Oliver Continuing Education Series A Guide to Critical Illness Insurance Continuing Education Module
Copyright 2009 Oliver Publishing Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the prior written permission of Oliver Publishing. April 2009 ISBN 1-894749-57-X Published by: Oliver Publishing 151 Bloor Street West, Suite 800 Toronto, Canada M5S 1S4 Tel: (416) 922-9604 Fax : (416) 922-5126 Toll Free 1-800-238-0377 e-mail: info@oliverslearning.com www.oliverslearning.com Printed and bound in Canada
TABLE OF CONTENTS Introduction 1 The Conceptual Basis of CI 1 The Elements and Variations of CI 3 The Cost of CI 9 The Tax Status of CI 14 The CI Market 14 Who is Buying CI and Why? 15 Additional Factors to Consider About CI 16
CRITICAL ILLNESS INSURANCE (CI) INTRODUCTION Launched in Canada in 1995, Critical Illness Insurance (CI) is designed to manage some of the risks associated with contracting certain dread diseases, sometimes described as critical illnesses or critical ailments. A CI policy pays a tax-free lump-sum benefit to the insured when he or she is diagnosed with any critical illness, or dreaded disease, covered in the policy, provided he or she is still living for a specified period (usually 30 days) after the diagnosis is made. CI is, therefore, unlike life insurance, since the benefit is paid only if the insured lives. THE CONCEPTUAL BASIS OF CI Conceptually, CI arose from medical research showing that patients were subject to high levels of stress when dealing with the effects of heart attacks and other critical illnesses. It was found that this stress often undid some of the positive work of the medical intervention in dealing with the disease; surviving the onset of a dreaded disease was one thing, but coping with the fear of its consequences was quite another. The fears of loss of income from a long absence from the workforce, debt management, depletion of savings including retirement income, and increased medical costs lingered long after the initial medical treatment of the disease. In addition, improvements in the diagnosis and treatment of dreaded diseases have played a major role in the development of CI from concept to product availability.
Heart attacks, stroke, and many cancers are more survivable today than they were a decade ago. Simply put, many of the diseases covered by CI simply don t kill the insured anymore. Statistics clearly demonstrate the extent of serious critical illnesses. Some examples include the following: The Heart and Stroke Foundation points out that 25% of all Canadians contract some form of heart disease, and although 75,000 Canadians suffer heart attacks annually, the rate of death among patients hospitalized for heart attacks is decreasing dramatically every year and presently stands at 8%. Of the 50,000 Canadians that suffer strokes every year (a third of which are under the age of 65), 75% survive the initial event, although 60% are left with a disability. The Foundation further states that coronary artery bypass surgery on people aged 65 and over is increasing, and now stands at approximately 11,000 surgeries annually. The Multiple Sclerosis Society of Canada notes that women are twice as likely to develop Multiple Sclerosis (MS) than men, and that more that 50,000 Canadians presently have MS. The Parkinson s Foundation of Canada estimates that, of the 80,000 to 100,000 Parkinson s sufferers, 30% are under age 50, and 20% are under age 40. The Canadian Alzheimer Society data shows Alzheimer disease occurs in 8% of the Canadian population over the age of 60 years, and ranks as the fourth leading cause of death in Canada. 2
THE ELEMENTS AND VARIATIONS OF CI When purchased, a CI policy pays a lump sum, tax-free to the insured if he or she is diagnosed with a dread disease or critical illness. The pre-determined lump-sum payment is payable following diagnosis of any illness covered by the policy and a survival period, and all contracts generally specify a survival period. (Note: diagnosis must occur while the policy is in effect, and means that the condition completely fulfils the condition definition in the particular policy). The new agreed-upon definition of survival period specifies a period beginning on the day of the diagnosis of the critical condition and ending 30 days following the date of diagnosis except in cases where the policy specifies a different time period. It does not include days on life support. The patient must be alive at the end of the period and must not have suffered irreversible cessation of brain function. Some policies stipulate that certain covered diseases require an extended survival period following diagnosis before the benefit is payable. Paralysis, multiple sclerosis, and loss of speech frequently have a 180-day survival period. Coverage is available to qualified applicants in good health between the ages of 18 and 65 (although some policies can be renewed to age 75 and even for life), for face amounts of $25,000 to $2 million, and is offered in a number of different forms such as ten-year renewable or level coverage to a specific age. The most common coverage is in the range of $100,000 to $150,000. High coverage amounts are appropriate when CI is used for key persons in small or family-owned businesses. CI is also available in small amounts in the form of group insurance benefits for employees. Unlike disability insurance benefits, which are paid monthly and linked to income, the lump sum can be used to reduce debt, to top up disability income replacement insurance, to take time off work, go on a vacation, or seek medical care in another jurisdiction, such as the United States. 3
