Critical illness insurance — a product for many needs

CI protection is more than just a supplement to health insurance — and it’s more important now than ever to your clients and prospects.

Over the past decade, many in our industry have been calling critical illness insurance America’s “product of the future.” Judging from the recent surge in CI sales in the United States, it’s reasonable to believe this product’s future has now arrived.

Market surveys have shown that CI sales are dramatically increasing. At the end of 2010, total critical illness sales were up 89% over 2009, according to LIMRA’s annual U.S. CI sales report. The 2008 and 2010 National Association for Critical Illness Insurance (NACII) and Gen Re Critical Illness Insurance Market Surveys indicate that CI sales doubled during that three-year period.

Critical illness coverage has had a successful track record in virtually every country where it has been introduced. Typically, sales began taking off after a period of five to seven years following introduction. While it’s taken a little longer in the U.S. market for CI to gain traction, we’re now seeing that same trend. As carriers, producers and consumers continue to become more educated about the product, I believe critical illness insurance is primed for exponential growth in sales.

The potential market for CI is, in effect, unlimited because a catastrophic illness can happen to anyone. With today’s advances in medicine, the chances of surviving a serious illness are greater than ever — but the costs of survival can be high. A CI benefit is designed to reduce financial stress so the insured can focus on recovery.

What is driving the recent success in the critical illness market? One significant influence is an increase in the sale of CI policies packaged with major medical plans. This spike may be attributed to several developments in the health insurance industry that have had an impact on both consumers and producers, including:

Higher health insurance deductibles — As major medical plans utilize higher deductibles to reduce health insurance premiums, CI can help offset insureds’ out-of-pocket expenses.

Health care reform — Since the advent of health care reform, many distributors are facing lower commissions. Packaging CI together with major medical insurance can restore commission levels while helping to fill gaps in clients’ coverage.

Protection for mortgages, small businesses

While these factors have contributed to the recent growth of CI sales, successful agents are able to position the product in a variety of ways to demonstrate what it can do for the client.

For example, there are tremendous opportunities for marketing CI as mortgage protection. Experience in the United Kingdom has demonstrated this potential. A common misconception is that the success of critical illness insurance in the U.K. is driven by the country’s national health care program. In reality, 60% to 65% of CI policies in the U.K. were purchased for mortgage protection, according to Nick Kirwan, assistant director for health and protection insurance at the Association of British Insurers.

If you think about it, that makes good sense. Many people buy life insurance to pay off a mortgage if they die. But what’s more likely to happen — premature death or a serious illness? The odds of death prior to age 65 for a 25-year-old male are only about 19%, based on a 2007 Life Mortality Table. In comparison, the same individual has a 24% (nonsmoker) or 49% (smoker) chance of being struck with cancer, a heart attack or a stroke before age 65, according to a recent CI Risk Assessment Study prepared by Milliman Inc.

Studies confirm that even with major medical coverage in place, a critical illness can have a devastating impact on household finances. A 2008 survey of homeowners in four states going through foreclosures in 2007 found that half of current foreclosures were due to medical causes, and 1.5 million Americans were in danger of losing their homes because of medical expenses.1 According to a well-known 2009 study by Harvard researchers, 62% of personal bankruptcies in the United States in 2007 were caused by health problems, and 78% of those filers had health insurance.

“Individuals recognize the value of buying enough CI protection to pay for one or two years’ worth of mortgage or rent payments, or to pay costs not covered by their health insurance,” says Jesse Slome, executive director of the American Association for Critical Illness Insurance (AACII).

Mortgage protection is not the only financial strategy where critical illness is making a difference.

Our neighbors to the north in Canada are successfully marketing CI to small-business owners. Keith Leech, president of Context Planning in Vancouver, B.C., and an internationally known CI expert, reported that the fastest-growing segment of critical illness sales in Canada has been the small-business market.

Leech said among the reasons for this growth is the difficulty small-business owners experience in buying adequate disability income coverage. Further, there is a perception among business owners that they cannot be away from their company, regardless of the reason. They refuse to believe something like a cancer diagnosis will keep them away from work. Many see the lump-sum benefit from a critical illness policy as a way to recoup lost income while the business owner undergoes treatment and during recovery.

“Here is an example,” Leech says. “I know a small-business owner diagnosed with cancer. He would take chemo treatments on Friday, recover over the weekend and be back to work on Monday or Tuesday. He didn’t miss much work, but did it have an impact on his business and income? You bet!”

Leech describes CI this way: “The magic of critical illness insurance is that everyone is a candidate for the coverage, but for different reasons. It’s all a matter of how the advisor positions the policy.”

Education necessary

Successful carriers and producers have recognized the essential role of education in the CI sales process. Companies must commit to the thorough sales training process required for agents to be successful. Agents must understand the need for the product so they, in turn, can educate their clients.

Consumers’ understanding of critical illness insurance is still an issue, but there is good evidence to show that once informed, they are receptive to purchase. A survey of full-time employees who didn’t own or had never heard of CI insurance found that 75% thought the product was appealing after the features were explained, according to a 2010 MetLife CI Insurance Awareness Study.

As voluntary companies are talking about CI on a regular basis, the demand for voluntary critical illness policies is increasing. More than half of the full-time employees surveyed in the MetLife study said they were worried about how a critical illness could affect their family’s financial well-being, and about two-thirds said they have less than three months’ savings available for a medical emergency.

The opportunities in the critical illness market are only going to proliferate in coming years. Many of those who purchase policies will do so as a way to help fill the gaps in coverage due to increasing medical insurance deductibles. Informed distributors will take the next step and begin making sales based on mortgage protection, small-business needs, disability income supplements, or for any of a variety of reasons. Whatever the individual buyer’s situation, the fundamental need behind every purchase of a critical illness policy is still about the costs of survival and recovery.

I believe CI currently offers our generation the best marketing opportunity in the industry. Critical illness insurance also addresses a need not met by another product. If this article is your introduction to CI insurance, take the next step and learn more. And once you’ve learned, start educating your clients and prospects.

I recall how excited I was about critical illness in 1997, while writing my first business plan. I saw the potential and knew it was just a matter of time before this product became the vital financial protection tool it has become in other countries. But as enthusiastic as I was then, I’m even more convinced today because I have seen the positive difference this product has made in the lives of so many individuals who have survived a critical illness.

By Kenneth J. Smith, CLU

From the February 01, 2012 issue of Life Insurance Selling 

Kenneth J. Smith, CLU, is director, Health Product Sales, for Assurity Life Insurance Company.

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