Critical Illness Insurance

Critical Illness Insurance

What is critical illness insurance? Did you know that medical problems contribute to over 60 percent of all bankruptcies in the United States?  You might assure yourself by saying “Nothing to worry about!  Unlike millions of other Americans, I have health insurance!”

A 2008 Harvard University study found that 77.9 percent of those had health insurance at the start of the bankrupting illness. As you may have noticed, this study was conducted prior to the economic downturn and will likely understate the current burden of financial suffering.

Consider how many Americans will be affected this year with a critical illness:

  • 1.4 million Americans will be diagnosed with cancer (American Cancer Society).
  • An estimated 785,000 Americans will have a first heart attack.
  • Some 600,000 Americans will experience their first stroke (American Heart   Association).

The good news: the vast majority will survive.

Yet the financial consequences of surviving a critical illness are something few people are prepared for. Most health insurance policies come with deductibles and co-pays that can be as high as $5,000 a year. Prescriptions are not just costly, they are rarely fully covered.

Here is something else you may have not considered: while you are undergoing treatment or recovering for an extended period of time, you will still have to pay your health insurance premiums. Further, you’ll need to continue to pay for insurance, rent or mortgage, credit card bills, school tuition, real estate taxes, food and utilities.

According to the Harvard study, many families with health insurance found themselves under-insured and responsible for thousands of dollars in out-of-pocket costs. The average out-of-pocket cost was $17,749 for all medically bankrupt families. Because most health insurance is linked to employment, a medical event can trigger loss of coverage. For patients who initially had private coverage but lost it, the family’s out-of-pocket expenses averaged $22,568.

Just to assure you that you may not be alone, six out of 10 American workers do not have a financial plan to deal with an unexpected and costly life event such as a medical emergency, according to a 2011 survey by supplemental insurance provider Aflac.

The 2011 Aflac WorkForces Report found that:

  • 51 percent of workers said they are not very prepared or not at all prepared to pay for out-of-pocket expenses not covered by major medical insurance.
  • 31 percent have less than $500 in savings for emergency expenses.

Health Perception Gap

The study uncovered that only 19 percent of employees think it likely they or a family member will be diagnosed with a chronic illness such as heart disease. However, the American Heart Association reports nearly one in three deaths in 2006 was caused by a form of cardiovascular disease, including coronary heart disease and stroke.

When asked how they would pay for out-of-pocket expenses attributable to an unexpected illness, 44 percent of workers said they would have to borrow money from family or friends, tap retirement savings or use a credit card. And 19 percent have no idea how they would cover the costs.

“About half of the workers we surveyed said they’re already struggling with financial stress,” said Audrey Tillman, executive vice president of Corporate Services at Aflac. “It shows how close to the edge many people are and how an unexpected accident or illness could make things even more challenging, financially.”

Consider Critical Illness Insurance

In October 1983, critical illness insurance was founded by Dr Marius Barnard in South Africa.  It was branded with the less-than-optimistic name of dread disease insurance. When sold to individuals, rather than groups, this coverage is sometimes called critical care insurance.

Since 1983, coverage has been introduced into many insurance markets around the world. Other names the insurance has been given include: trauma insurance, serious illness insurance and living assurance.

In 1996, critical illness insurance was developed in the United States to help American consumers cover expenses associated with critical illness. This specialized insurance provides a lump-sum, tax-free payment should a policyholder suffer from certain specific critical conditions.

How much cash could I receive?

The cash payments which can range from $10,000 to as much as $1 million. Unlike other insurance payouts, for critical illness insurance, recipients are paid a single, lump sum payment as soon as the individual is diagnosed with a covered condition.

Some policies could even pay you multiple times. For instance, you’d get one payout for a cancer diagnosis, then a second, albeit reduced payment if you have a heart attack.

What illnesses are covered by critical illness insurance?