Government health plans and group insurance benefits are generally limited to basic medical hospital care in Canada, while disability income coverage pays a monthly income to an insured that cannot work. However, CI coverage still pays if the insured suffers a heart attack, for example, and can return to work. The benefit may be used in whatever way the insured wishes; it is designed to buy peace of mind while the insured is still alive. A CI policy can be written to cover over 20 diseases and surgical procedures. Definitions of a number of disease conditions have recently (2008) been agreed on by a committee representing 80% of the Canadian CI market. The aim was to arrive at standardized definitions that reflect new thinking on covered conditions, new diagnoses procedures, and current practices. In the United Kingdom formal standardization took place in 1999, and it was considered helpful in allowing companies and clients to compare products. Twenty-six critical illness conditions for which definitions were provided available on the website of Munich Reinsurance Canada, which initiated the committee s work, at http://www.munichre.ca Alzheimer s disease (not including other dementia or psychiatric disorders); aortic surgery; aplastic anemia; bacterial meningitis (not including viral meningitis); benign brain tumour (not including pituitary adenomas less than 10 mm); blindness; cancer (life-threatening), including lymphoma and Hodgkin s disease; coma (at least 96 hours in which the Glasgow coma score is 4 or less); coronary angioplasty; coronary artery bypass; deafness; heart attack; heart valve replacement (excluding heart valve repair); kidney failure; 4
loss of independent existence: cognitive impairment or inability to perform two of the six following activities of daily living (that lasts 90 days without chance of recovery): Bathing; Dressing; Toileting; Managing bladder and bowel continence; Transferring; Feeding. cognitive impairment (with a demonstrable organic cause); loss of limbs; loss of speech(unless it has a psychiatric cause); major organ failure on waiting list; major organ transplant; multiple sclerosis; occupational HIV infection; paralysis; Parkinson s disease (requiring assistance for at least two of the six activities of daily living [see above]); severe burns stroke (excluding transient ischemic attacks; trauma). All contracts will require that diagnosis and treatment of any covered condition be made by a specialist or a physician licensed in Canada, the United States, or another approved jurisdiction. Note: the diagnosing specialist can not be either the policy owner or the insured, or a relative or business associate of the policy owner or the insured. Although coverage varies among insurers, the following ailments are insurable by virtually all companies: heart attack (now covering smaller heart attacks, previously referred to as unstable angina ); coronary bypass surgery (other than angioplasty); prostate cancer; stroke; breast cancer; other life threatening cancers (including lymphoma and Hodgkin s disease). 5
In addition, depending on the insurer, the following conditions are insurable: multiple sclerosis(which can now be diagnosed at an earlier stage, permitting earlier treatment); kidney failure; major organ transplant; aorta graft surgery; benign brain tumour; coma (now defined as a required Glasgow coma score of four or less; heart-valve surgery; pre-senile dementia (Alzheimer s); HIV assault with a needle; Parkinson s disease; paralysis/paraplegia; severe burns; balloon angioplasty; blindness in both eyes; coronary artery disease; HIV through blood transfusion; HIV through the medical profession; loss of hearing; loss of limb; motor neuron disease; loss of speech; loss of independent existence(see standards above). Because every policy specifies a definition for each medical condition, it is very important to pay close attention to the fine print, although the new effort to standardize definitions will make it easier to compare products. For example, one group policy defines coverage for cancer as: A malignancy characterized by the uncontrolled growth and spread of malignant cells and the invasion of tissue. However, the same policy excludes the following conditions from coverage: Early prostate coverage, diagnosed as T1 NO MO or equivalent staging; pre-malignant lesions, benign tumours or polyps; non-invasive cancer in situ; any skin cancer other than invasive malignant melanoma into the dermis or deeper, and any tumour in the presence of the human immunodeficiency virus (HIV). 6
