Critical mass: critical illness coverage holds promise for insurers, but not without support from producers. (Life/Health: Critical Illness).

Critical illness insurance is another of the insurance industry's newer products that is long on potential but has not been fully accepted by producers and prospects. The lack of substantial sales in the United States, however, has not dampened enthusiasm in the industry for designing new products or trying to find better ways to sell them.

Denver-based ING Reinsurance entered this field about four years ago. Its emphasis now is on helping direct writers develop products, but it still will cover some of the writers' risk through reinsurance.

"They rely on us heavily, because they don't have the experience and background," said Susan Kimball, executive director of living benefits. "They need help with product design, and we've done the market research." ING Re handles product pricing and helps with state filing requirements, which Kimball said vary greatly from state to state.

The allure of critical illness insurance is that it typically pays benefits in a lump sum upon diagnosis of a covered illness, and in any given year, people are three times more likely to be diagnosed with critical illnesses than to die from those illnesses. Patients increasingly survive, but treatment costs can drain patients' savings, even if the patients have health insurance. Two-thirds of the costs associated with serious cancer are nonmedical, according to the American Cancer Society. Disability income insurance, which typically replaces 50% to 60% of salary, is designed to cover the normal expenses of living, not the additional expenses that a critical illness can cause. Kimball said 48% of the foreclosures on homes in the United States are due to critical illness, while only 3% are due to death.

What It Pays

Critical illness policies pay a percentage of the face amount--usually 25% to 100%--upon diagnosis of a covered disease and survival for some stipulated amount of time. The money can be used for any reason, but it may be particularly useful for covering medical copayments, deductibles, rehabilitation expenses and experimental treatments not covered by medical insurance. It comes in handy for the costs of travel to distant medical facilities, including lodging, meals and parking. It also can be used for modifications to a home or an automobile or for simply offsetting each spouse's loss of income.

Sales of critical illness policies in Canada are growing rapidly, according to marketing and research firm Limra International, Hartford, Conn. Premiums in 2001 for 14 Canadian companies selling the product were $37 million for new sales, more than double the premiums in 2000. In-force premiums reached $65.4 million, up 93%. Canadian insurers sold 41,638 new policies, up 107%, and had 75,816 in force, up 87%.

Limra does not collect statistics for sales in the United States because there is so little activity, said Limra spokesman Howard Drescher. He said sales are strong in the United Kingdom because of cuts in a government mortgage-assistance program, and mortgage-related critical illness insurance will pay off a house loan in the event of illness. In Canada, the insurance is often seen as a supplement to the country's universal health insurance plan, which often involves long delays for tests and treatment. Consumers can use the benefit payouts for treatment outside of Canada, Drescher said.

Agent training and attitude, usually factors in how soon new products sell, are holding back U.S. sales, Kimball said. "Limra says consumers really like this product, so we think agents are the problem," she said. "Premiums are somewhat higher than those of a life product, so there are some issues with that."

But Kimball said an apparent negative is that agents simply "get into a nit" selling their products and are slow to warm up to new products like critical illness insurance. "Top producers and new producers tend to do much better," she said. "A key thing we tell our clients is that they have to train their agents and set aside dollars for it."

Then there are the different regulatory requirements. "In some states you can file right away, but others have regulations that pose unique challenges for CI products," she said. "The key issues are around waiting periods and survival periods. Some states don't want a survival period at all."

Most states have waiting periods of 30 days, but Kimball said a 90-day period helps reduce adverse selection.

States also have different loss-ratio requirements. Kimball said a loss ratio of 50 gets approved in most states. Overall, it's "physically impossible" to create a critical illness product that all states would approve, she said.

Work-Site Marketing

A strategy that may help improve sales is work-site marketing. In February, UnumProvident Corp. reported "significant sales success" in its first year of offering a specified critical illness product as a voluntary benefit paid for by employees. Neiciee Durrence, vice president in product and market development, Voluntary Workplace Benefits, declined to discuss premiums, but she said the sales success was in terms of percentage of sales growth.

A high rate of sales growth spilled! over into this year. Durrence said the company reached its annual sales goal in May. As of June, it had written about five times the total sales volume in 2001, and she said the company had more than 2,100 in-force policies. "A lot of the appeal for the product has to do with current trends in health care, with double-digit cost increases," she said. "This is a very attractive supplement. An attractive feature is that we've designed the base policy to cover heart attack and stroke."

UnumProvident's policies are designed for middle-income employees. They choose face amounts averaging about $20,000 to $25,000. A 35-year-old nonsmoker with a lump-sum benefit of $25,000 with a rider for cancer and carcinoma would pay $210.60 a year through payroll deductions. The base policy pays 100% of face amount for heart attack, stroke, major organ transplant, permanent paralysis and end-stage kidney failure. It pays 25% for coronary artery bypass surgery. Once all of the benefit is paid, the contract terminates. UnumProvident does not require any waiting period for most illnesses under the base policy. and there are no survival-period requirements.

Cancer is covered as a rider to keep the base product flexible enough to be sold across the nation, Durrence said. It represents about one-third of the total premium if elected, she said.

"In certain regions of the country, cancer coverage is not palatable," Durrence said. "It's not well-received, because it is an emotional issue." She also said that cancer indemnity plans have been marketed by the industry but not well-received in parts of the country. particularly the Northeast, clue to the need to file numerous claims to receive low-level benefits and the fact that other illnesses are not covered. But other parts of the country have embraced cancer indemnity plans, and in those areas, much cancer coverage is already in force.

UnumProvident's plan is portable without health questions or qualifications. Spousal coverage is available up to $25,000, and child coverage is offered at either $2,500 or $5,000.

