Actuarial Notes

Critical Illness Turns 40!

By Ashlee Borcan and Jennifer Howard · Society of Actuaries · 2023

Study guide: Exam CP-321

An article in the Society of Actuaries Health Section's Health Watch of September 2023 on critical illness insurance, forty years after the first policy was issued on August 6, 1983. It describes the coverage as a lump sum paid on diagnosis of a covered condition, and the three primary ways it is offered in the United States: agent-sold individual policies, worksite-sold individual policies and worksite-sold group policies.

On the syllabus

Introduction

  • Critical illness insurance grew from a surgeon's observation of the financial hardship of patients with serious illnesses; the first policy was issued on August 6, 1983.
  • There are three primary ways to offer coverage in the United States: agent-sold policies outside the worksite (typically on an individual product chassis), worksite-sold policies on an individual chassis, and worksite-sold policies on a group chassis; other options include direct-to-consumer policies and association group coverage.

Critical Illness 101

  • The coverage pays a lump sum benefit, as life insurance does, without requiring death; each covered condition is a benefit "trigger".
  • The most common triggers are heart attack, stroke, invasive cancer, major organ failure and end-stage renal disease, typically paid in full (100 percent benefits).
  • Less serious conditions are often covered at a lesser benefit amount, such as 25 percent: cancer in situ, and coronary artery bypass graft or coronary artery disease.

Agent-Sold Individual Policies

  • Contracted directly between the insured and the carrier, for face amounts from 10,000 to as much as 1,000,000, with underwriting running from simple questions to full medical underwriting.
  • Policies generally have a preexisting condition clause, represented by two numbers such as 6/12, as the contracts are typically guaranteed renewable for life and can be subject to antiselection.
  • Contracts are typically issue age rated, with morbidity assumptions determined separately for each benefit trigger and added together, so issue age rated contracts can have material prefunding of future benefits.
  • Lapse rates and discount rates are key assumptions in the present value of anticipated benefit payments; a table illustrates the importance of the lapse rate assumption for a simplified 20-year term policy under three lapse scenarios.
  • Insurers must hold statutory active life reserves, with minimum standards stipulated by the Valuation Manual.

Worksite-Sold Individual Policies

  • Policy sizes are much smaller, with typical face amounts below $50,000 and minimal individual underwriting; dependents are commonly offered reduced coverage, typically 50 percent.
  • Benefits are paid directly to the insureds, with no burden to provide proof of medical expenses, unlike medical coverage.
  • Premiums are typically paid through payroll deduction, so employee turnover adds turbulence to lapse rates.

Worksite-Sold Group Policies

  • The group is the policyholder and the individual insureds are certificate holders.
  • States are generally more comfortable with benefits and flexibility in group policies than in individual contracts, so group critical illness can be highly variable even when issued by the same carrier, with up to 50 potential benefit triggers.
  • Carriers typically restrict customization to larger groups, and for smaller groups offer a set of "shelf plans".

Conclusion

Sources