The premiums, and other terms and conditions vary among insurers and are influenced by factors including the age, gender, and lifestyle of the insured, the medical history of his or her family, and any pre-existing medical conditions. Premium levels will also vary according to the amount of coverage (i.e., the number of dread diseases and the amount of the benefit, etc.), the length of the term, specific ailments covered, and actuarial assumptions dealing with morbidity, demographics, claims history, and survival rates. The premiums for men are greater than those for women, because men are more susceptible to common ailments, such as heart attack and stroke. All CI policies provide payments of benefits upon diagnosis of one of the medical conditions set out in each policy, and while most Canadian insurers cover similar lists of conditions, they differ in whether they provide and in how they calculate benefits in the early stages of some conditions that have not reached the lifethreatening stage. For example, one insurance company may pay 10% of the face amount of a policy up to a capped dollar amount for an early-stage non-life-threatening form of breast cancer, another insurer may pay up to 25% to a different capped dollar amount, while a third may provide no early-non-life-threatening benefits at all, for the same diagnosed stage of the same cancer. It is important that all clients fully understand what is covered by the definitions of dread disease in their policy, and what is not covered. Some policies provide for a partial refund of premiums to those whose contracts have run their full term without a claim, or who have received no benefits. However, some insurers do not include this return-of-premium feature as a standard clause in their policies, but offer it only as policy rider, thereby driving up the cost of the premium. 7
Some insurers may offer to refund a specified amount (up to 100%) of premiums at the later of two dates (e.g., age 65 or after a specified number of years of coverage), while others may offer a grading system that refunds, for example, 75% of the premiums at age 65, and an additional 5% every two years to age 75. Insurers may also vary their definition of client characteristics. Some insurers have different specific exclusions in their standard policies. For example, one insurer may exclude medical conditions that arise as a result of war, civil strife, or riots, while other insurers may not. Other policies often stipulate that benefits under the policy will not be paid if: a covered condition results from attempted suicide; a pre-existing condition is diagnosed prior to the effective date of coverage; the insured has taken poison; the insured has taken a drug other than one prescribed by a licensed physician; the covered condition is the result of participation in a criminal act; the cover condition is a result of impaired driving by the insured. Most policies are available with a waiver-of-premium provision that covers the insured s premium payments in the event he or she becomes disabled while the policy is in force. CI is available as a stand-alone policy or attached as a rider to some life policies. CI presents a number of advantages for the insurer, particularly when compared with long-term disability insurance. CI payout costs are both more predictable and lower than those for long-term disability insurance. 8
CI generally pays out a one-time fixed amount, whereas long-term disability pays out monthly benefits that can run for 25 years. This means that the administrative costs directly related to long-term disability insurance are greater than those for CI. THE COST OF CI The cost of a CI policy varies as widely as the coverage available, and is in large measure dependent on the factors mentioned above. Generally, CI policies are cheaper when attached as riders to life policies, than when sold as stand-alone policies. CI policies are more expensive than life policies. For example, a comparison between a ten-year term policy and a ten-year CI policy, with a $250,000 benefit, for a non-smoking 50- year-old male, in Ontario, in good health, shows the premium for the CI policy to range roughly between $2,500 and $2,900 per annum, while the premiums for ten-year term policies for the same person, range between $425 and $485 per annum. The charts below illustrate the chances of critical-illness claims versus death-benefit claims of smokers and non-smokers, males and females, before age 75. In every case, a critical-illness claim is more likely than a death claim. The expense of premiums reflects this likelihood of a claim being made. 9
Chance of Critical Illness Vs. Death Claim Before Age 75 Male Non-Smoker 80 70 60 50 40 30 20 10 0 35 45 55 65 Critical Illness Claim Death Claim Chance of Critical Illness Vs. Death Claim Before Age 75 Female Non-Smoker 80 70 60 50 40 30 20 10 0 35 45 55 65 Critical Illness Claim Death Claim 10
Chance of Critical Illness Vs. Death Claim Before Age 75 Male Smoker 80 70 60 50 40 30 20 10 0 35 45 55 65 Critical Illness Claim Death Claim Chance of Critical Illness Vs. Death Claim Before Age 75 Female Smoker 80 70 60 50 40 30 20 10 0 35 45 55 65 Critical Illness Claim Death Claim 11
