Will critical illness insurance take off?

Don’t get caught in the rain

Just as is the case with retirement savings, there’s a common theme when it comes to Americans and finances: We’re just not prepared enough.

There’s a long list of data telling us we aren’t prepared for a rainy day—or barely even a week from now: A Bankrate.com survey found that only 24 percent of consumers have the recommended cushion of at least six months’ expenses set aside. The vast majority isn’t ready for contingencies; another 24 percent don’t have any emergency savings at all.

And while a majority of us are outspending our income and charging new plasma TVs instead of padding our savings, we’re getting hit hard by real problems, health care most often topping the list.

In fact, medical expenses are the No. 1 reason for bankruptcies in the United States. And, according to a study in the American Journal of Medicine, among those bankruptcies, 78 percent of those individuals had health insurance.

Yes, health care costs are big and the rate at which they continue to grow is unsustainable. But to survive this mess, we need to be proactive.

Part of the solution? Critical illness insurance.

Consider this: A critical illness—such as a stroke, heart attack or cancer—can have a devastating effect on a typical household budget. And with most Americans admitting to not being financially prepared or financially fit, this is an obvious blow.

“Many people assume their major medical insurance will cover everything if they suffer a heart attack or stroke or are diagnosed with cancer,” explains Randy Finn, assistant vice president of product development at Colonial Life. “They don’t realize they’re going to have a lot of expenses outside their major medical insurance.”

Facing one of those illnesses can reduce a family’s income by more than $12,000 in the first year alone, even if the patient has medical coverage, according to a MetLife study.

Critical illness insurance is designed to help cover the medical expenses that health insurance won’t cover, such as deductibles, copays, noncovered prescription drugs, alternative treatments and out-of-town care, as well as nonmedical expenses, including mortgage or rent, utilities, car payments and insurance, health insurance premiums and lost income.

So have all these overwhelming stats finally begun to sink in for Americans?

Yes, if you believe industry experts.

Riding a new wave

Sales have been good for critical illness insurance this year—but still “nominally so,” explains Jesse Slome, executive director for the American Association for Critical Illness Insurance. He thinks it’s poised for a modest, steady growth this year more than it is destined for a fast growth spurt.

What’s maybe more surprising about the numbers is that younger people are buying critical illness protection.

Research from the American Association for Critical Illness Insurance and General Re Life Corp shows that roughly half of men and women who purchased individual critical illness insurance were younger than 45. Some 18 percent of male buyers and 17 percent of female buyers were between the ages of 25 and 34. Fewer than one in 10 buyers were age 25 or younger and just over one in five buyers were age 55 or older.

Finn says simplicity has to do with why that is.

“Critical illness insurance is a fairly simple product,” Finn says. “It generally pays a lump sum benefit upon initial diagnosis, although some products may include other benefits. This simplicity makes it easier to understand, especially for a younger person who may not have been in the workforce very long and doesn’t have a lot of experience with employee benefits.”

In general though, Slome says there’s a number of significant factors taking place propelling greater interest and sales growth.

For one, it’s a way to keep health insurance plans more affordable. “The health insurance plan you had five years ago is not the health insurance plan you are going to have today,” he says. “People are finding there’s a bigger gap in their financial exposure. As more people opt for high deductible health coverage as a way to control skyrocketing health premiums, a small amount of CI protection becomes an affordable strategy to address the uncovered part of the risk.”

Additionally, changing circumstances are making individuals modify the way they look at their health care and financial planning strategies.

“Today, for individuals in their 40s and 50s, the likelihood of surviving a critical illness should require employers to re-balance their employee education from a strictly life insurance focus to one that addresses the consequences of living following a critical illness occurrence,” Slome says. “That trend is just starting but as more employers look at what risks their employees face today, they will chose to adjust the mix of employee benefits offered.”

It also doesn’t hurt that critical illness is a member of the voluntary benefits market, a particularly hot trend.

Voluntary emphasis

Most industry insiders will tell you the voluntary market is taking off. Looming changes from health care reform, combined with increased cost-shifting to employees, has put voluntary products at the forefront of the benefits industry—or, at least, that’s what’s about to happen.

The Eastbridge Consulting Group’s Voluntary Industry Confidence Index shows brokers are increasingly confident about the voluntary employee benefits industry. Based on sales growth, profitability of the industry and employee enthusiasm about voluntary products, confidence increased to 99.7 at year-end, up from 98.4 in a mid-year 2011 survey.

And instead of the usual ancillary benefits that come to mind with voluntary products—say dental and vision—products like critical illness are taking the spotlight.

While those two often top the list in terms of sales, CI is among the top five in terms of sales growth potential, says Marty Traynor, vice president of voluntary benefits and products at Mutual of Omaha.

Critical illness insurance, most industry insiders will agree, is one of the top voluntary products to watch this year. That’s because, Traynor explains, it’s finally getting into mainstream benefit sale by employee benefit.

As awareness grows, so will sales. “The recession and the slow economic recovery have awakened and renewed people’s interest in the idea of financial protection,” says Jodi Anatole, vice president at MetLife.

“No thanks”

But for many, there’s still a great deal of hesitation for products like critical illness insurance. When it comes to cancer or other devastating illnesses, there’s the usual thought of “it can’t happen to me.”

But the likelihood of suffering a critical illness is surprisingly high. Among two of the most used critical illness claims—heart attack and cancer—the stats are alarming. The American Heart Association says one in three adults have some form of cardiovascular disease. And one in three women and one in two men in the United States will develop cancer during their lifetime, the American Cancer Society reports.

“As more people—and more young people—become aware of what the risks are, what can happen, and why a small amount of this insurance is actually a really smart deal, they’ll look and they’ll say, ‘OK. I see,’” Slome says.

But as Anatole explains it, there’s a “lack of awareness on two fronts when it comes to the financial implications of a critical illness on a household budget.”

“One is that people don’t understand what critical illness is and how it can provide a financial safety net to help cover the unexpected costs of a critical illness,” she says. “The other is that people do not realize that their medical and disability coverage may not address the full financial consequences of an illness—and are often surprised to find that there are uncovered expenses.”

So what to do?

Industry experts advocate what you might expect: Education, education, education.

One important thing to note to potential buyers: It can actually be really affordable.

“The nice thing about critical illness is you can buy half a million dollars worth of coverage, but you’re probably not going to need half a million dollars worth of coverage,” Slome says. “You need enough just to cover some of the expenses while you’re undergoing treatment—so you might only need $20,000. And as a result, it’s a much more cost effective way to get that insurance.”

His association’s research shows roughly half of critical illness insurance buyers purchased individual policies providing benefits of $20,000 or less. And some 29 percent of male buyers and 31 percent of female buyers purchased benefit levels of $10,000 or less. Only 9 percent of men and 8 percent of women purchased more than $50,000 in protection.

Though it sounds like an easy sell, there won’t be any sales if there’s not more awareness brought to the product.

Where insurance is involved—and especially such a specific type—the average employee doesn’t understand it. According to MetLife numbers, only a quarter of full-time employees say they’ve even heard of critical illness insurance. Among those, the majority are confusing it for health insurance, disability income insurance, or a government insurance program.

But once they do know, most of them—75 percent—say they find the product “extremely appealing,” with many even willing to pay the entire premium.

“This is a product that is still being sold—meaning someone has to come in and educate and make people aware,” Slome says. “But over time, what you’ll see is a growing amount of consumer awareness and consumer understanding and then that’s when this product will really take off.”

By Kathryn Mayer from the September 2012 issue of Benefits Selling Magazine

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