Filed Under:Life Insurance, Life Planning Strategies

Critical illness insurance: Deciding on a dollar amount

How much cash does an individual need to cover expenses, health care-related or otherwise, while suffering from a critical illness? That's a question the industry is increasingly grappling with.

While sales of CII are growing, the needs analysis underpinning a  recommendation remains a work in progress.
While sales of CII are growing, the needs analysis underpinning a recommendation remains a work in progress.

While sales of critical illness insurance — a product that pays a lump sum in cash if the policyholder is diagnosed with a critical illness covered by the contract -- are growing, the needs analysis underpinning a product recommendation (a key component of the sales process) remains a work in progress.

Should the policy size be $30,000 or $300,000? Beyond certain known figures, estimates often become guesstimates. one reason is the lack of industry data about expenses incurred by those diagnosed with a critical illness, be it heart attack, stroke, cancer or other life-threatening ailment. That information would be especially useful for individuals who have a family history dealing with one disease or another. The data might also help boost revenue for an industry that prides itself on the ability to leverage numbers to achieve financial objectives.

Ken Smith, director of health product sales at Assurity Life Insurance Company, adds that CI policyholders should figure on covering between two and five years of mortgage payments.

Also to weigh are personal relationships that may be impacted by a critical illness. A spouse, adult children or other family members may need to take time off from work, potentially without pay, to care for someone with a critical illness.

Beyond the known variables, arriving at policy size requires a certain degree of guesswork. In many cases, the face amount will simply be decided by what an applicant can afford. Affordability should be less of an issue if critical illness insurance is purchased as a rider to a term life insurance policy. Hybrid life/CI solutions, like their long-term care insurance counterparts (life/LTCI), are growing in number to cater to middle market consumers for whom a single-purpose product is beyond reach.

But there’s a catch: If the critical illness rider is invoked, the policy death benefit will be reduced by the amount distributed to cover CI expenses. For those intent on passing on a legacy to policy beneficiaries, that has to be of concern. Also a potential issue is the limited duration of coverage. Whereas the critical illness rider lasts only as long as the term contract, stand-alone CI policies typically last to age 100.

“If a need can’t be met under Canada’s socialized health care system, a critically ill individual may need a lot of cash to get treatment in the U.S.,” says Weber. “That's one reason why Canadians tend to buy more coverage.”

They tend to buy more, too, because there is a greater focus on critical illness insurance in financial planning engagements north of the border. According to Weber, Canadian financial advisors take a holistic approach to planning, in contrast to U.S. counterparts who tailor their practices more narrowly (specializing in, for example, investments and/or particular lines of insurance.)

The worksite market is also attractive, says Patience, because employees tend to “pay a lot of attention” to company-vetted benefits; and because of the “power of automatic payroll deduction,” making policy lapses are less of a concern.

For policyholders, be they of worksite, group or individual products, critical illness insurance is likely to grow in popularity as product manufacturers expand the number of medical conditions and benefits covered under contract. In contrast to the first generation of products, which mostly covered a diagnosis of cancer, the current offerings embrace other common critical illnesses, among them: heart attack, stroke and renal (kidney) failure.

Often, says Weber, the mere mention of “illness” when referring to CII calls to mind health insurance. So to distinguish the offering, he describes the product as “critical insurance,” a label that reliably prompts questioning and thus serves as a good conversation-starter.

To help make the financial case for the product, Weber also describes how critical illness insurance might impact the needs analysis for other insurance products. If, say, an advisor recommends $40,000 in critical illness insurance to cover basic expenses over two years, then this total may reduce the amount of life insurance required.

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Nichole Morford

Nichole Morford
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