Critical illness insurance pays a lump-sum benefit upon the diagnosis of a serious illness such as life-threatening cancer, heart disease, or stroke. Other covered conditions often include major organ transplants, Alzheimer's disease, deafness, multiple sclerosis, kidney failure, blindness, or paralysis, with partial payments for angioplasty, bypass surgery, or noninvasive carcinoma. A major selling feature is that the lump-sum payment can be used for anything -- it does not have to be related to the illness.
Developed in 1983 by Dr. Marius Barnard in his native South Africa, critical illness insurance was initially marketed in South Africa. Since then, the concept has spread to Great Britain, Australia, Ireland, Japan, Canada, and the U.S. While sales have been booming in the United Kingdom and Canada, they've been sluggish in the U.S., where the critical illness market continues to develop with the introduction of new products and new players.
Critical illness insurance evolved from the so-called "dread disease" or "cancer" policies, which have been around for decades but were typically a bad way to insure against the risk of illness. Policies were expensive, covered only one disease (typically cancer), and paid only small sums of money on a daily basis. Many carriers have expanded these policies to include several diseases and conditions. Not surprisingly, the critical illness market is slowly gaining momentum as health care costs continue to skyrocket and insureds face a corresponding increase in out-of-pocket expenses.
Critical illness insurance is not meant to replace health, life, or disability insurance. Rather, it is designed to fill gaps in existing coverage when policyholders are diagnosed with a serious illness by providing a lump-sum benefit that can be used for anything, including items and services not ordinarily covered by traditional health insurance.
Sounds simple, right? Not so fast. Before you jump on the critical illness bandwagon, you should be prepared. It is vital that you understand exactly what is covered and what is not. Critical illness policies include numerous limitations and restrictions, and benefits can be difficult to collect. For example, what does the insurance company consider to be a life-threatening cancer? How is diagnosis defined in the policy? If there is a family history of a certain illness, will the policy exclude that illness? Are there pre-existing condition limitations? Does the premium increase? When is the lump sum received?
Important features to look for in critical illness policies include:
o Survival period: The number of days following diagnosis, if any, that the insured must live in order to receive benefits.
o Waiting period: The number of days following issue/reinstatement of the policy before full benefits are provided.
o Covered illnesses: Companies vary in which illnesses are covered and whether they are paid at 100 percent or a reduced amount (generally 25 percent).
o Conditions of payment: There are specific criteria that must be met before the benefit is paid. For example, some policies pay the major organ transplant benefit once an insured goes on the donor list, while other policies require that the transplant actually be completed. There are also specific requirements for diagnosis of a heart attack and special limitations for life-threatening cancer and noninvasive carcinoma. Be sure to know the policy definitions, as they dictate when (and if) claims will be paid.
o Benefit reduction age and amount: Most policies reduce the maximum benefit amount by 50 percent at age 65.
o Return of premium: Most policies refund premium (minus benefits paid) only upon the death of the insured.
o Pre-existing conditions: There is little consistency among companies on how and when they exclude pre-existing conditions. Pre-existing condition limitations can range from 30 days to 10 years (some companies use the "look back" approach, going back two to 10 years in reviewing an applicant's medical history).
o Underwriting: Generally, there is simplified underwriting with benefits less than $100,000 and full underwriting with benefits greater than $100,000. Some applications include questions related to height, weight, and family history. An insured with a family history of heart disease, stroke, or breast cancer may be denied coverage or charged a steep premium.
o Guaranteed renewable "to age": Most policies are guaranteed renewable (rates can only be raised by policy class), with some continuing for life, while others terminate at age 75 or 80.
o Issue ages: Generally 18 to 69, while some companies have maximum issue ages of 65, 70, or 75.
o Minimum and maximum benefit amounts: $10,000 up to $1 million or more.
Agents looking to expand their business into the critical illness marketplace should commit the time and effort necessary to learn the intricacies of the product -- it could mean the difference between success and failure.
Frank N. Darras is a partner with the law firm of Shernoff, Bidart & Darras LLP and heads the firm's health, life, and disability department. He has been singled out as America's leading plaintiff's lawyer, representing disabled policyholders and long term care insureds. Mr. Darras can be reached at 909-390-3770.
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