Some insurers offer critical illness insurance to clients once they’ve been approved for better-than-standard rates for life insurance, since those healthy clients have the best chance of qualifying. But the percentage of offers that actually get accepted is dismal. Word of mouth tells me that around 5% of all offers are actually taken.
Reasons advisors give include:
- My clients aren’t worried about this happening to them.
- It seems expensive.
- The product is complex and confusing.
- There’s a lot of difficulty with underwriting.
Let’s examine each of the four objections.
Do clients actually feel no need for this product?
LIMRA research from 2013 tells us 77% Canadians are concerned with lifestyle and health costs if they became critically ill. A further 84% were concerned with the government’s ability to fund the current healthcare system. Those concerns are not unfounded. A StatsCan survey from 2011 found that 24% of retirees had retired due to health or disability; a Sun Life survey from 2014 found that 41% of retirees did so because of personal health.
So many people are aware of health-related financial costs, but how many Canadians could be a fit for this coverage?
Just like life insurance, critical illness coverage is likely suitable for people under age 55 (CI coverage is often cost-prohibitive after that age). CI coverage can help anyone whose illness or death would cause financial liabilities (e.g., debt, bills) for a spouse or dependant. Often, the money is used to replace lost income when disability coverage doesn’t pay out, which can happen if the insured’s condition is not severe enough to satisfy a doctor’s opinion of someone’s inability to work for a sustained period. CI simply pays out upon diagnosis of specific illnesses.
Also, single people who don’t need life insurance could benefit from CI coverage, as they could use the payout to replace lost income and pay for caregiving services.
LIMRA data says the industry had less than 700,000 policies in force at the end of 2014. With nearly 15 million Canadians between the income-earning ages of 25-55, more than 95% of people who may need CI protection aren’t covered.
Is critical illness expensive?
Cheap and expensive are relative terms. A Term 10 CI plan should cost more than a Term 10 life insurance plan, because the T10 CI is priced to potentially pay out while the policyholder is still alive.
But if cost is an issue, why does the majority of the industry recommend CI plans as Level Cost to 75 or 100 with Return of Premium? Is it because clients are clamoring for the return of premium? Or is it because it’s easier to talk about a money-back exit than doing needs-based planning?
In my opinion, every client who qualifies should own at least enough to cover a year of lifestyle expenses, plus a cushion for unforeseen medical costs. This would give most people up to a year of expense coverage to allow them to make choices that focus on recovery from illness. A 35-year-old male non-smoker can buy $100,000 Term 10 for around $35 per month, renewing in year 11 at approximately $70 per month. A 45-year-old female non-smoker can buy the same amount of Term 20 for less than $90 per month. If a client wanted less protection, $50,000 of coverage would cost slightly more than half those figures. If the client uses after-tax dollars to pay for basic protection, these benefits would be payable on a tax-free basis.
What impact would $50,000 of protection have on a client’s finances? If someone withdrew $50,000 from her RRSP, it would cost $75,000 to $100,000 before tax, depending on her marginal tax rate. That $100,000 could have been worth $200,000 or more at retirement, depending on time and growth rates. You can prepare personalized analyses for clients by inputting a lump sum expense, or ceasing their income for a brief period of time. The impact is often staggering.
Consider a family with children, with combined income under $150,000, and a mortgage. They want to cover income replacement needs at death, but they have many competing financial priorities. Most advisors would recommend Term 10 or Term 20; virtually no advisor would suggest $1 million of fully overfunded UL or WL for a 45-year-old male, since it would cost tens of thousands of dollars. Term 10 could have been purchased for less than $60 per month. So why are advisors recommending premium CI products to that same family?
Is CI too complex for a client to understand?
I would suggest it’s no more complicated than any comprehensive whole life or UL plan. Those plans’ complex machinations of tax sheltering, internal credits, disclosed and undisclosed assumptions, and various changing cash access concepts are embraced by the advisory community, yet a product that was originally designed by a doctor to pay money upon diagnosis of a life-altering illness is somehow deemed to be more complex.
Is critical illness insurance hard to qualify for?
Anyone over 50 or who has a family history of hereditary issues will have a tougher time qualifying. But the majority of people who apply still get standard offers. And many people receive offers when they qualify for life insurance rates on a better-than-standard basis. These offers are often done with few, if any, additional health questions, and the majority of these offers are not taken.
CI coverage is, and should be, more difficult to qualify for than life insurance: if a claim is made, the claim pays sooner than a death claim would — sometimes decades earlier. And, many people live fruitful lives after a claim.
What should our industry do?
- Companies need to help advisors who find making these offers difficult.
- Advisors need to explain the need up front, not as an afterthought.
- Advisors need to simplify the conversation and focus on how the product fits client needs.
Advisors should approach critical illness the same way they approach life insurance – focus on covering the need with term first, and then upgrade to long-term, cash-rich plans for clients who can afford to do so. Most advisors I know who emigrated from South Africa, where the product was born, use the product this way.
More importantly, advisors need to take a holistic, risk management approach, and explain all risks up front, so that if an offer for illness protection is given after a life insurance plan is accepted, the client doesn’t think it’s an afterthought.