, stroke, heart attack, or kidney failure or must undergo coronary bypass surgery or major organ transplant.

The cash payouts can be used for whatever purpose the policyholder wishes. Uses can include second opinions or additional medical tests not covered by health insurance, transportation of the policyholder and family to another location for treatment, or expenses not covered by disability insurance.

In the U.S., sales of critical illness insurance have been slower to materialize. The reason? Employers’ concern about the cost of group medical benefits has kept the spotlight on controlling health care expenses and adjusting plan design rather than on introducing new coverage options.

“The United States is really the last area to take hold of critical insurance,” Eagle explains. “There are now two major obstacles to a big market breakthrough: agent acceptance and agent training in the product design.”

Marketing options

In the United States, the coverage can be sold as a stand-alone policy for limits up to $50,000 or as a rider to life insurance that accelerates payment of one-half or more of a death benefit on diagnosis.

The coverage can also be packaged as a rider to long term disability insurance (LTD), where it helps fill the gap between the initiation of disability income payments for a critical illness and the beginning of LTD payments.

The product is marketed in three ways: true group coverage paid by employers, voluntary supplemental coverage available at the worksite and paid by employees, and individual policies sold by agents and brokers or via direct marketing. Premiums range from $20 to $30 per month depending on coverage limits.

Underwriters say that worksite marketing of the coverage and payroll deduction of premiums provides the best outlet for distributing the product, which fits in well with a roster of voluntary products that include long term care insurance and mini-med health insurance plans that fill the gaps in consumer-directed high-deductible health plans and supplemental disability coverage.

Wilma G. Anderson, president of Senior Care Associates in Littleton, Colorado, trains agents in marketing long term care insurance and has recently begun promoting critical illness insurance.

In September, Anderson became a critical illness insurance wholesaler representing several leading insurers, including American International Group, Mutual of Omaha and Protective Life Insurance Company.

Since the announcement, she says she has been receiving more than 150 inquiries a week and has already compiled a database of about 1,700 agents interested in learning more about the coverage. She says she expects to add about 20 active producers per month once she begins processing coverage applications next year.

Anderson says that once agents are aware of the coverage details and have access to insurers providing the coverage, they immediately see the opportunities to market the coverage along with supplemental disability coverages and long term care insurance.

“Critical illness insurance completes a roster of supplemental coverage that agents can market very successfully in the workplace as a level of protection that few employees have had previously available.

“Moreover, since the coverage is relatively new in the United States, it can provide agents with a new talking point with their employers who continue to be interested in improving benefits for their employees without additional cost. This may be the key to getting access to employees for the first time.”

Anderson advises agents to promote the coverage as “financial recovery insurance” and feature protection against the non-medical losses caused by illness.

“Everyone is especially sensitive to just how precarious their financial security may be. Critical illness insurance speaks directly to that concern,” she says.

Getting on board

Transamerica Worksite Marketing in Little Rock, Arkansas, a division of Transamerica Life Insurance Company, added the coverage to its package of voluntary benefits two years ago.

Joe Beckham, senior vice president of sales, says critical illness insurance has begun to achieve some recognition among employers and employees who have been making changes in their group medical benefits.

“We’re actually pretty excited about it,” he says. “As more employers shift toward consumer-directed health plans with high deductibles for full-time employees and mini-med coverage for hourly or seasonal workers, they are beginning to see the need to make supplemental coverages available to employees.

“Some employers are considering critical illness coverage as a paid benefit for senior executives along with long term care and long-term disability and as an unpaid voluntary benefit for other workers.”

Transamerica Life also markets critical illness insurance directly to consumers with a Web site (www.keeplifegoing.com) that introduces the coverage, explains the details of the insurers’ individual policies and provides online quotes. However, Beckham agrees that employer-sponsored worksite marketing has greater potential for agents and brokers.

The worksite-marketed coverage offers premium discounts and simplified underwriting that, along with payroll deduction of premiums, makes the coverage more attractive.

“What makes critical illness insurance particularly attractive as an employer-sponsored voluntary benefit is the improved underwriting conditions that make it available to employees who may have medical histories that would preclude acceptance on an individual basis,” he says. *

The author
Len Strazewski has been covering employee benefits issues for more than 20 years and is employee benefits editor of Human Resource Executive magazine. He has an M.A. in industrial relations from Loyola University.