Bill Solomon, consulting actuary and fellow at the Canadian Institute of Actuaries

stance a really bad idea

Flawed philosophy

The fact that critical illness (CI) insurance hasn’t caught on in Canada may be a reflection that it’s a flawed, poorly designed and overly expensive product.

My concerns are:

• It’s incomplete. Insurance is good if it protects you against all perils. When you buy home or car insurance, it’s comprehensive. You want to make sure you’re not just protecting these assets against very specific causes of damage. In the same way, critical illness coverage should be comprehensive. But it’s not.
• It’s misleading. The way CI is underwritten at the time of a claim is problematic. It makes you believe you have coverage, when in many cases you don’t. When the insured are most vulnerable and in need of coverage, they may be told they don’t qualify.
• It’s expensive. Companies try to soften the blow by throwing in the “return of premium” lapse-supported feature. But clients pay extra for it, and most don’t use it.

Piecemeal protection

I’m not opposed to insurance per se; I understand the role life insurance plays in protecting against the financial impact of premature death. However, in order for insurance to work as intended, it must protect against all possible causes of death, not just those most feared.We shouldn’t have to pick and choose protection against conditions deemed critical by insurance companies.

CI is limiting. Clients may or may not be covered for benefits, depending on how their illness arose. Pre-existing conditions or a history of the specific condition in the insured’s family may further become reason for exclusion of coverage.

Ambiguous adjudication

Whole life, term and universal life have one thing in common. The benefit is paid in full, regardless of cause. Underwriting of the policy is done at the time of issue, not at the time of claim.

There are certain (limited) exclusions that apply, usually involving fraudulent misrepresentation at the time of issue or self-inflicted causes within two years of issue. Otherwise, claims are paid.

That isn’t the case with CI—claims can often be denied (or reduced), depending on findings at the time of claim.

CI has the highest rate of denial among all insurance products. A large part of the premium goes toward paying commissions, administration fees and marketing. Less than half of it goes toward supporting the claims.

Fear factor

Why does CI have a market? In part, because of the emotional fear response associated with the mere mention of conditions such as cancer and heart disease. Other fatal conditions seem to have a lesser impact, although their consequences are no less dramatic or life-threatening.

The oft-touted statistic that you are twice as likely to succumb to cancer or heart disease as you are to die from other causes is misleading. It holds true only after age 75. We’re all going to die sometime. Therefore whole life insurance or term-to-life insurance or its variations provide lifetime coverage.CI expires after age 75.

Some conditions we have no control over; others we can manage. Take heart disease. A more sure-shot way to insure against heart conditions is to quit smoking, eat wisely, exercise regularly, and adjust your lifestyle to minimize some of these conditions.

Demographics of CI insurance

CI is appropriate for clients aged 30 to 55. Other factors to consider include:

• Does the client have any other financial protection in place?

• Do they have any assets built up so that if they needed to take six months to a year off from work they’d be able to draw on them?

• Do they have any outstanding liabilities like mortgages or debts?

What’s in a name?

Apparently a lot, if you’re shopping around for critical illness insurance. Definitions of different illnesses vary from company to company, making matters murky for advisors and clients.

Non-standardized definitions make product comparisons difficult and end up causing a battle between who has better definitions, rather than who offers the best services, claims experience and prices.

To make their products more attractive,many insurers offer the return-of-premium feature. The actuarial calculation of this feature,—often based on lapse-supported assumptions that shift the benefit pattern in favour of those that stay over those that lapse—further complicates an already confusing product.

Besides, by adding the element of refund, the insurance company is often able to coerce policyholders to retain the insurance in force, possibly long after it may be needed.

Force-feeding

CI may have been created to address a need that was not as great as anticipated.There wasn’t a groundswell of demand for it. It’s not the first time this has happened in the insurance industry.

There are other products that have been created over the years, such as guaranteed insurability benefit (GIB) under which you paid an extra premium up until age 40 to ensure you’d be eligible to buy insurance at a future age. The product didn’t have much buy-in.

David Wm. Brown, partner, Al G. Brown and associates

Stance It’s a great product with wide application

Coping with complexity

It is true CI insurance may not have done as well in Canada as expected. But that’s because insurance products are successful only if agents believe in them. And agents are uncomfortable with CI because it isn’t such a straightforward product—lack of standard definitions, complex adjudication and high premiums make it costly.

We still consider it a moral obligation to educate our clients about CI—all agents should do the same. If one of our clients gets an illness that CI could have covered, we potentially open ourselves up to a lawsuit if we don’t advise the client of the product’s availability.

CI has wide application—people who can afford it should consider it. I’ve seen cases where it has made dramatic change in people’s lives and the lives of their families. A significant majority of our clients with cash flow consider CI.

We don’t resort to scare tactics to sell CI.We don’t say: “Have you ever thought you could lose your house if you have a heart attack?” We’re straightforward in trying to educate clients about what’s out there.

We tell them there’s a product that can pay them a tax-free, lumpsum benefit if they get diagnosed with a critical illness. We help them make an informed assessment about whether they think the product should be part of their portfolio.

Who should buy it?

CI is a mid-to-high-market product—decidedly expensive for people who don’t have the disposable income, and redundant for the very high-net-worth clients who don’t need the type of protection it provides.

The real CI market is among clients paying off mortgages or relying upon monthly income. If they become critically ill—but not disabled—CI can provide a life changing benefit, and allow them the opportunity to pay off their mortgage, or take a break while they recuperate.

Medical science is constantly evolving, and as a result people are getting diagnosed with illnesses sooner and surviving longer—the average age of a CI claim is about 42 to 45. And that’s the age you need an influx of cash for various other needs.We service the CI market up to age 60. After that, we recommend long-term care insurance. I don’t, however, believe long-term disability is a replacement for CI.

We also fill out a lot of CI forms for spouses who would want to spend time with a spouse diagnosed with cancer, for example, and accompany them to treatments, but may not be able to take time off from work.

It’s also important for people who aren’t income earners, and wish to get some cash, cope with the family’s loss of income, and spend time with their spouse during recuperation.

CI’s role as a recovery product is only part of the story.That’s not the only thing people use the money for. They use it for other lifestyle aspects as well. A mother diagnosed with terminal illness used the claim to take her kids around the world before she died.

Understanding adjudication

Family history comes into play for CI. But that’s more reason for people to get it sooner than later. Insurance is underwritten at the time of application, and anything that happens after that is not a factor in possible denial, as long as there’s full disclosure.

Complete disclosure at the time of application is absolutely critical. The biggest reason for claim denial is partial or inaccurate disclosure.

I haven’t had problems with my clients’ CI claims being denied. On the other hand, I’ve had claims paid out even in cases where I was skeptical.

I don’t believe the insurance companies try to look for a way to get out of paying a claim. As a matter of fact, when compared globally, CI is actually underpriced in Canada—which is also the only country where premiums are guaranteed.

If we feel clients don’t have a fair chance of getting an application approved, we don’t put them through the process. And that doesn’t necessarily negate their ability to buy life or disability insurance.

Premium protection

CI actually offers two return-of premium features—one in the event of death, and another at maturity.

I’m not a believer in the return of-premium-on-maturity feature. I was before it was re-priced. It’s good, however, to have your premium returned in the event of death as a result of something other than critical illness—getting hit by a car, for instance.

Return of premium upon maturity is more expensive. Besides, I don’t believe people buy CI for a set period of time.

If you’re 40 and buy the return of-premium feature for a 15-year term, there’s greater likelihood you’ll claim later than earlier. Most people would not terminate the contract before maturity. I’d rather people used that money to buy additional CI.