The company markets through brokers or enrollment firms, first to the employer and then to the employee. Most is solicited face to face, Durrence said. UnumProvident offers the critical illness coverage as part of a broad portfolio, including group life and disability insurance.

Durrence said Unumprovident competes mostly with regional insurers, such as Baltimore Life. It does not compete much with Aflac, which Durrence said is very strong in the smalkase marketplace, while UnumProvident focuses on companies with 100 or more lives.

Marketing Critical Illness

Allianz Life Insurance Company of North America has begun selling critical illness insurance, but as part of a unique multibenefit product that it is marketing with good success through its vast network of independent agents. Its product is the Equity Index LifeFund, which provides life insurance and coverages for critical illness, chronic illness (long-term care) and disability. The policy also can serve as a kind of annuity by turning cash value into a retirement-income stream.

Allianz came out with a preliminary version of the product last summer, but has been in "mass production" for several months as of June, said Charles M. Kavitsky, president and chief marketing officer. The second-quarter sales trend in June was up 50% from the first quarter, and some 2,100 policies were in force as of May. Those policies totaled almost a third of a billion dollars in face amount, or an average of more than $150,000 per policy. The company will sell face amounts up to $1 million.

The company is "very happy with where we are, but we've got a long, long way to go," said Kavitsky. The chief task is educating its distribution partners to sell a product it is not used to selling.

A marketing professional for more than 25 years and a seminar/workshop instructor, Kavitsky is adept at using anecdotes to make a point. He recently addressed one of the challenges of selling LifeFund, which carries a premium about 30% more than the same face amount for a traditional permanent life insurance policy. He said producers tend to compare premiums when selling life products, so he told a group of about 100 producers the following story to help illustrate the value of the LifeFund product:

"I told them I had a great deal in car insurance for them, that I could cut their premium by 50%. I asked how many would be interested, and everyone was. Then I revealed the policy would only protect them if their car was totaled. I asked again, and nobody was interested. That's the difference between what LifeFund will do and traditional insurance."

Kavitsky said he also asks groups of producers how many have delivered a check for a death benefit. Hardly any producers selling over the past five years have, but practically all of them have visited clients who have suffered a heart attack or cancer. "So I ask them how much impact they would have had delivering a check for those reasons," he said.

Big Insurers on Board

The entry of Allianz and UnumProvident into the critical illness product line may augur well for new sales. Kimball said companies that sell the line have tended to be small. Both UnumProvident and Allianz are large and have considerable sales forces. UnumProvident estimates it has about 200,000 producers, while Kavitsky said Allianz has 138,000 contract agents selling fixed products, a number that is growing by about 650 a week, and about 60,000 contracted representatives selling variable products. Not all, of course, are productive, and not all try to sell LifeFund. Kavitsky said the company tends to work with successful agents. In addition, LifeFund is not designed for seniors, but rather for baby boomers and members of Generation X, so those that specialize in senior markets aren't interested.

LifeFund pays critical illness benefits as a percentage of the initial face amount. The maximum benefit is 50% for Lou Gehrig's Disease, blindness (100% if caused by accident), cancer, failure of both kidneys, organ transplant, paralysis and stroke. It pays 25% for hearing loss (50% if caused by accident) and major heart attack. The rate is 10% for a minor heart attack.

For chronic illness, the payout is up to 10% annually in the form of monthly payments. For disability, it is 1% a month until age 65. The policy also provides a post-retirement disability benefit in which monthly payments increase by 30% for partial disability and 60% for total disability as defined by inability to perform certain activities of daily living.

The cash-value portion of the policy can be invested in an S&P 500 index fund, a Nasdaq 100 index fund or a fixed-interest-rate account. The cash value can be converted into a stream of retirement income. Premium assigned to either market index can grow in value to an annual maximum, but guaranteed policy values will not be reduced because of a market downturn.

The cash value determines how much is available for a retirement income stream guaranteed for life. For policyholders that pay premiums for a minimum of 15 years or to age 65, whichever is later, Allianz will increase the amount available for retirement income by three times net cash value. For a minimum of 10 years or age 55, the available amount is 1.5 times net cash value.

Despite the fact critical illness insurance has been in the United States since at least as far back as the mid-1990s, Kimball said it is still a new market, but she sees a big difference in interest from last year. "Early on, we had to tell clients what this product was," she said. "Many had many things on their plates, and they said they wouldn't get into critical illness until agents start to ask for it. This year, clients are asking for it, because agents and marketers are asking for it."

ING Re currently has about 10 clients, Kimball said. Some are interested purely in reinsurance, but most want help with product development. Most are small to midsize insurers, but ING Re has been talking with larger companies. Five clients are selling the product, but Kimball said she is not permitted to identify them.

Critical illness insurance is currently more popular in the work-site market than in individual sales. "That's because for people at a lower income level, a critical illness would be devastating financially," Kimball said. But the product also is a good fit in key-man cover-ages, where partners in professional firms could have a tough time if one of them is unable to work. Key man is traditionally a life insurance sale, but critical illness coverage "could work really well in that market," Kimball said.

She also saw promise for sales through independent financial planners. "Certainly, single people are not buying life insurance, but they might like to have critical illness insurance," she said.

Insurers could use a consulting firm to help develop a product, but a reinsurer is more of a partner, in that it accepts some of the risk, Kimball said. "And we have expertise in the house: underwriters, actuaries, morbidity researchers and doctors."

RELATED ARTICLE: Critical Illness Statistics, Canada

New sales face amounts: $3.8 billion

In-force face amounts: $6.9 billion

Average policy size, career channel: $103,121

Average policy size, independent channel: $86,337

Source: Limra International