Another attractive rider links a dread disease to the insured s mortgage, so that the insured s mortgage is automatically paid off if the insured contracts a defined dread disease. Premiums for coverage linked directly to the mortgage of the insured can be included as part of the regular monthly mortgage payment. An example of approximate monthly premium rates per $1,000 of single coverage related to the mortgage of the insured is as follows: Age Monthly premium per $1,000 of single coverage 18-30 $0.10 31-35 $0.14 36-40 $0.21 41-45 $0.39 46-50 $0.62 51-55 $0.96 One insurer offers a CI plan with benefit amounts that decrease over time as the mortgage loan decreases, while another offers a plan with a combination of level and decreasing benefits over the term of the coverage. Some insurers will offer a 10 to 15% premium discount on this type of coverage when there is more than one insured on the same mortgage. Canadian CI policies presently differ in one significant way from their international counterparts in that they are non-cancellable. This means that once the policy is issued, the insurance company cannot change the premiums or add conditions until the term of the contract expires. Thus the premium is guaranteed to be the same over the life of the contract. In foreign jurisdictions, CI policies are issued on a guaranteed renewable basis, which means that insurers are free to alter premiums or conditions in the policy during the term, based on their experiences in the market. 12
There are expectations in the insurance industry that the days of guaranteed premiums are numbered; the existing Canadian benefit/price structure may be altered, allowing Canadian insurers to increase premiums over the life of the contract. The reasons for this include the question of whether the limited claims history for CI in Canada is such that it is uncertain whether the product is presently priced high enough to support future claims. However, future claims levels will change and rise as medical diagnostic techniques improve the incidence of early detection and treatment of dreaded diseases. Keep in mind that CI has been priced in the traditional manner, summarized as: interest + morbidity (claims) + expenses = pricing. It is the morbidity factor or claims data that is uncertain at this point. If morbidity projections turn out to be less than expected, then future premiums levels could be pushed down (less illness = fewer claims = lower premiums). If morbidity projections exceed the expected levels, then future premiums levels could be pushed upwards. Since reinsurers generally insure all or part of the risks assumed by insurance companies, they too are concerned over the lack of Canadian CI data and rapid developments in medical science. CI, unlike traditional life insurance, does not benefit from increased longevity. Improved diagnostic and surgical techniques will lead to an increase in CI claims. There is a belief that currently fixed contract definitions of dreaded diseases may be redefined by future medical breakthroughs, and thus some reinsurers are backing away from treaties or contracts for CI products with guarantees. Reinsurers are also leery of CI coverage that is granted on a longterm basis for a single premium, because changes to the premiums or benefits in these contracts cannot be made once the policies are purchased. One recent attempt to alter the current premium structure while still making it palatable to the consumer is the introduction of a lifetime premium increase cap (e.g. 20%). This means that all the premium increases over the life of the policy will never exceed 20% of the original premium. 13
THE TAX STATUS OF CI Benefits paid under a standard CI policy are not taxed. However, Canada Revenue Agency has yet to clearly define its tax treatment on CI premiums that are returned or refunded to policyholders or their estates. THE CI MARKET Although CI has been available in Canada since 1995, its growth in market share in the insurance industry has been slow, and consumer awareness of the product is minimal. A recent survey suggests that less than 55% of all Canadian consumers had ever heard of CI, and approximately one-tenth of 1% of Canadians have CI coverage. Historical data and recent comments from insurers suggest that the Canadian CI market is expanding rapidly. In Britain, where CI has been available for some time, almost 15% of the population has CI coverage, and similar growth can be expected in the Canadian market. For example, one Canadian insurer reports that CI has grown to slightly more than 10% of its total business during the decade it has been available. Another major insurer indicates that CI is the fastest growing product in the company s portfolio, and that the industry as a whole has seen a 43% annual growth in CI policy-writing since its introduction. A current industry survey shows that over 70% of advisors are currently recommending CI. CI is not a replacement for disability or long-term-care insurance, but rather is intended to help the insured get over the hump of a dreaded disease or critical illness and to cover costs above and beyond income replacement and medical bills. 14
