Critical Illness Insurance Essential protection for a new era

Specialists in tax advantaged benefit plans for small business owners & key individuals Long Term Care Disability CI Health/HSA s Dental Supplemental Life Annuities Critical Illness Insurance Essential protection for a new era David B. Berg Director of Benefit Services Overview Over the years we have all experienced the changes in health insurance. Unfortunately health insurance no longer protects us to the extent that it did even 10 years ago, so it s no wonder the primary reason for bankruptcy in the USA is medical expenses. The individual share of health expenses commonly known as co insurance continues to increase as employers and associations attempt to limit increases in the cost of heath insurance. Unfortunately our share of medical expenses is often a hidden cost that we don t discover until after a significant illness or condition. What has this increase in co-insurance and other expense sharing requirements do to the value of our coverage? One consequence of this effort often is that our health insurance has a maximum out of pocket (OOP) cost that exceeds our ability to pay. This isn t usually recognized until we have a major medical expense and we realize that not only do we have out of pocket costs but that many procedures may not be covered. It is a tragic situation that often leads to catastrophic financial consequences. However, it is also a sign of changing times when health insurance may no longer be the total coverage we once thought. Not understanding that your maximum OOP is quite large and that some treatments may not be covered can lead to some unfortunate situations. So why does this happen? Many of us do not review the details of our coverage to determine what our maximum OOP cost could be in the case of a major illness or condition. Since many plan options now have high out of pocket (OOP) limits and also limit access to specific treatments, may contain costs on a monthly or annual basis, many employers and employees select this option. It appears to produce a reasonable premium until a serious medical condition occurs. We then learn that we are not only responsible for the costs of treatment but we can no longer afford to pay for them, despite having health insurance. That is an awful surprise for those of thus that believe we are covered. However this situation is common enough to have driven a need for a solution. Why the need for critical illness insurance? When we realize that our health insurance does not cover all the treatments nor has a very high out of pocket cost, there are situations beyond paying for the total cost ourselves or considering bankruptcy. The situation can be solved quite easily with Critical Illness insurance. Critical illness insurance is medical insurance that pays a lump-sum benefit upon diagnosis of a critical illness or condition. A critical illness insurance payout helps you avoid the financial strain a major illness can create so you can focus on your recovery. The policy can be used to supplement your health insurance for specific illnesses or conditions. Insurance & Annuity Brokers Offices: Oregon Portland Washington Vancouver, Olympia, and Seattle 503.344.5044 (v) 503.210.0572 (f) 888.772.2758

However Critical Illness (CI) is different in that the policy pays your directly the lump some cash benefit. Since the policy pays you directly you have much more flexibility in how the cash can be used to help improve your situation. It gives you the freedom to: Get the treatment you want Spend time with your family and friends Keep your home and other assets Cover your out of pocket (OOP) costs. During a major medical condition we may find we cannot work for an extended period, often 15-365 days. So a well thought out plan combining both critical illness and disability income may be your best solution to protecting your family and your business during a major illness or injury. This is why we often suggest that priorities should be health insurance, disability insurance, and critical illness insurance prior to retirement. These three types of coverage protect us from the most common events that occur under age 65. Fortunately catastrophic financial situations are no longer necessary given CI insurance protection. Critical Illness coverage is a wonderful concept as long as we understand the benefit and use it wisely to compliment our health and disability income insurance. The key to doing this is to understand our coverage and also meet our individual financial requirements. If our health insurance doesn t cover all of the costs we can use the benefit to protect ourselves, as we need it, given specific conditions or illnesses. If our health insurance does cover everything we still get the benefit and can use it to offset other costs associated with our condition. It is truly a revolutionary benefit, I don t believe there is a better win-win type of protection than critical illness coverage when adequately investigated and applied given our other insurance priorities. What changes now require Critical Illness Protection? Clearly, a major-medical plan does not fill the financial gap created by a devastating illness. The U.S. Department of Housing and Urban Development reports that up to half of all foreclosures are the direct result of homeowners suffering a critical illness. Critical-illness coverage pays directly to the covered individual or family so there are no restrictions on how the funds are used even to pay the mortgage. CI policy payments may be used to help cover day-to-day expenses or the payment(s) can be used to meet out-of-pocket medical expenses that are not covered by major-medical policies, such as experimental drug therapies or home and vehicle modifications. A Critical illness policy can be a financial life saver as the lump-sum payment can help keep a family afloat financially until the patient recovers or qualifies for other coverage like disability insurance. It is truly unique and a required benefit. Many families today cannot afford to pay for their OOP expenses or lose their income. They often carry a substantial debt burden which is impossible to pay if a major illness or condition occurs. So it is not just the overall move away from total health insurance coverage but also the need to limit unanticipated expenses and income loss. If there is any possibility that your health insurance will not cover all expenses or that your OOP cost exceeds your short term (90 day) ability to pay, we strongly suggest CI coverage.

