Why isn’t CI selling?

For 10 years, critical illness (CI) insurance has promised Canadians money if they’re stricken with a life-threatening medical problem such as cancer. At first, sales were brisk, but in the last five years the CI space has basically come to a standstill.

Starting in 2005, sales have continually dropped, with the industry seeing a -5% change in sales of new individual CI policies in the first quarter of this year. The falling numbers have sparked debate across the insurance and advisory community as to why CI can’t sell.

Janet Freedman, a financial planner with Toronto-based Finance Matters, says a big part of the problem is cost. For a 55-year-old female non-smoker, the cost of level coverage to 75 would be $2,005 a year for $100,000 worth of coverage without return-of-premium (ROP) — an option which allows clients to get back all the cash they’ve put in after the policy expires.

With the ROP option, that level coverage to 75 would cost $4,394. That may be hard for some clients to stomach, especially after buying life insurance and disability insurance policies.

“There’s a finite amount of insurance dollars,” says Freedman. “Where is the average family going to come up with another $2,000 or $3,000 for a decent CI policy?”

Mark Halpern, a CFP and founder of illnessPROTECTION.com, says ROP can increase monthly payments by about 40%. He explains that return-of-premium is the hook he uses to get clients in the door. Once they’re interested, though, he rarely sells them that type of policy.

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The ROP option is popular among high-net-worth clients who have money to spend. Still, yearly costs are high, especially because many of them are taking out policies for $1 million, or more. Halpern has one client who pays $90,000 a year for a $2 million 15-year ROP policy.

“He gets all his money back [if he doesn’t make a claim],” says Halpern. “For wealthier people they have a whole bunch of assets with some fixed income earning 2% after tax. I just say why not shift money into this hedge? If they get sick, they can get $1 million tax free after 30 days or stay healthy and get all their money back.”

While CI seems to make sense for cash-rich Canucks, it’s not the wealthy that are making up the bulk of buyers. The average policy is for $80,549, signaling it’s the ordinary Canadian who’s purchasing the product.

“It’s not cheap,” says Corry Collins, a CFP with Halifax-based Living Benefits Atlantic. “But it’s expensive not to have it, and the product is so flexible.”

Until recently, another problem preventing massive sales of CI has been the definitions of the illnesses covered. Despite what some might think, Freedman says that a heart attack or cancer does not automatically warrant a payout.

“When we first saw these policies it covered heart attack, stroke and cancer,” she says. “But there has to be heart damage under heart attack, essentially brain damage for a stroke, and cancer has to be stage three.”

She adds the coverage doesn’t pay out immediately — it takes about 30 days — so “don’t rely on it to cover you for everything,” she says.

Freedman herself was paralyzed for two months a few years ago, but she says no insurance company would have paid her. “If I had been someone who ended up in a wheelchair and completely paralyzed it would have paid out,” she says.

Halpern admits that non-critical conditions either aren’t covered or will have a limited payout. First-stage breast cancer, prostate cancer and angioplasty will sometimes pay $50,000 depending on the policy. But otherwise, he says “the definitions are quite clear. If people fill out their application properly with a professional advisor, there’s no reason they won’t get paid.”

At the recent World CI Conference in Toronto, Munich Re, the country’s only CI reinsurer, tightened up the definitions so there would be no discrepancy on what will pay out and what won’t. “It’s really good that they’ve done this,” says Halpern. “For those people sitting on the sidelines — consumers and advisors — hopefully it will be [easier] to sell.”

Probably the biggest issue facing declining CI sales, however, is that advisors have yet to fully embrace the insurance product. Collins says advisors just aren’t talking about it. “If you don’t talk about it, you’re not going to sell it,” he says. “We sell it because we bring it up.”

“Why hasn’t it sold?” asks Halpern. “The average age of advisors in Canada is 57. When you’re that age you’ve been doing things the same old comfortable way. You’re selling a product you know nothing about so why bother? It’s apathy. A lot of younger people will be selling this.”

He points out that often clients don’t like talking about mortality, so they avoid the subject of CI altogether. “People who know about it don’t want to deal with it,” he explains. “Most people like to put their head in the sand.”

Many clients also think that any financial setbacks due to medical conditions will be covered by provincial health plans or a work plan. “I’d call that the ignorance factor,” he says.

The advisors who sell CI are optimistic that when the masses know about the coverage, it’ll really fly off the shelves. But both Halpern and Collins say that the more mature the Canadian CI market becomes the more expensive the product will become.

Halpern says that, because there’s only one reinsurer, once more claims are made and they measure things from a profit/loss perspective, it will be more difficult to get CI. “Rates will only go up,” he says. “The definition of disabilities is only going to become more stringent.”

“If you look at the rest of the world, where they have more experience [with CI], the overall comment you hear about Canadian policies is that they’re on sale,” adds Collins. “The fact that you can have a policy to age 100, or that there’s ROP, that won’t be able to last.”

Instead of deterring advisors from selling the product, though, the changes to the marketplace should encourage advisors to sell CI now. “Buy while it’s still here,” says Collins. “This gives a reason to sell.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(05/09/08)