You have probably read about critical illness insurance in trade publications, or maybe your insurance marketing organization has sent you marketing emails about it. But do you understand the importance of this coverage for your clients, and have you learned how to implement it into your product portfolio? If you are like most agents or advisors with whom I have spoken over the years, the answer is a resounding “No, but I would like to.” I want to help you understand the importance of and need for critical illness insurance and provide you with a foundation for implementing it into your protection portfolio.
Most of the advisors I know do not feel prepared to answer questions about critical illness insurance, let alone educate their clients on its importance. Considering how important this product is for certain clients, it is a subject that you and your clients must address. I believe that critical illness insurance is not a product that fits everyone’s needs. There are needs that critical illness insurance is not designed to meet.
Critical illness insurance is designed to protect your client’s retirement portfolio during the asset accumulation stage of life. Clients who are in the process of building toward retirement must be made aware of this protection. The best path I have found in educating advisors on how to advise their clients about critical illness insurance is to use the following analogy:
Imagine that you have a table in front of you. We are going to call this your client’s “retirement table.” (Not to be confused with the retirement income stool of Social Security: retirement, plans and savings.) Their goal is to have as much food as possible on their table at retirement. But they don’t have the luxury of implementing the “10-second rule” and so they can’t let that food/retirement touch the floor. So as with any table, we need to add legs for protection and stability.
For the best stability and protection of your client’s retirement table, there are four legs on this table: life, health, disability and critical illness insurance. Each leg is as important to the table as the other three legs, and all four legs should be balanced. Imagine what your client’s retirement table would look like with one leg twice as long as the others. You should be prepared to advise your clients on each leg of protection for their table.
The first leg of your client’s retirement table is life insurance. Although there are many reasons why life insurance coverage is important, it boils down to the beneficiary. People purchase life insurance to protect their beneficiary from the costs of dying, such as lost income, mortgages, debts, college funding, etc. Even if the life insurance policy were purchased for equity growth, that benefit normally has a designated purpose, such as a supplement to retirement benefits or funding a business succession plan. So what happens if your client doesn’t die, but came close to death and now faces a long recovery? What will their life insurance policy pay them? There are life policies available that can provide an accelerated death benefit. But if we accelerate the death benefit, what did we just do to the beneficiary? So the question is: Do your clients have a better way of answering their need for money if they survive?
The second leg of your client’s retirement table is health insurance. Health insurance was designed to reimburse catastrophic medical expenses from doctors and hospitals based on usual, reasonable and customary charges within your client’s local network. The real challenge consumers have is to understand what health insurance does not cover. Unfortunately, consumers have been conditioned to approach health insurance from a “carrier should pay all costs” mentality. It’s like paying for auto insurance and expecting oil changes, replacement tires, routine car washes and the like to be covered in addition to having coverage for the catastrophic risks.
Even with the current coverage mandated under the Affordable Care Act, the exclusions and limitations on health insurance reimbursements still are very significant and can lead to bankruptcy.
With a life-altering diagnosis, these two legs of the table do not answer the need for protecting the retirement portfolio – the table still needs two additional legs.
The third leg of your client’s retirement table is disability insurance. Disability insurance replaces up to a maximum of 60 percent of income upon diagnosis and continued proof of an injury or accident. How many people have a tough time living on 100 percent of their income, let alone 60 percent? In addition, we normally see a 90-day elimination period on policies sold to clients. What many people also don’t realize is that disability insurance pays benefits in arrears. So in the case of a 90-day elimination period, the client would technically have to wait 120 days before receiving their first benefit. Most of the population would have to live off of friends, family or the federal government if they went three months without income, let alone four months, and then had only 60 percent of their income replaced thereafter. Don’t forget that your client’s spouse certainly will be missing work to help care for your ill client, and disability insurance doesn’t replace the well spouse’s income. The bottom line – your client’s paycheck is an important asset to cover, but even with the coverage, where will your clients go to get the money they need?
Advisors who assist clients with investment planning know the answer to that question all too well. People will go to their savings first when they are in need of money. So what happens when your clients have to raid their principal? What if that money is also qualified money? The issue is, if they need the money, they have no other choice.
So in an attempt to pay for surviving a life-altering diagnosis, clients sometimes can dodge bankruptcy, but they do so at the expense of their retirement. Even though they might have life, health and disability insurance, without the fourth leg to the table, clients are still at major risk of losing what they are working so hard to build – their retirement.
Critical Illness Insurance
The fourth leg of your client’s retirement table is critical illness insurance. Dr. Marius Barnard, renowned heart surgeon and creator of critical illness insurance, recognized that with life expectancy nearly doubling over the past 50 years due to medical advances, the cost of surviving is increasing at an even faster rate. People are living longer, but they are not necessarily healthier. That is why critical illness insurance was developed. It pays a tax-free, lump-sum amount to those who survive a life-altering medical event. However, it also pays a tax-free, lump-sum amount upon death from a covered condition or a complete return of premium if death occurs from any other reason.
Imagine what a client could do with an infusion of $100,000! They could seek care from any doctor, they could afford to have their family travel with them, they could take a vacation or they could even put some of the benefit toward their retirement. Instead of postponing retirement by raiding their savings, they can put tax-free dollars into their savings to accelerate their retirement. The more options your clients have, the more control they have and the less stress they will feel. By the way, your clients are not limited to $100,000 and actually can have access to more than $1 million in critical illness benefit when the need is substantiated.
We all have been touched by someone who was diagnosed with a life-altering condition. Whom do you know who has been diagnosed with a heart attack, cancer or a stroke? Would $100,000 of tax-free money have made a difference to them? Would it make a difference to your clients? Make sure you properly protect your client’s retirement table with a balanced approach to their insurance needs, and remember how important critical illness insurance is in protecting your client’s retirement.