Why are people asking for Critical Illness Insurance? Most critical illness policies cover a broad range of conditions from heart attacks, stroke, cancer, coma, kidney failure, organ transplants, and paralysis. So when you evaluate them you can easily see that they cover a broad range of conditions that most of us would consider to catastrophic. Any one of these conditions could easily cost us tens of thousands of dollars in unpaid medical expenses or lost income. If any of these conditions occur in your immediate family or your physician informs you are at risk, strongly consider a significant level of CI protection immediately. Here is why? About 1.2 million Americans will have a first or recurrent coronary attack in 2005. Nearly sixty percent will survive three years or more. However, many of those will be partially or totally disabled. There are 5.4 million stroke survivors alive today, many with disabilities. Each year about 700,000 people suffer a new or recurrent stroke in the United States. The AHA says: Recovery from a severe stroke usually takes months or years of medical treatment, rehabilitation therapy and determined effort by the stroke survivor. Many survivors never regain all their lost functions. The American Cancer Society, in its brochure Cancer Facts and Figures for 2005, estimates that there will be 1,372,910 new cancer cases for 2005, excluding basal and squamous cell skin cancers and in-situ carcinomas. The overall 2004 costs for cancer were $189.4 billion but only $69.4 billion was for direct medical costs. The costs surrounding a cancer diagnosis average $146,000 per patient, with many treatments not covered. These statistics represent only some of the individuals who are incapacitated for a month, six months or longer after a critical illness. The good news in all this is that, due to the burgeoning advancements in medical technology and care, more and more people are surviving critical illnesses. The bad news is that these survivors often have severe disabilities that limit their ability to work and uncovered medical expenses that produce bankruptcy and loss of their lifestyle. Fortunately many people are aware of the situation after they observe an occurrence in their family or friends. They are now driving the need for critical illness coverage and demanding more extensive benefits from the health insurance industry. In fact most employers provide supplemental CI coverage when paid for by the employee. About Critical Illness (CI) Insurance Most CI policies make full or partial (25% or more) direct lump-sum payments to the policyholder in the event of heart attack, stroke, life-threatening cancer or major organ transplants. More enhanced policies also include in their covered illness list bypass surgery, angioplasty, atherectomy, stint placement, end-stage renal failure, MS, Alzheimer s and paralysis. The more extensive the number of conditions included in the policy, the better the coverage for most of us. The objective should be to fill the gap in our primary health insurance policy to cover our out of pocket costs and provide more flexibility for treatments and paying for indirect expenses.

There are a number of insurance carriers that provide CI insurance in the USA. These include major carriers like Mutual of Omaha, AIG, and AFLAC. Underwriting for these policies varies but is much less invasive than life insurance. The agent needs only to ask for a family history, smoking status, and perhaps an oral swab test. These policies do not even require blood tests except at the highest benefit amounts. So underwriting can be quick and coverage approved rapidly Benefit amounts are a key decision for most applicants. They are very flexible and affordable, ranging from $5,000 up to $250,000, and there is usually no waiting period. However we strongly suggest that each applicant review their appropriate level of coverage with an experienced advisor. Some narrow forms of coverage may be acceptable for a benefit amount of $5-15,000 but most often $25,000 is a minimum level of coverage. Since payouts can be partial (i.e. 25% or more) review the minimum amount for each condition. In general we suggest a minimum benefit of $25,000 as it is not only affordable but can provide assistance, even on a partial payout. The applicant and their advisor should consider a number of factors including: 1. Out of Pocket (OOP) maximum for their health insurance policy. 2. Cost of treatments not covered by health insurance. 3. Elimination Period for their disability Income coverage. 4. Monthly expenses if the applicant cannot work or is in recovery. 5. Financial obligations if they become disabled or have an extended recovery period beyond 30-365 days. Critical-illness policies have been around for at least 25 years. The policies originated in South Africa and are sold successfully in United Kingdom, Australia, Japan and Canada. This type of policy was introduced more recently in the U.S.A. In the U.K., sale of CI policies has been growing since the mid-1980s, usually positioned as supplemental life insurance and often tied to mortgages. According to Swiss Re Life, which conducts surveys of life and pension plans, The peak year for CI sales was 2003, when 46.7% of all new term policies had a CI benefit, rising from 31.3% in 1999. In the United States, CI coverage is sold more often as a standalone supplemental health insurance product than as a life insurance rider. The scope of these policies varies widely but generally they are supplemental policies that cover a variety of health insurance conditions. The cost of the policies is often relatively inexpensive for a benefit of $25-50,000. Premiums are often in the $30-75 per month range at these benefit levels. Most companies will only pay for one covered illness upon surviving for 30 days after the diagnosis. The best CI policies do not terminate after a single payout but continue to provide more than a single benefit. In any case if the benefit has been reviewed and structured properly for the applicant, the payout will more than compensate for the cost of premiums and likely be a financial lifesaver. Many policies limit the age for which they will accept applicants to fewer than 60. However benefits may continue at a reduced rate if the policyholder is older than age 60. Thus applying for coverage prior to retirement is critical. In fact the optimal age may be 30-55 for most applicants. The best policies provide for no reduction in benefits when a policyholder exceeds age 60. For seniors this can be a very valuable benefit if they apply and are accepted early.