The schedule of insured illnesses varies between insurance companies. In 1983, four conditions were covered by the policy

  • heart attack
  • cancer
  • stroke
  • coronary artery by-pass surgery

Today, here are examples of other conditions that might be covered:

  • Alzheimer’s disease

  • blindness

  • deafness

  • kidney failure

  • A major organ transplant

  • multiple sclerosis

  • HIV/AIDS contracted by blood transfusion or during an operation

  • Parkinson’s disease

  • paralysis of limb

  • terminal illness

Since the incidence of a condition may decrease over time and both the diagnosis and treatment may improve over time, the financial need to cover some illnesses deemed critical a decade ago may no longer deemed necessary today. Likewise, some of the conditions covered today may no longer be needed a decade or so in the future.

Critical illness insurance was originally sold with the intention of providing financial protection to individuals following the diagnosis or treatment of an illness that was determined to be critical. Critical illness insurance may now be purchased by individuals in conjunction with a life insurance or term assurance policy, and known as a ‘bolt-on’ benefit.

The finances received from a critical care insurance policy could be used to:

  • pay for the costs of the care and treatment

  • pay for recuperation aids

  • replace any lost income due to a decreasing ability to earn

  • even pay for a change in lifestyle

An example of how proceeds from a critical care insurance policy could be used

This insurance could provide financial protection to the policyholder or their dependents on the to repay a mortgage due to the policyholder contracting a critical illness or upon the death of the policyholder.

As an example, in developing a critical care insurance policy, some insurers may choose to structure the policy to repay a portion of the outstanding mortgage debt on the contracting of a critical illness, while the full outstanding mortgage debt could be repaid upon the death of the policyholder.

Another option would be for the full sum to be paid on diagnosis of the critical illness, but then no further payment would made on the policyholder’s death, effectively making the critical illness payment an ‘accelerated death payment’.

What are the challenges of marketing critical care insurance?

Before reading this article, you probably never heard of critical illness insurance.  It is a simple and reasonably priced supplemental health policy that can be a financial lifesaver, especially if you’re diagnosed with one of the “big three” — cancer, heart attack or stroke.

First, the coverage is relatively new to the U.S. market.  As we mentioned earlier, the first policy was sold in 1996 and just 600,000 Americans are currently covered, according to the American Association for Critical Illness Insurance. Secondly, it’s sold by brokers and agents who tend to  focus on selling their bread-and-butter product, life insurance. Thirdly, it mostly benefits those in their 30s, 40s and early 50s, a demographic that isn’t exactly beating down the doors of life insurers these days.

“The No. 1 problem is nobody has ever heard of this protection,” says Jesse Slome, executive director of the American Association for Critical Illness Insurance (AACII). “In that regard, it’s very much like long-term care insurance.”

What is Long-Term Care Insurance?

Long-term care insurance (LTC) is an insurance product that helps provide for the cost of long-term care beyond a predetermined period. Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid.

What can long-term care insurance offer you?

Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities. If home care coverage is purchased, unlike with Medicaid, long-term care insurance can pay for home care, often from the first day it is needed. Home care will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to seven days a week, 24 hours a day (up to the policy benefit maximum).

So, with long-term care, one need not be “sick” in the traditional sense of the word or be “critically ill” to receive the kinds of services that long-term care insurance can provide.

What are the challenges of marketing long-term care insurance?

According to figures from Genworth Financial, the sales of long-term care, or LTC, insurance plummeted 32 percent between 2005 and 2009. This is in part due to premium hikes that reflect increasing claims on existing policies and the potential impact of the rising costs of home health care and assisted living on future contracts.

“It’s highly priced,” says Norse Blazzard of Blazzard & Hasenauer, a Florida firm that advises insurance companies. “The problem with long-term care insurance is that anybody who can afford it doesn’t need it, and anybody who needs it can’t afford it.”

Long-term care also struggles under the weight of two historical anomalies today: the aging baby boomer population and rock-bottom interest rates. For insurers, that translates into more potential claims and meager investment returns with which to pay them.

“Some companies like MetLife and others have gotten out of the (LTC) business because they just couldn’t price it properly,” says Blazzard, who serves on the MetLife board. “They were losing their shirts.”

All of which is forcing many Americans to consider plan B.

“What people need to do is get away from saying, ‘I’m going to buy something that’s going to take care of 100 percent of my need’ and instead buy something that takes care of a large percentage of their need,” says Dan Prescott of Prescott Pailet Benefits of Dallas.

