Critical care: as more Americans contend with serious illnesses, insurers are trying to dispel misconceptions and show how critical insurance can fill a void in traditional medical plans.

Adrienne Sutton's triple bypass in 2004 resulted in hospitalization for several days, loss of income when her husband took family leave to be with her, and an ongoing pile of bills. But the financial load was eased by a critical illness insurance policy that paid many of the family's expenses during her recuperation.

One of the misconceptions about comprehensive major-medical insurance is that it pays for all expenses related to a serious illness. That's not true, plus there is the additional burden of daily living expenses and monthly bills. Critical illness insurance helps fill the gap. Despite its benefits, critical illness insurance has not sold as well in the United States as it has in the United Kingdom, Australia, Canada and other nations. Some carriers believe the gap is closing slightly, and they're trying to boost sales by educating consumers, employers and producers about the coverage--and myths surrounding it.

On the Rise

The average cost of a critical illness in the United States is $146,000, said Michael Witwer, senior vice president of product development and marketing for AIG Benefit Solutions. Major medical plans don't pick up the whole tab, which is where critical illness policies come in.

The supplemental coverage pays a lump sum to the policyholder upon diagnosis of a+ serious illness such as life-threatening cancer, stroke or heart disease. Policies also can provide full or partial coverage for Alzheimer's disease, multiple sclerosis, renal failure, organ transplant, blindness, paralysis, deafness, third-degree burns and coma.

The coverage isn't meant to replace health, life or disability insurance, said Frank Darras, managing partner with California-based Shernoff, Bidart & Darras. "Rather, it's designed to till in the gaps in existing coverage when the policyholder is diagnosed with a serious illness, by providing a lump-sum benefit that can be used for anything, including items and services not ordinarily covered by traditional insurance," he said.

The product is evolving. American International Group unsuccessfully introduced its first generation critical illness product in 1999. It wasn't until the past two years, however, that there was a groundswell of interest and awareness among consumers and employers, said Joe Puzzo, senior vice president, AIG@Work Profit Center, AIG Domestic Accident and Health Division.

Now AIG's second generation product is sold in 40 states, and Puzzo said it contains "much more flexibility so HR departments can customize the products and pick and choose different options and limits based on what they perceive employees' needs to be."

Critical illness coverage also has moved away from "once-and-done" policies where an indemnity was paid for an event, and the contract then expired. "Now policies have the flexibility that if an event occurs, [policyholders] can still continue the contract for the rest of their benefits and have the option for a second occurrence,' said Puzzo.

Aflac, which has been in the cancer coverage market since the 1950s, takes a somewhat different approach. It provides an indemnity-based critical care policy in which policyholders are paid as a first occurrence and additional money is paid throughout the course of treatment. Policies are guaranteed renewable, said Lance Osborne, vice president of field force development. Cancer represents 17% of Aflac's overall business.

On the Job

Puzzo deems critical illness insurance as "the next great voluntary offering for corporate America employees,' particularly as rising health-care costs force employers to squeeze budgets, increase deductibles, lower coinsurance amounts and ask employees to foot more of their health-care bills.

Critical illness is Unum's fastest-growing voluntary product, with 20% growth in sales over the past five years. "The average benefit amount for the mid-income consumer earning between $18,000 to $50,000 is $15,000 to $25,000. In the white collar market (earning $50,000 to $100,000), [benefits] generally range between $25,000 to $50,000," said Neiciee Durrence, vice president of voluntary products.

Many businesses offer critical illness coverage along with supplemental insurance as an umbrella, said Osborne. "Business owners know health insurance doesn't cover all expenses, and they're interested in attracting and retaining key employees and improving morale, which impact productivity and profits," he said.

Individual sales of critical illness policies have had a slower-than-expected uptake, said Brad Buechler, critical illness product director for Mutual of Omaha. But he said that's starting to change, particularly as "macroeconomic conditions contributing to widespread anxiety over inadequate health insurance continue to support positive sales momentum. People want to know they'll be able to pay the bills if they become seriously ill."

While the average age of a typical critical illness insurance purchaser falls within the 40-49 range, Durrence said she's seeing a "more level playing field across various age-band participation."

Policies at Work

Once a person is diagnosed with a critical illness, the coverage allows them to finance related lifestyle changes such as traveling out-of-country for treatment or medicine or modifying their home or auto, Darras said.