Critical Illness (CI) Policies & Choices Overall, the CI policies can be extremely flexible and affordable. There are a number of major insurance carriers with solid ratings that provide CI insurance. So we have options and the premiums will vary between carriers and the breadth of coverage. This is why it is important to first determine the optimal level of coverage for each individual situation. Do we need $5,000 or $75,000 in coverage for the most common conditions that may affect us? Is there a partial payment for the most common condition or is it a full payout of the benefit? Do we want individual or family coverage? These are all questions we must ask ourselves. Most of us would be quite pleased to cover our OOP expense, provide access to all treatments, and pay for specific bills. Often this level of benefit can be obtained for under $50-75 per month if we are reasonable in our expectations and in good health. Note that premiums for CI policies vary according to the illnesses covered the dollar value of the plan, and the policy-holder s age and health habits, especially smokers versus nonsmokers. Also many carriers ask for family and personal history of major illnesses/conditions. This can have an impact on premiums if there is an extensive history of critical illness. A good rule in determining benefit amount is for the policy-holder to cover at least six months of income. Critical-illness insurance is not a replacement health insurance, disability insurance, or longterm care. This type of coverage is intended to fill gaps in other benefits complimentary to your health, disability and long term care insurance. Given its common affordability, we can all see the value in these policies when integrated into an overall plan of protection. So selecting the right benefit level in coordination with your other core policies is essential. Critical Illness (CI) & Disability Income (DI) protection The biggest differences between a CI policy and a disability income plan are that CI is paid out in a lump sum and at each occurrence. Most disability-insurance policies pay as much as twothirds of wages after an elimination period is met. The sad thing is that most Americans do not have sufficient financial resources to cover the first 30 days of illness as well as resources to meet the continuing increased expenses during convalescence. Many small-business owners and employees do not have disability coverage and yet cannot afford to lose their income. CI insurance is not directly related to the individual s inability to perform occupational activities or activities of daily living (in the case of long term care). It pays a scheduled lump sum at the first diagnosis of a variety of expensive health conditions. This difference alone shows how CI can compliment DI for business owners and most applicants. We suggest that applicants look at CI as a supplement to fill gaps in their health insurance, with the potential benefit of replacing some income and covering expenses during a critical illness or condition. CI is not a replacement for a well thought out disability income plan. Quite the contrary, the three types of coverage (Health insurance, CI and DI) comprise the core elements of protection.

Another major difference is portability. Many CI policies are renewable for life, whereas disability coverage ceases when an employee changes jobs or loses his or her employment. Health insurance may also be covered under COBRA but the full cost of protection may not be affordable. Unfortunately this leaves many employees without DI or health insurance. Who needs CI Insurance? Most of us would ask ourselves if we really need critical illness protection. The answer to the question is nearly everyone may need CI insurance, but what is the appropriate level of benefit? Only if we truly have total protection in our health insurance for all conditions and we can immediately afford our out of pocket costs, would we not consider Critical illness protection. So we need to quantify how much CI is appropriate, not if we actually need the protection. CI is a relatively new concept in the U.S. marketplace, so there is limited awareness of the need until it is often too late. No wonder half of the bankruptcies are due to medial expenses! We all need to review our health insurance to see if the coverage has sufficient protection given our individual financial situation. For younger adults, ages 30-45, the CI coverage may be essential because they don t have the financial resources of older individuals but do have many of the same fixed monthly expenses, such as a mortgage, credit cards, and auto loans. In addition, they often have young children to think about. Those of us aged 46-59 have a more significant need for CI protection. Why? We are at the prime age for major conditions and illnesses and still have both families and assets to protect. Because we have assets like a home and we have a family, we often need critical illness protection even more than younger employees. The long term impact of a critical illness can be more devastating with this group. These individuals are not only more vulnerable to critical illnesses, often they are often defined as the sandwich generation struggling financially to pay for aging parents care and children s college costs. This group can barely afford to save for retirement, so an unexpected illness could wipe them out financially. Conclusion Health insurance often no longer provides the total coverage we expected even a few years ago. We now find that our out of pocket (OOP) costs are quite high and that not all treatments are covered. This usually happens after we are diagnosed with a critical illness or a significant medical condition. Today more than half of all bankruptcies are due to medical expenses. Why? Because we do not have sufficient health insurance and we often did not realize it until it was too late. Critical illness insurance attempts to fill this gap and can be very inexpensive. Reviewing our Health insurance and disability insurance in combination with critical illness options is essential for our long term financial well being.