When it comes to insurance, choose wisely

More than 30 years ago, I entered into the insurance industry as a career agent for the Canadian division of the Paul Revere Life Insurance Company. Despite a host of life insurance products, the company’s true focus was on “accident and sickness” — providing disability income or income replacement insurance (a protection product that replaces an income in the event a client gets sick or has a debilitating accident that makes him or her unable to work and earn).

The company offered many variations on the disability income product which appealed to high-earning professionals and blue-collar workers alike. Much like the system today, the company would grade applicants based on their occupations and risk, and assign them to categories ranging from 4A to B. The former was reserved for white-collar professionals such as lawyers and doctors, and the latter catering to blue-collar workers such as bricklayers.

The categories would dictate the type of plan available and the premium level. As the classification progressed from B to 4A, the terms and benefits offered by the plans improved as well. More extensive and expensive categories such as “own occupation,” and options such as residual benefits and pre-disability indexing became part of the standard plan for professionals.

Replacing income

The amounts of income replacement indemnity or monthly disability income available were based on income earned before taxes, and after expenses. An income table would dictate the amount of indemnity available, taking into account income and benefits that might be received from other sources such as group employee benefit plans or association plans.

The applicant could decide on the elimination period — the period that would have to lapse from the onset of disability to the commencement of the claim — and the benefit period, which is the period when the individual would become eligible to receive payments.

There was a plethora of additional benefits, options and riders that could be added to the contract to enhance the coverage and increase the premium.One of the most popular, and useful, was the guaranteed insurability rider that provided an opportunity for the insured to increase the indemnity in unit amounts on certain pre-set anniversary dates.

The option to increase could be exercised without the requirements of providing evidence of insurability. My clientele uses this option even to this day. As their income increases, so does their ability to increase their level of protection.

Individual disability income replacement contracts or group employee long-term disability plans were, and still are, designed to insure up to the age of 65, in line with the accepted and acknowledged retirement age. So, if clients became disabled and eligible for claim they would receive benefits until 65.

Some individual contracts have the option to continue coverage past age 65, based on non-guaranteed rates. However, if a person over 65 becomes disabled, payments are generally capped at 24 months. For today’s demographic — and the current environment of deferred or part-time retirement after 65 — these contracts might need to be redesigned. This will likely be the next challenge for actuaries and companies that provide disability income protection.

Insurance evolutions

Disability income contracts haven’t changed dramatically but the industry has evolved and other types of insurance have been introduced. Over the years, other products have been developed to protect our clients who may be diagnosed with an illness or suffer a debilitating accident and are unable to perform daily living activities. They provide levels of protection for specific health-related situations that weren’t previously addressed.

Certain concepts actually weren’t even developed by insurance companies, but by other professionals who saw a gap in insurance offerings. Critical illness insurance, developed by Dr. Marius Barnard, was one such plan.

Having successfully transplanted organs and saved the lives of several patients in South Africa, the Barnard brothers were concerned with their patients financial positions after the costly procedure. In many cases, according to Marius Barnard, the patient was saved but left destitute and penniless. So he approached a company in South Africa to develop and price critical illness insurance. The idea caught on and now critical illness insurance is available around the globe.

A newer product gaining traction in Canada is long-term care insurance. Healthier lifestyles and advances in medical science mean Canadians are living longer. Oftentimes though, long life isn’t synonymous with quality of life. There are many situations where older people due to illness, age or disease, require additional care with daily activities. Eventually, they may need more extensive care that’s available only in a nursing home or assisted living residence.

Not to be confused with retirement homes, long-term care institutions have staff trained to assist with managing basic everyday activities such as feeding, toileting and movement. There are also patients who suffer from cognitive ailments and would endanger themselves or others if left alone. Long-term care contracts provide monthly income to mitigate the costs of either at-home or a long-term care or palliative facility.

Determining suitability

While beneficial to the consumer, the availability of these new products presents a challenge to the insurance advisor.

As advisors, how do we determine what product is most suitable for our clients situation? If they have limited disposable cash for these insurance products, how do they determine if they should have long-term disability insurance protection in order to replace their income, critical illness in the event of diagnosis with a life threatening illness or long-term care? What plan is best suited for them and how do we advise them where to spend their hard-earned money?

To help clients consider which plan is best, we need to first be aware of any existing individual or group insurance and of the benefits available through any provincial health care plans. In many cases, prospects insured through group benefit plans are eligible for short- and long-term disability benefits. In that scenario, the client might not need, nor be interested, in long-term disability or income replacement coverage.

Furthermore, some clients won’t be eligible for excess coverage because the group plan covers them to the maximum. As far as professionals such as physicians or lawyers go, their association plans might provide adequate coverage. A proper approach is to compare the benefits and costs of the association plan with individual plans and determine if a supplement is warranted.

Group options

The vast majority of group employment plans wont have a critical illness or long-term care component. Group critical illness insurance is available on the market and the plans can either be designed by grouping together individual contracts or purchased on a true group basis. In general, the amount of indemnity is low, usually less than $25,000. The contracts continue up to age 65 or 75, and many are not portable. If your client leaves his or her employer the critical illness insurance may no longer be available, so consider supplementing group CI with a personal plan.

