Critical Illness Insurance

If I bought groceries the way I buy health insurance, I'd eat a lot better - and so would my dog - Phil Gramm

Critical Illness Insurance

image by: Critical Illness Insurance SG

It’s often pitched as an insurance policy for your health insurance policy.

The product, known as critical illness insurance, promises to pay a lump sum, anywhere from $5,000 to $100,000, after someone receives some sort of dreaded diagnosis, like cancer, a heart attack or a stroke. And the coverage is not terribly expensive; if you are in your 40s, it might cost $25 to $50 a month.

These policies have become increasingly popular, partly because they are being marketed as a way to provide another layer of financial support now that consumers are shouldering an ever-rising share of medical expenses out of pocket.

More employers are offering these policies alongside their high-deductible health plans as well, as way to ease financial anxiety. It’s akin to putting a Band-Aid on the less generous medical coverage — or perhaps a way to nudge employees into feeling more comfortable with a high-deductible policy.

“Quite honestly, these high-deductible plans are a source of initial employee stress,” said Barry Schilmeister, a principal in the health and benefits business at Mercer, a human resources consulting firm. “And it seems as though these plans are helping a certain group of employees feel a little bit better about signing up for a plan that has a high deductible, at least in certain cases where the employee is afraid they will have a large out-of-pocket cost in those kinds of not-frequent situations.”

But some consumer advocates and health policy analysts have questioned whether these policies are worth the expense, partly because they are so narrowly focused. They will not cover the bill if you have a high-cost trip to the emergency room when you break a leg. The better option might be to buy a disability policy — which covers a wider range of conditions — and life insurance.

“Deductibles are rising. More people are getting out-of-network bills,” said Jackson Williams, director of government affairs at Dialysis Patient Citizens, who has studied the policies in his role as a consumer representative for the National Association of Insurance Commissioners. “What concerns me is that these products are being marketed as being helpful to people’s personal finances in the event they have some sort of illness and need to pay their outsized deductible. But I would vehemently disagree that these products are very good at addressing that problem.”

Mercer found that nearly 60 percent of large employers offer some type of high-deductible plan — often referred to with the euphemistic name “consumer directed health plan” — and about one out of every four covered employees is enrolled in one.

So it’s not surprising that more people — both employees and people in the individual market — are buying critical illness insurance. About 1.2 million policies were sold in 2014, according to a study by Gen Re. And sales, which totaled $380.7 million in 2014, more than doubling from 2009, are on the rise, Gen Re’s market research found.

Though the Affordable Care Act put a ceiling on out-of-pocket expenses, they are still high: There is a $6,850 annual maximum for individual plans in 2016, and $13,700 for families. Among workers with a deductible, the burden has significantly increased over the last decade. In 2005, the average deductible was $584 for an individual, compared with $1,318 in 2015, according to the Kaiser Family Foundation.

Though a critical illness would surely require consumers to meet their deductibles and probably more, some experts say it is more likely that an individual will have a chronic illness that will require large out-of-pocket payments. As Mr. Williams sees it, the insurance exploits a cognitive bias, or consumers’ overestimation of their risk of a catastrophic illness. He also said consumers tended to drop the policies before their high-risk years, which he said is something the industry is banking on. (Critical illness policies paid out an estimated $184 million in 2014, according to Gen Re.)

The fine details and mechanics of the policies can vary greatly. Some policies might just cover cancer, though many include at least five conditions — cancer, heart attack, stroke, renal failure or a major organ transplant. But many insurers cover an average of 19 conditions. Those might extend to Parkinson’s disease, Alzheimer’s, amyotrophic lateral sclerosis, loss of sight and speech and heart valve replacement.

But for the policy to pay out, the diagnosis must meet a specific definition. At Unum, for example, a stroke is defined as a “cerebrovascular incident including infarction of brain tissue, cerebral and subarachnoid hemorrhage, cerebral embolism and cerebral thrombosis.” And the diagnosis must be supported by “evidence of persistent neurological deficits confirmed by a neurologist at least 30 days after the event,” with neuroimaging studies confirming the problem.

“With some diseases, there are degrees,” said Todd Dzen, director of voluntary benefits at the American International Group. “If you had a very small and treatable cancer, that might not meet our cancer definition.” (But A.I.G. would pay 25 percent of the benefits for certain minor cancer diagnoses.)

If the definition is met, the insured receives the lump-sum payment. The money can be used however the insured pleases. “The intention behind critical illness insurance was to help patients pay for the high cost so often associated with surviving a critical condition,” said Stephen Rowley, a vice president at Gen Re.

So what if someone dies shortly after receiving a diagnosis, or perhaps after a heart attack? That may not be covered, since some companies require that the insured survive for a certain period.

Qualifying for the insurance also differs across providers. Policies offered through employers generally do not require medical underwriting, while those sold in the individual market do. And while the Affordable Care Act did away with most exclusions based on pre-existing conditions, these policies are excepted — sopre-existing conditions or family history could potentially preclude an individual from receiving coverage. Diabetics, for example, may not be insurable. But if someone had cancer, for example, some providers will underwrite the policy with certain conditions: They will not pay for 12 months after the coverage date, if someone was diagnosed with cancer up to 12 months before the policy’s effective date.

Some insurers will also pay for more than one condition — a heart attack after cancer, for example, or for recurrences within a certain period. Children may also be covered — for a portion, maybe 25 percent, of the policy amount — from birth until age 26 for all of the same conditions along with several others, such as cerebral palsy, cystic fibrosis and spina bifida. Coverage for spouses is often available for a higher premium.

Pricing varies. Some insurers offer a steady premium, whereas others increase the premium as the insured ages. On average, a nonsmoking 42-year-old seeking a $50,000 policy might pay $54 to $66 a month, according to Gen Re’s research. A $25,000 policy might cost $27 to $41.

But premiums may be far higher for older people, and some policies significantly reduce coverage — by half — once you reach, say, age 70. One insurer, for example, said $50,000 in coverage could cost roughly $210 a month at age 60.

“Maximum issue ages varies as well, but little is sold beyond the mid-50s as the cost can become somewhat prohibitive,” Mr. Rowley said.

But it would seem that is precisely when risks begin to rise. The insurers are quick to highlight all of the scary statistics on their websites — every 40 seconds someone has a stroke — so I asked one of the actuaries who specializes in critical illness insurance, Darrell D. Spell of Milliman, an actuarial consulting firm, to lay out the actual risk.

For every 1,000 people who are 50 years old, he estimated, roughly 12 to 15 might experience one of the five conditions often covered by critical illness policies: cancer, heart attack, stroke, renal failure or a major organ transplant. Ninety percent of the claims are tied to the first three.

But that does not mean he would suggest buying critical illness at the expense of other policies first. “I think of things in terms of a hierarchy of need,” Mr. Spell said. He said the most important was comprehensive medical coverage, followed by disability and life insurance. Once those bases are covered, he would consider a critical illness policy. And he’s a fan.

Healthy policy analysts and consumer-focused groups are not convinced. “They are being marketed as a gap filler for a high-deductible policy,” said Timothy S. Jost, a professor at the Washington and Lee University School of Law, who reviewed the policies in his role as a consumer representative to the insurance commissioners association. “And then you buy a cancer policy and an accident policy — and it is supposed to cover your deductible. And it probably never will.”

Source: Tara Siegel Bernard, Insurance for Critical Illness May Add Security, but at a Cost, The New York Times, March 18, 2016.

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Last Updated : Monday, June 1, 2020