Benefits Column'Survival Entails a Price'

Thirty years after its creation, critical-illness insurance can still play an important role in protecting employees when a medical disaster strikes.

Wednesday, March 12, 2014
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I have my prejudices when it comes to employee benefits. If you've read any of my prior columns, you know I'd rather see people choose disability benefits over dental or pet insurance.

But, I am softening some of my viewpoints. I've gained an appreciation for giving employees what they want, instead of what I believe they need -- and that includes understanding that beer available in the workplace can be both an employee benefit and a wellness strategy.

My biases were tested again in January. I gave the keynote address at a client's private conference for their broker customers. One of the featured product presentations during the event concerned critical-illness insurance.

When I first entered the insurance industry after working in a clinical setting, my employer -- a major financial-services company -- cast a series of disparaging remarks about both cancer and critical-illness benefits. In hindsight, I realize I squashed my normally curious nature, took the comments at face value and never thought about either product again.

And then, at the conference, I heard Dr. Marius Barnard explain how he created the concept of critical-illness insurance 30 years ago.

Barnard is not your typical insurance-product-development manager. A South African cardiac surgeon, he was a member of the team -- led by his brother, Dr. Christian Barnard -- that performed the world's first human-to-human heart transplantation in 1967.

Throughout his career, Barnard witnessed the transition of patients dying from diseases such as cancer, cardiac disease, heart attacks and strokes to people surviving. And he realized one key fact from this evolution: "Survival entails a price."

In his book titled Defining Moments, Barnard cites an estimate that the cost of a cancer diagnosis for a patient is one part medical expenses and two parts indirect costs. He eventually became obsessed with how to provide his patients with the money they needed in the event they survived a life-threatening condition -- the odds of which were going up all the time.

Barnard says he worked for years to create a critical-illness product, "not because you're going to die, but because you're going to live." He finally was able to help launch a "dread disease" insurance product through Crusader Life in his home country in 1983.

The product had a simple design. It covered four conditions: heart attack, stroke, cancer and coronary-artery-bypass surgery. And, it was designed like a life-insurance benefit in that it paid a lump sum and paid "real money" -- generally dollar amounts in excess of $250,000. This would allow the insured to address his or her most pressing money issues, such as paying off a home mortgage.

Marcia Johnson (who has known and worked with Barnard since the product was designed for the U.S. market in the late 1990s) explained the role of critical-illness insurance in the benefits hierarchy this way:

·         Life insurance pays for dying, but not the consequences of surviving;

·         Health insurance pays for the treatment of illness;

·         Disability insurance provides income, but not all the money necessary for the consequences of being disabled; and

·         Critical-illness insurance pays for the consequences of the event, not the event itself.

After hearing Barnard present and after speaking with his long-time American colleague (Johnson) I was intrigued with both the simplicity of the product and the logic behind offering it. But, 30 years later, what is its place as an option during the next benefits-enrollment period?

Critical-illness insurance is different in the United States -- where it is mainly a worksite voluntary product offering -- compared with the higher-dollar, individual polices available in other countries. Coverage amounts here range from about $5,000 to $20,000. The annual price point for voluntary coverage is approximately $300 per year, according to Neicee Durrance, vice president of customer acquisition strategies at the Chattanooga-based insurance leader Unum.

Global reinsurance and risk-management-services provider Gen Re indicates that, at best, only 3 percent to 5 percent of Americans currently have critical-illness coverage. However, the company's 2013 U.S. Critical Illness Market Survey found participants reported $308 million in new premium sales for the year 2012. This represented a 90-percent increase over reported 2011 sales figures. This increased interest appears to be driven by both consumers and insurance brokers.

Why the growing interest in critical-illness insurance?

The first reason may be related to the continuing increase in the number of employees covered under high-deductible health-insurance plans (28 percent, according to the Kaiser Family Foundation) as well as the large majority of employees paying either a copayment or co-insurance for primary and specialty care office visits. Even a small critical-illness policy can offset the cost of the deductible and the copayments if an employee finds himself or herself in a medical crisis.

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The second reason for increased focus on the product may come from insurance brokers who are seeking new revenue streams, particularly as they anticipate reduced health-insurance commissions as a result of the Affordable Care Act.

If an HR executive is interested in providing employees with the opportunity to purchase critical-illness insurance, the following are some considerations to keep in mind:

·       If you decide to offer a worksite individual policy, consider providing the best product offering available for your employees' money. Three benefit provisions that several carriers found to be important to employees are the ability to take the policy with them if they leave a company (portability), no reduction in benefits as employees get older and no change in premiums over the life of the policy.

Keep in mind that some voluntary critical-illness products have language in the contracts allowing the carrier to have a renewal period during which the carrier can raise premiums. Even if the carrier has historically never exercised the right to use this language, the possibility exists that this could happen in the future. You may want to remove this language from the contract.

·        If you are making changes to your medical plan and are moving to high-deductible coverage (or are increasing the amount of your deductible), you may want to consider coupling this plan alteration with a base employer-paid group-critical-illness policy of $5,000. You can give employees the right to buy-up from this base.

Remember that this plan design will be subject to renewal periods during which the carrier can raise premiums.

·        Simplicity in plan design is important to keep in the forefront. Barnard's original product was easy to understand, although its "once-and-done" design was not palatable to the American consumer. The product has morphed from covering eight to now 10 to 15 critical conditions. Covering more conditions than these is not necessarily an important focus.

Instead, pay attention to contract provisions such as the annual benefit, reoccurrence language, staged benefits and separation periods.

·        Finally, be aware that all insurance carriers are both pleased and concerned by the number of brokers who are promoting critical-illness coverage. The major apprehension is that brokers will attempt to move the business every few years to take advantage of larger first-year commissions.

Carol Harnett is a widely respected consultant, speaker, writer and trendspotter in the fields of employee benefits, health and productivity management, health and performance innovation, and value-based health. Follow her on Twitter via @carolharnett and on her video blog, The Work.Love.Play.Daily.


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