Premium Advice — Opening up the CI space

At the recent World Critical Illness Conference and the Conference for Advanced Life Underwriting, Munich Reinsurance made a long-awaited announcement that benchmark definitions have arrived in Canada. Why did they do this, and why is it important to advisors? Although it’s a voluntary measure that each manufacturer must adopt, it addresses what many advisors have been saying for some time: “If only there were benchmark/standardized definitions, I’d sell CI.”

The question that faces us now is this: will benchmark definitions remove a barrier that has prevented so many advisors from integrating critical illness insurance into their practice? In my opinion, the answer is no. However, it does alleviate one of the barriers that have plagued advisors since the launch of this product over a decade ago. It also shows remarkable co-operation amongst many competitors that have often differentiated themselves based on a value proposition of product debate, instead of training and developing advisor expertise and helping to grow the entire living benefits marketplace.

Overall, benchmark definitions are certainly a giant step in the right direction. They can provide a base platform of consistency, while still offering manufacturers the freedom to vary their product based on additional features.

To me, the answer to growing the market is fairly simple in theory, but very complex and difficult in execution. It involves all companies adopting more of a training and skill development approach to wholesaling instead of debating product minutia. For the majority of advisors, the answer is to take on the challenge of truly integrating risk management planning into their business, instead of solely estate planning. The most successful advisors in the CI market have done one of two things:

specialized in CI and other living benefits, or

positioned CI as part of an overall risk management strategy when talking about life insurance, investments and other products.

There really are not many other formulae that are working aside from the above two. Most advisors won’t change the focus of their practice if they’re already successful in other product lines, nor should they.

So how does risk management planning work? Consider your average clients, where you manage their retirement assets, and are now doing estate planning with them. The same capital needs analysis used for life insurance planning can be used to position critical illness or any other living benefit product. All needs analysis tools calculate immediate lump sum needs (like the mortgage) plus income replacement capital (an amount of capital that will be invested to replace the lost income of the deceased spouse to the survivors). The only variables in using this approach to CI are in defining exact amounts, as you never know what illness clients may be struck with, the severity of it, or the treatment and recovery options they’ll choose. However, the amounts are secondary. The main challenges are helping clients understand the need, and helping them understand that insurance is a more effective method of creating cash than self-insuring.

Lump sum/immediate cash needs

When doing life insurance and estate planning, the obvious needs at death for immediate cash tend to be burial costs, mortgage and debt repayment, and pre-funding any family-based financial goals (such as education funding for the children). Many of these same types of subjects can be introduced in discussing illness recovery.

Instead of burial costs, you discuss healthcare costs such as expenses not covered by provincial health plans, home renovation in the event of a stroke, and other costs directly related to the event.

Mortgage and debt repayment is the same discussion. Everyone knows the banks sell more CI than the entire advisory community, and they do it purely on mortgage coverage. It’s been widely reported that nearly half of all mortgage foreclosures are due to illness. Having insurance to at least service the mortgage, if not pay it off, is crucial to the family’s ability to focus on recovery.

Pre-funding family goals such as education funding, the purchase of a cottage, or other matters can lead to a conversation in living benefit planning around lifestyle adaptation post-recovery. After a serious event such as a heart attack or cancer, many survivors change the focus of their life, and having the financial security to effect these changes though appropriate insurance coverage is crucial.

Income replacement capital

With life insurance planning, the numbers are fairly simple to calculate. After defining with the family what amount of income is needed for the survivors to continue their lifestyle (usually 60%-80% of the couple’s total income), a discussion should take place surrounding the length of time this income should continue. Until the kids are no longer dependent? Until the surviving spouse retires? For the life of the surviving spouse?

The third step is to determine how the insurance proceeds would be invested to generate the income needed. This results in an interest rate that can be used to capitalize the income need, such as $40,000 of additional family income would require $800,000 of capital if the investment rate were 5%.

You could take the same approach on critical illness. If there’s a lifestyle adaptation needed after a health event, you can use capitalization to determine how much CI clients should purchase. Consider a lawyer or investment banker who works 80-hour weeks. If that individual had a heart attack, chances are the person’s doctor would suggest working a more reasonable 40-hour work week. The problem is, the income would go down significantly. Most heart attack victims are back at work within 90 days; however, they can’t be expected to work at the same level that may have contributed to the heart attack. Critical illness coverage can help the individual ease into this new professional reality.

We as an industry have overcomplicated the critical illness opportunity. Successful advisors have adopted CI planning into their existing processes and sales language. The more barriers we work together to remove, such as agreeing to benchmark definitions, the more advisors will be willing to give these products a chance to do what they were meant to do — provide valuable dollars to clients suffering a health event, so they have options in how they address their recovery.

Chris Paterson is vice-president of sales for Manulife Financial.

(05/07/08)