But Blazzard isn’t optimistic that long-term care insurance per se will be viable, much less affordable, anytime soon.

“We need it desperately. The problem is, in today’s economic climate, I don’t see how anybody can sell it at a profit, because you either have to crank up the loads so high that nobody can afford it, or you’ve got to crank down the benefits to where there is no point in having it. It’s a bit of a conundrum that I don’t know how to solve, and I don’t think any actuaries do either.”

Just as long-term care recognized the new reality that Americans were living longer, critical illness insurance acknowledges that we’re far more likely to survive a heart attack, cancer or stroke today than we were just a few years ago. For example, of the 1.4 million Americans who will be diagnosed with cancer this year, women have a 63 percent chance of surviving at least five years and men a 66 percent chance, according to AACII figures.

“The good news is you’re likely to live,” says Slome. “The bad news is you’re likely to be broke.”

Do you really need critical illness coverage?

Critical illness insurance is designed to help cover the medical expenses that your health insurance won’t cover, such as deductibles, copays, non-covered 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.

“If you’re 30 years old, married with kids and you get cancer, the first thing that is going to happen is, you’ll take time off from work,” says Slome. “Some of that is compensated, some won’t be. And your spouse will likely take some time off to help compensate. So it’s not just losing one income; it impacts the whole family.”

It can make up for the shortcomings of your employer-sponsored disability coverage, which typically only covers 60 percent of your income and may not kick in at all if your treatments allow you to return to work.

Critical illness coverage pays your entire benefit amount in one lump-sum payment if you are diagnosed with a critical illness covered by the policy, even if you make a full recovery.

With proper planning, critical insurance can help individuals withstand a prolonged treatment and recovery period without digging themselves deep into debt. It also can help pay for lifesaving treatment that requires temporary relocation, such as waiting for an organ transplant.

Costs and considerations

How much critical illness insurance might you need? As a starting point, Ken Smith, director of product sales at Assurity Life Insurance, recommends multiplying your monthly mortgage payment by 24, or two years, and adding $5,000 for expenses not covered by your health insurance. For example, if your mortgage is $1,500 per month, your policy benefit amount would be $41,000. Policy limits can range from $10,000 to $1 million.

As for costs, rates may depend on your age, sex, use of tobacco products, health and the coverage amount. For example, the average annual premium for a male nonsmoker based on a $40,000 benefit is $575 to $610 at age 40; $745 to $785 at age 45; and $940 to $980 at age 50, according to the AACII. Tobacco users can expect to pay roughly double.

Critical illness insurance is available as individual coverage, through an employer’s group plan and even as a rider on some life insurance policies. Slome says critical illness insurance policy rates are usually guaranteed for three years and, while not tax deductible for individuals, are paid tax-free to recipients. Policies with face values of less than $50,000 typically don’t require a medical exam, he says.

The two components of critical illness insurance and long-term care insurance

Both kinds of insurance coverage have two main components: medical and financial. Both issues must be evaluated using some combination of personal preference, probability and statistics in order to determine a sensible course of action. There isn’t one right answer for any couple or individual; many will have several options to choose from based on their risk tolerance, and personal situation.   Remember that paying premiums is less costly than paying long-term expenses out of your pocket.

Before purchasing a policy, be sure to compare rates, features and benefits offered by different insurance companies. More importantly, since the purchase of critical illness insurance or long-term care insurance involves the consideration of a myriad of factors, be sure to consult with your estate or financial planner, attorney and insurance agent about the choices that are appropriate for you and your family.

Other Enhanced Insurance articles related to Long-Term Care Insurance:

Alzheimer’s, Dementia, and Long-Term Care Insurance

Why Didn’t My Parents Buy Long-Term Care Insurance

Is There a Benefit to Purchasing a Limited Pay Long-Term Care Policy

Do I Need Long-Term Care Insurance

Long-Term Care Rider

Long-Term Care Insurance (With Video)

Group Long-Term Care Insurance

Medicare and Medicaid in Regard to Long-Term Care

The Cost of Long-Term Care Insurance

Types of Long-Term Care Insurance

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