The relatively inexpensive coverage is ideal for consumers because lump-sum payments are made with just a diagnosis, Darras added. "For people without health insurance, it's one way to hedge their bet," he said. "If they get something awful, they will have a pot of money to help cover expenses"

Another payout is if a policyholder dies from a noncovered condition or an accident, said Buechler. "We'll return their premiums to their beneficiaries, minus claims already paid out."

American General Life Insurance recently added a feature called Loss of Independent Living, which provides coverage if a policyholder can no longer do two out of six activities of daily living, such as bathing or dressing. "While it's designed not to replace long-term-care, it provides a lump-sum benefit for permanent loss of two ADLs," said Jay Drucker, director of accident and health product development.

He said the company's policies also address affordability of the product. "Rather than seeing a lifetime plan, you can get a 10-, 15-, 20-or 30-year term, if someone is buying coverage because of a specific concern. It makes it affordable for consumers who are thinking of coverage not in terms of the rest of their life, but to have some additional coverage to pay the mortgage or other bills for a certain period of time, he added.

Drucker said it's important that consumers view the policies as supplemental and not primary coverage. "No one should mistake that it will replace medical or disability protection; there are places where it fits in and helps fill the need," he said.

One of the top concerns of fulltime employees is having enough money to pay bills during a period of sudden income loss, according to a recent MetLife Employee Benefits Trends Survey. But about 40% of individuals have less than $1,000 in personal savings in the event they or their spouse experience a major illness, according to another MetLife survey. "Critical illness insurance can help provide a safety net, especially for those living paycheck-to-paycheck," said Clea Gorthy, MetLife assistant vice president of critical illness insurance.

Consumers also like being in control of their spending. "Policyholders are free to use the money as they see fit, and we're not telling someone what their needs are relative to their situation," said Gorthy.

Lagging Behind

The United States is caught in a catch-up game when it comes to critical illness sales.

Great Britain, Australia, Ireland, Japan and Canada have had much success in the market. "Those socialized medicine countries have been successfully selling it as a 'don't die on a waiting list' type of insurance that pays for travel and medical treatment expenses, or as mortgage protection insurance that pays off a person's mortgage if they become seriously ill," said Buechler.

Witwer also said the United States was late entering the market. "Other countries' regulatory environments are more favorable for moving these products ahead, so the States were slower to adopt approvals," he said. "That's now improving, and there's an understanding by the departments of insurance of the product, and more filings are moving more quickly as we update the product."

While Aflac's Osborne believes the gap is slightly closing between the United States and other international players, he doesn't "know that it will ever completely close." That's not a result of product design or companies, he said, but rather about consumers. "With national health care you understand what's not covered; many Americans believe that major medical will cover everything and are surprised when it doesn't."

An Eastbridge Consulting Group study predicts if critical illness insurance receives acceptance in the United States, total sales could reach $70 billion in a few years.

Onward Bound

The growing incidence of critical illnesses likely will drive demand for coverage, said Osborne.

"The important message for critical illness coverage is that consumers recognize that health insurance pays doctors, hospitals and pharmaceutical costs but doesn't help them with their bills like deductibles, lost wages due to missing work, mortgage payments, etc.," said Osborne. "Not only does critical illness insurance help with their expenses, but we believe it helps with the healing process. If they don't have to worry about where the money is coming from and how they'll pay the bills, they can focus on getting better."

The Big Number

$70 Billion

Possible total sales if critical illness coverage is accepted in the United States.

Source: Eastbridge Consulting Group

Key Points

* Critical illness policies can fill the financial gap where major medical policies leave off.

* Most critical illness policies are sold at work.

* Policies provide financial freedom and flexibility, along with immediate benefit payouts to be used as the policyholder chooses.

RELATED ARTICLE: Package deal.

Critical illness policies are teaming up with other coverages. "It's a logical collateral sale with life insurance, because what ails us in this day and age is often not going to kill us," said Brad Buechler, critical illness product director for Mutual of Omaha. "CI helps sustain a person's standard of living and allows them to get the best care possible if they get a dread disease. When partnered with disability income protection, CI can help cover expenses during the elimination period before the disability benefits commence."

