Bridging the Gap
Few products can help bridge a gap quite like critical illness insurance.
This relatively affordable solution has the potential power to help cover medical costs not covered by traditional health plans, facilitate small business continuity from one generation/partner to another in the event of a covered illness, and generate incremental streams of revenue for financial professionals.
THE NEED
Critical illness insurance provides payments for the occurrence of one or more covered medical conditions, subject to policy terms and specifications, including limitations and exclusions. The contracts differ from carrier to carrier, but this solution generally is designed to empower policy holders to choose the care and treatment they prefer if they undergo a major organ transplant or are diagnosed with another qualifying event such as a heart attack, invasive cancer, stroke, kidney failure, coma, paralysis, severe burn, and/or the loss of sight, speech or hearing. The stats related to these conditions are compelling.
In fact, as the American Heart Association and the American Stroke Association have shared, about 85.6 million Americans are living with some form of cardiovascular disease or the after-effects of stroke. Furthermore, although boomers and seniors are most prone to strokes, research published recently by the two nonprofit organizations shows that the risk to younger generations has increased dramatically. Compared with the 1995-1999 period, stroke rates in 2010-2014 for the studied population rose 147 percent in people ages 35-39 and doubled in people ages 40-44.
As the study’s lead author, Joel N. Swerdel, relayed in a related press release, “People, especially those under 50, need to realize that stroke does not just occur in the old, and the outcome can be much more debilitating than a heart attack” — leaving them living for another 30-50 years with the ramifications.”
Additionally, a recent update from the National Cancer Institute shared that the number of people in America living beyond a cancer diagnosis is expected to rise to nearly 19 million by 2024.
Many of these survivors’ conditions may constitute critical illness as spelled out in a critical illness insurance policy and the afflicted people may need help paying for the costs of care.
But even having Medicare, with a Medicare gap plan, does not necessarily equate to affordable cancer care, as a Medscape article shared recently: “New findings show that depending on the type of supplemental Medicare coverage, cancer patients may find themselves with significant out-of-pocket (OOP) expenses. For beneficiaries insured by traditional fee-for-service Medicare but without supplemental insurance, mean annual OOP expenses were $8,115.”
Bend fits from a critical illness insurance policy can provide immediate payment to the eligible insured on diagnosis
Doctor using electrode on patient in operating theatre.
THE BENEFITS
The cash benefits may help with direct costs, such as deductibles, co-pays and out-of-network medical expenses, to bridge the gap between what the client’s health insurance plan will pay and actual expenses incurred for the best specialists, physicians and hospitals, and experimental drugs or therapies.
However, clients have the freedom to use the policy payouts as needed. Therefore, it also can help replace lost income, cover transportation and lodging for non-local health treatment or even provide for everyday living expenses, such as a mortgage, bills and debts.
Also, as a general rule, if insurance premiums are paid with after-tax dollars, then the benefits from the plan are received income-tax-free, based on current federal income tax laws. Be sure to tell the client, however, to consult a qualified tax expert about his or her specific situation.
ALLISON’S SITUATION
Consider Allison, a hypothetical 46-year-old client, and her situation. After Allison and her husband divorced, her first priority was ensuring a bright future for her 11-year-old son Jeremy, who aspired to become an architect. Month after month, Allison set aside funds to pay for her son’s education. She also purchased a 10-year critical illness insurance policy to ensure that if she ever were faced with a critical illness, her son’s college savings would be protected.
When Allison suffered a stroke, her employer-provided major medical plan covered most of her expenses, but others, such as modifications to her home to help her get around, had to be paid out of pocket. Fortunately, the $75,000 benefit from her critical illness policy helped her address these expenses without tapping into her savings. Allison’s recovery was slow and arduous, but years later, she was able to watch her son follow his ambitions and enter the college of his choice.
SMALL BUSINESS USE
Think about how critical illness insurance has the potential to bridge the gap in many business succession plans. As background, a small business usually is the owner’s largest retirement asset and business succession plans typically are designed to protect the value of this asset from the catastrophic impacts of an untimely death of the owner.
However, a 40-year-old male is over five times more likely (and a 40-year-old female is over four times more likely) to suffer a critical illness than an untimely death prior to age 65. A 50-year-old male is more than eight times more likely (and a 50-year-old female is more than six times more likely) to become critically ill than die before age 65. Yet, succession plans typically do not address critical illness.
PONDERING THE PROBLEM
Jeff and Bob, two hypothetical clients, own a business worth over $1 million. Jeff manages the production responsibilities while Bob does the selling. With their attorney’s assistance, they enter into a typical buy-sell agreement.
Three years later:
Bob is diagnosed with a stroke that will require an extended recovery period and prevent his return to work.
As Bob is an officer of the company, the firm continues paying him, even though he no longer is contributing.
Due to that compensation and the loss of sales revenue, the company cannot afford to hire a suitable replacement for Bob, buy him out, or continue to pay him for very long.
CONSIDERING POSSIBLE SOLUTIONS
Jeff and Bob meet with their attorney long before Bob suffers the stroke and ensure that their buy-sell agreement includes a provision for critical illness. The language in the buy-sell contract allows the business to “wait and see” whether a critically ill owner will be able to (or want to) return to work.
The company applies for two critical illness insurance policies, with face values of $500,000 each, on Jeff and Bob and pays the premiums to help fund the buyout. The parties ensure that the buy-sell agreement includes language defining “critical illness” in the same way as the critical illness policies. And, to help avoid conflicts, the critical illness definition and provision are coordinated with any disability buyout provisions.
REVIEWING THE RESULTS
When Bob is diagnosed with his critical illness, his company receives the policy benefits (assuming all criteria are met). The company then faces two possibilities.
One is that the illness proves permanent. In that case, the business uses the policy benefits to help buy out Bob in accordance with the buy-sell agreement (although some of the funds also could be used to help pay to recruit Bob’s replacement). Bob and his family now have a portion of the business value, in cash, to replace the lost income and their most significant asset.
The other possibility is that Bob’s illness proves temporary. If that happens, the policy benefits could help cover the revenue losses due to Bob’s absence. The benefits also could be used to help pay an income to Bob during his recovery.
LOOKING AT THE BOTTOM LINE
The addition of some simple language to business succession plans, in sync with the purchase of critical illness protection, may help address crucial challenges for clients and their families. Financial professionals who help small business clients leverage critical illness insurance have the opportunity to build stronger relationships with them and, when appropriate, to offer competitive funding options for the clients who implement the buy-sell changes.
LEARN MORE
Given the potential for critical illness insurance to help clients keep their retirement and family savings intact, ensure small business continuity, and create additional revenue for financial professionals, having full-featured solutions top of mind is a no-brainer. If questions remain about how critical illness protection can help bridge gaps, Ask us to learn more now about how the available offerings compare.
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