Critical Illness Insurance May Fill Important Niche
Although critical illness insurance is a relatively new and unknown product in Canadian markets, it could potentially fill an important gap in the insurance portfolio of some individuals.
"Consumers often get disability insurance confused with critical illness insurance. (They say) ‘I’ve got disability insurance. Why do I need critical illness insurance?’ But once you explain to the consumer what the product is and what it’s intended to do, they usually have a very strong interest in purchasing it," says Steve Carter, senior vice-president of marketing at AIG Life of Canada in Toronto.
Critical insurance (CI) is designed to provide coverage in the event a person is diagnosed with any of a specified list of about 20 critical illnesses – topped by cancer, stroke or heart attack. Unlike disability insurance, which usually takes much longer to kick in – and then only after there are visible signs of disability, most benefits are realized within 30 days of diagnosis, which can make a huge difference, emphasizes Stephen B. H. Smith, president of Yorkminster Insurance Brokers Limited in Port Hope, Ontario.
He cites the example of a hypothetical individual diagnosed with ALS (Lou Gehrig’s disease), noting it might take a long time after the original diagnosis for that person to become disabled and, therefore, eligible to collect disability insurance. "They’re not disabled (in the sense that) they can do whatever they did (before) perfectly well, except they don’t have the heart to because they know they’re going to be dead in (a few) years. So the purpose of critical illness insurance is to provide some cash for whatever they want prior to disability," he says.
The benefit money can be used for anything, such as paying down a mortgage, taking the trip of a lifetime, or seeking out the best medical treatment anywhere in the world. At this point, the tax status of critical illness policy benefits (i.e., whether or not they are tax-free) has yet to be determined by the Canada Customs and Revenue Agency (CCRA).
CI policies usually provide coverage with level premiums until expiry at ages 65, 75 or 100, although there are some shorter-term policies that run for only ten or 20 years, then are renewable at higher premiums based on the policyholder’s current age. Some insurance brokers also offer family plans whereby other family members, including a spouse and/or children, can also be covered under the same policy; this provides overall savings compared to taking out individual policies.
One of the most popular options is the policy with level premiums until age 75, which makes a lot of demographic sense to Mr. Smith. "Most people live to age 75 in reasonably good health—working to age 65 and then (enjoying) 10 years of retirement. So to my way of thinking, the purpose of critical illness insurance is to get you through if you are struck down with a critical illness before you’ve lived out your three score and fifteen years," he says.
For most diseases covered by the critical illness insurance policy, it is standard to have a waiting period, or survival requirement, of at least 30 days after diagnosis before the policyholder is eligible to obtain benefits (some illnesses, such as multiple sclerosis, or paralysis, may involve a longer period of 60 or 90 days). A return of premium is generally issued to the estate of individuals that don’t survive at least that long. With respect to a cancer diagnosis, it is also customary that the policy should have been in force for at least 90 days prior to that diagnosis to ensure coverage for the ensuing illness.
Individuals applying for critical illness insurance go through a process similar to that for life insurance, including undergoing medical tests and answering questions about their family medical history. The existence or lack of a family history of critical illness is a major factor in the policy’s underwriting. If, for example, there were certain serious illnesses within the immediate family, such as cancer among parents or siblings before age 60, the applicant might end up having to pay a surcharge on their annual premium to compensate for the additional risk, or be rejected for the CI policy altogether.
The types of cancers that could potentially cause coverage to be denied vary since some illnesses, such as prostate, colon and breast cancer, have stronger hereditary ties than others. The age of the applicant, relative to the age of the family member when they contracted the disease, is also taken into consideration.
"In critical illness, you’re underwriting to review the risk that a person will be on claim very soon. One family incidence of cancer is usually not a problem. But where you have multiple incidences, that is our best indication there is a significant risk this individual too will be diagnosed with cancer," says Teresa Walkey, life product director at the Individual Life Centre of Manulife Financial in Kitchener, Ontario.
For an additional annual charge, insurance companies generally offer policyholders a return of premium rider upon expiry if the client never comes down with one of the specified illnesses before their policy terminates. In fact, the return of premium rider upon expiry is one of the most compelling sales features of the CI-related product, with some two-thirds of all policies sold in Canada today containing that rider, according to Ms. Walkey.
"People understand the need for life insurance because death and taxes are certain. But although the risk of critical illness is statistically great, it isn’t a certainty. So, the ability to get your money back if you aren’t diagnosed (with one of these illnesses) is a very powerful closer," she says.
Canadian insurance companies offer CI policies over varying lengths of time. For instance, AIG Life of Canada, which introduced its first CI product in 1999, offers five options under the banner Living Benefit. These include Living Benefit 100, Living Benefit 75, Living Benefit 65, Living Benefit 10 and Living Benefit Plus.
When the Living Benefit 65 terminates, AIG Life provides the recipient with lifetime coverage until age 100 for half the amount of the original policy. If, for instance, a client had a $200,000 policy, by age 65, when they no longer have to pay any premiums they would be entitled to permanent critical illness coverage of $100,000, says Mr. Carter.
Manulife Financial, which inherited its Lifecheque brand of CI policies in a takeover of Commercial Union Life Assurance Company of Canada in 2001, offers CI policies with level premiums until age 65, 75 or 100. Policyholders can also opt for ten-year premium cycles until age 75. The policy to age 65 covers only four conditions—cancer, heart attack, stroke and coronary artery disease, whereas the policies that run to ages 75 or 100 cover the company’s full list of 22 illnesses (see accompanying sidebar).
Manulife also provides a partial benefit of 25 per cent of the policy’s face amount to cover for early intervention conditions with respect to prostate cancer, breast cancer, and coronary angioplasty, Ms. Walkey points out.
In addition, Manulife offers a partial payment for a policyholder diagnosed with cancer within the 30-day holding period. "We (realized) people could have treatment decisions to make long before that waiting period is over, so we said ‘submit your information as fast as you can and we will pay a recovery benefit (of) 10 per cent of the face amount up to a maximum of $10,000 to get you started focusing on your recovery,’" says Ms. Walkey.
Mila Markovic, director of individual product and market development at UnumProvident in Burlington, Ontario, says that company’s Critical Illness Recovery Plan product, which was first introduced about 1998, offers four options, including a Term 10 policy that renews every 10 years and is convertible to a permanent policy; as well as policies with level premium terms to ages 65, 75 and 100.
UnumProvident also offers a functional independence rider if a client cannot perform certain activities of daily living because of a disability that is not specifically covered by their policy. This rider becomes effective under circumstances involving the loss of two or more activities of daily living (including bathing, continence, dressing, eating, toileting, and transferring), or in the event of cognitive impairment, that arise as a result of injury or sickness. One-sixtieth of the lump sum payable under this rider is payable each month over a five-year period.
Maritime Life offers its product, Critical Needs, which has been available since 2000, in policies where premiums remain fixed for ten and 20-year terms. Another policy offers level premiums to age 75, says Sue Simone, the company’s Toronto-based product manager of living benefits.
The accompanying sidebar provides some general CI-related policy details, along with a hypothetical example of premium costs for three insurance companies mentioned in this article. There are, of course, a number of other financial services companies in Canada that also offer critical illness insurance policies to their clients.
Jeff Buckstein, CGA, Financial Journalist, 32 Ipswich Terrace, Kanata, Ontario K2K 2R4 (613) 599-2498
© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published July/August 2003
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