Frank Darras, managing partner with Shernoff, Bidart & Darras, believes critical illness coverage fits well as a rider to life insurance or as a standalone product. "If someone reaches age 75 and hasn't had a claim on the critical illness policy, the return-of-premium feature allows them to receive all their money back. And, if they want to keep the policy in-force until the time of death, their beneficiaries receive the money," he said.

"We're working with producers who sell major medical coverage, specifically HSAs [health savings accounts], and we're packaging critical illness with that in smaller amounts like $5,000 or $15,000 in coverage and wrapping it around high deductibles," said Jay Drucker, director of accident and health product development for American General Life Insurance. "It's a natural match."

But not everyone is convinced. "I believe certain products are better served under the niche market," said Joe Puzzo, senior vice president of AIG@Work Profit Center, AIG Domestic Accident and Health Division. "I think critical illness is a stand-alone voluntary product as a component and is essentially geared for working individuals in the 25- to 70- [year] age range."

Busting the Myths

Companies are trying to dispel several misconceptions surrounding critical illness insurance. "People often mistake the [critical illness] coverage with cancer coverage," said Michael Witwer, senior vice president of product development and marketing for AIG Benefit Solutions. "They don't realize how broad the particular benefit actually is." AIG Benefit Solutions' lump-sum payouts range from $2,500 to $50,000. He said the plans also pay for some specific cancer-related treatment beyond the lump sum, including anti-nausea medications, experimental treatments, radiation and chemotherapy.

While the first generations of critical illness insurance began as cancer policies, most policies now have cancer as an optional rider, said Lance Osborne, vice president of field force development for Aflac. Aflac views cancer as a separate illness because of the diagnosis and ongoing treat ment, and that it's "an ongoing and recurring event--not a lump-sum event; he said.

Misconceptions also surround the whole umbrella of supplemental insurance, Osborne said. "People have to understand that these policies are designed to pay over and above regular health insurance. They pay the money directly to the policyholder." More often than not, he said, money is used toward family expenses such as mortgage payments, utilities, child care or other bills. "If Americans would understand that concept, there would be a rise in sales; he added.

Assessing the Need for Critical Illness Insurance

* About every 26 seconds, an American suffers a coronary event.

* On average, someone in the United States has a stroke every 45 seconds.

* 75% of heart attack victims under age 45 will survive three years or more.

* 1 in 2 people will contract heart disease--50% under age 65.

* More than 1.4 million cancer cases are expected to be diagnosed in 2007.

* Men have about a 1-in-2 lifetime risk of developing some form of cancer; for women, the lifetime risk is about 1 in 3.

* More than 5 million people in the United States have Alzheimer's disease.

* Every week, about 200 people are diagnosed with multiple sclerosis.

Sources: American Cancer Society, American Heart Association, Alzheimer's Association, National Multiple Sclerosis Society, The Pharmaceutical Industry report by Geoffrey Poitras

Learn More

American Family Life Assurance Company of Columbus (A member of Aflac group)

A.M. Best company # 06051

Distribution: Independent contractors 

American General Life Insurance Co.

A.M. Best Company # 06058

Distribution: Personal producing general agents, brokers, independent marketing organizations, agency system

American International Group

A.M. Best Company #05953

Distribution: Direct, agents and brokers

MetLife

A.M. Best Company # 06704 (Metropolitan Life Insurance Co.)

Distribution: Career agents, LTC specialists, independent agents, wirehouses, banks and contractual through AARP and federal

Mutual of Omaha Insurance Co.

A.M. Best Company # 07369

Distribution: Direct, independent agents and brokerage channels

UnumProvident

A.M. Best Company # 69743

Distribution: Brokers, benefits consultants and a direct sales force

For ratings and other financial strength information about these companies, visit www.ambest.com.

Critical Illness Insurance Market:
Future Potential

A number of companies now are considering adding critical illness
insurance to their product portfolios in the future. Many companies
entering the market offer diverse products with a strong focus on
group health products.

Considering or Developing
A CII Product

Yes   67%
No    33%

Note: Table made from pie chart.

Claim Incidence
For the CII Product

Claims Less Than Expected   56%
Matches Expectations        39%
Higher Than Expected         6%

Company Note: These results are not
unexpected given the early duration of the
product and the initial impact of underwriting.

Note: Table made from pie chart.

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