WHO IS BUYING CI AND WHY? A leading seller of CI indicates that its clients range in age from 25 to 50 years of age. Although those consumers all buy CI that is similar in coverage and benefits, they purchase CI for different reasons at different ages. Industry sources indicate that the largest market segment for CI is comprised of self-employed people, business owners and professionals, but CI is suitable for anyone earning income that requires protection. CI is also targeted at people who do not earn an income, such as stay-at-home parents, who can use the funds to hire someone to care for the children and provide additional time for that parent to recover from an ailment, as well as providing in-home nursing care, meal preparation, etc. Older clients tend to buy CI to protect their assets. They wish to avoid using their RRSPs and other assets earmarked for retirement to finance unexpected financial necessities that arise from contracting a dreaded disease. A recent industry survey found that almost 50% of those surveyed were concerned about their inability to cover their expenses if they became critically ill. Younger clientele without dependents tend to purchase CI before life insurance so that they can cover mortgages, student loans, and other debts and expenses if they contract an illness. Industry trends indicate that CI is also being used as an alternative to the traditional approach of using life or disability insurance to pay the remainder of a client s debts in case of disability or death. In the past, banks often insured business loans by taking out life insurance on the borrower. Now, financial institutions offer CI on their borrowers lives to provide the same protection. Business partners can use CI to cover costs associated with hiring a replacement employee to carry on the work of the sick partner. Young families acquire CI in order to take care of children or to allow the healthy spouse to leave the workplace or work part-time. 15
Consumers are attracted to policies that include the medical services offered by Best Doctors Inc. A U.S.-based company located in Boston, Massachusetts, Best Doctors provides highly specialized medical services to clients throughout the world, and is regarded as one of the premier independent medical decision support providers for patients. It works with insurers in Canada and worldwide, and provides services to nearly eight million people in over 20 countries. After the initial diagnosis, Best Doctors assists the insured in his or her search for the best specialist who can provide top-level medical advice for treatment of their critical illness. The insured receives an evaluation of his or her medical records by world-class physicians, who verify the diagnosis and recommend the appropriate treatment options offered by a number of specialists drawn from the Best Doctors global database search. The Best Doctor s database includes Canadian and international specialists who have been ranked by their peers as the best for treating over 40 specialties and 400 sub-specialties of medicine. ADDITIONAL FACTORS TO CONSIDER ABOUT CI The following are some factors that clients should keep in mind when contemplating the purchase of CI: The price of CI is escalating and expected to increase this year by 15% to 30% depending on the age and other factors relevant to the insured. This increase in price is a result of the existing price guarantees on policies already written. This means that insurers are locked into specific revenues, while the possibility of higher payouts increases as the client base ages and becomes increasingly susceptible to illness. In addition because of the relatively newness of the product, existing premiums have been set without the benefit of long-term claims histories and other factors used to establish realistic premium levels. 16
Although family medical history is a factor when setting premiums for life and long-term-disability policies, it is a more important factor for insurers who offer CI insurance. Insurers are more prone to reject applicants for CI whose families have histories of diabetes, heart murmur, hepatitis, kidney failure, multiple sclerosis, and other select ailments before the age of 50. A family history of heart attack, stroke, or cancer or the presence of symptoms that may lead to heart attack (e.g., high blood pressure, high cholesterol, and excess weight) may result in higher premiums. CI coverage is unavailable for certain illnesses, including Crohn s and colitis, and some chronic conditions, such as congestive heart failure and Cushing s disease. Coverage for coronary surgery varies between insurers; few insurers cover angioplasty treatment, while most cover more serious bypass surgery. Choosing the amount of coverage is an important consideration. Most advisors recommend choosing one of two benchmarks when setting the policy s face value. The first benchmark is related to the client s long-term debt load, which quite often includes a mortgage, plus the costs required for home care and any alterations to the home that result from the critical illness (e.g., installation of wheelchair access). The second benchmark is equal to one-time the gross annual income of the insured. 17