Long-term care insurance plans are relatively new in Canada because the provincial plans generally provide some basic coverage. Many feel the benefits provided by government plans are sufficient but the amount of government assistance provided at home is extremely limited in both hours and scope.

In an institution, the plans provide for a ward room but anything above the basics must be privately funded. The resources are stretched and extensive 24-hour attention just isn’t feasible under the government plans. If you want someone to sit with your elderly parent and help feed him or her, you’ll likely need to hire a personal caregiver.

Group employee long-term care disability contracts provided by the employer have yet to be formally developed and introduced, however, it’s only a matter of time before these coverage options become available to group employee benefit plans. Group critical illness plans have already started trickling into the group benefit industry.

After determining if your client has access to income replacement plans, critical illness plans or long-term care, through either the government or a private employer, its time to have a discussion to determine their priorities.

It’s usually useful to begin with outlining the differences between the various types of plans and their pros and cons. While one type of insurance plan isn’t a replacement for another, it might be challenging for a client to afford all three — long-term disability insurance, critical illness and long- term care insurance. They’ll need help to determine the right plans for their situations.

Coverage triggers

Initially it’s helpful to explain each type of insurance plan responds to a different triggering event. Prospects have to consider which events are more likely in their circumstances and which are of primary, secondary and perhaps tertiary concern.

In general, the triggering event in the case of long-term disability or income replacement is the inability to work and the inability to take up any other occupation for which the insured is reasonably fitted by training, experience or education.

Let’s take for example a disabled lawyer who is a litigator: If that lawyer can still function and earn an income as a real estate lawyer, would he or she still be considered disabled in accordance with the terms of the contract?

Well, if the lawyers contract has an “own occupation” definition, he or she would be eligible for a claim. Once again, the contract will only pay a benefit if the lawyer is unable to perform in his or her occupation. So if the lawyers diagnosed with say multiple sclerosis or has a heart attack, this contract would not necessarily provide a benefit payment.

In the case of a critical illness contract the triggering event is the diagnosis. So a physician who has a heart attack or is diagnosed with multiple sclerosis would likely be entitled to a claim. Even though he or she’s able to continue in that occupation, just by being diagnosed the physicians eligible for a payment.

However, it’s unlikely the long term-care contract would provide an immediate payment. Under the terms of the LTC plan, the insured must be unable to perform two out of six activities — unable to feed, or toilet for example, without assistance. Only if the insured cannot do two of these six daily living activities would a claim be payable.

Benefit timing

The other consideration is the nature and mode of benefit provided by the different types of coverage.

Long-term disability income contracts provide monthly benefits used to replace lost income. The benefits usually continue on a monthly basis until 65. At that time the contract ceases. Presumably, though, other government benefits — pension plans or registered retirement savings plans — will kick in.

Long-term care contracts can be designed to pay on a monthly basis for life. As long as the insured is able to satisfy the definition of inability to perform two out of six daily living activities that person will remain on claim. Potentially, payments from long-term care plans can extend for years or decades.

In determining the appropriate type of plan, the client should also take into account liabilities, assets and other sources of income. If a person doesn’t have significant liabilities and has some emergency cash saved up, critical illness might not be necessary. However, outstanding liabilities such as mortgage or loan critical illness coverage might be crucial.

Statistically, more people lose their homes because they’re unable to meet mortgage payments as a result of a critical illness not death. Therefore, for mortgage holders critical illness insurance is a given requirement. However, they might not require long-term care or long-term disability replacement insurance, as it would be included under their group or government plan. Once the mortgage is paid off, the income requirement might be less.

It’s important to keep in mind that critical illness for the most part pays off in the event of an illness; an injury might not be covered.

Assessing costs

Premiums for each of these plans will in all likelihood impact the decision-making process. Long-term disability insurance and critical illness insurance are more economical when people are younger. In addition, premiums for these plans can be locked in and guaranteed in Canada. Options such as return of premium, if there are no claims at maturity or death, are available on certain critical illness and long-term disability contracts.

Long-term-care plans seem more interesting to clients 55 and older. The premiums are reasonable but not guaranteed. They can adjust every five years based on the company’s experience. In general, these plans can be purchased with limited premium payment periods. Plans that are paid up after twenty years can also be designed and can be an advantage to the younger purchaser.

Needs test

Considering all of the options and different plans and types of insurance available, how do we as advisors help our clients determine what’s best for them?

Try these five steps:

• Assess what’s available to the client from group plans and government plans;
• Explain the different triggering events pivotal to each contract and try to determine which is of more concern to the client;
• Describe the method of benefit payment and the limiting factors to each contract;
• Provide a pricing for each of the products; and
• Help the client by providing case studies to demonstrate how each of the contracts function.

I’ve found that if I review these basic steps with my clients, they’re able to voice their concerns with reference to their specific situations. They’re also able to suggest contracts they feel are right for them, and what amounts.

In the end, it’s usually the client who makes the final decision on the ultimate solution. It’s our duty to arm our clients with as much information as possible in order to assist them with arriving at the right solution for them and their families.

(10/20/09)