The Marketplace for Critical Illness Coverage

August 2004

Presented by : Jerry Jacobs, CLU

5416 Yale Street

Metairie, Louisiana 70003

Ph#(504)888-2242 Fax#(504)889-1753

Email: jerry_in_metairie@msn.com Think Outside The Box!!!

1

AGENDA

Introduction What is Critical Illness

Insurance? U.S. Marketplace Trends Need for Critical Illness

Protection Product Design

Marketing Applications Global Perspective U.S. Critical Illness

Marketplace Why Sell C.I.I. Q&A/Discussion – Open

Forum – Issues/Concerns

Approximately 1.5 million Americans suffer a heart attack each year.

Of these, 1.1 million survive at least three (3) years.

Over 40% of the population will develop breast, prostrate, or some

form of cancer at some point in their lives.

The probability of surviving a critical illness before age 65 is almost

twice as great as dying.

Source: 1987 Employee Benefits News And Views Magazine

FACTS

What Is Critical Illness Insurance?

Critical illness insurance (C.I.I.) has characteristics of both life insurance and health insurance.

C.I.I. pays a life insurance-type lump sum benefit, upon diagnosis of one of a number of critical illnesses rather than upon death.

C.I.I. Coverage

C.I.I. will pay a lump sum benefit after the insured is diagnosed with a critical illness. Virtually all products cover the “Big Three”:

Heart Attack

Stroke

Life Threatening Cancer

Nearly 70% of all deaths under age 75 are associated with heart disease, stroke and cancer.

The “Big Three”Heart Attack

• Death of a portion of the heart muscle (myocardium) from a

blockage of one or more coronary arteries.

Stroke

• Any acute cerebrovascular accident producing permanent neurological

impairment resulting in at least thirty (30) days of paralysis or other measurable neurological deficit.

The “Big Three”

Life Threatening Cancer

• Only those types of cancer shown by the presence of a malignancy identified by the uncontrolled growth and spread of

malignant cells and the invasion of tissue that could result in death.

World Growth Concept developed by Marius Barnard

Introduced South Africa in 1980s

• United Kingdom

• Japan

• Continental Europe

• Australia

• Canada

• Ireland

• United States

Types of Critical Illnesses Heart Attack

Stroke

Life Threatening Cancer

Coronary artery (bypass) Surgery

Angioplasty

Renal (kidney) Failure

Major Organ Transplant

(heart, lung, liver, bone marrow)

Types of Critical Illnesses Alzheimer Disease (before age 65)

Brain Damage

Coma

Loss of Hearing

Loss of Independent Existence (before age 65)

Loss of Sight

Loss of Speech

Types of Critical Illnesses

Loss of use of two or more limbs

Multiple Sclerosis

Muscular Dystrophy

Parkinson’s Disease

Rheumatoid Arthritis (before age 65)

Total Permanent Disability (before age 65)

Benign Brain Tumor

Diabetes

Illnesses Types of Critical

Emphysema (before age 65)

Heart Valve Surgery

Severe Burns

Terminal Illness

U.S. Marketplace Trends

Medical technology is keeping people alive longer

The concern today is not dying too soon – it’s living long

People Living Longer

65 year old male can expect to live to age 83

65 year old female can expect to live to age 87

Attitudinal Trends

Consumers have greater fears than premature death, such as:

• The cost of health care

• Cost of nursing homes

• Having enough income to retire

LIFE INSURANCE INDUSTRY TRENDS

Demographics favor living benefits over death benefits

THE RESULT: Individual life sales have declined

30% over the past ten (10) years.

Source: Marketing Edit LIMRA 1997

Why C.I. Coverage?

Probability of surviving C.I. before age 65 is almost twice that of dying

Costs associated with C.I. are not covered by traditional insurance

Why C.I. Coverage? EXAMPLE: Two-thirds of all cancer-related costs are indirect,

non-medical expenses, such as:

• Lost income for C.I. Survivor

• Lost income and work time for spouse or care giver

• Housekeeping and child care expenses

• Home health care needs

• Home or car modifications

• Non-covered experimental treatments

• Expenses not covered by insurance (including co-payments

and deductibles)

Life Insurance – with rare exception, not available while the

sufferer is alive. Intended for dependents or beneficiaries.

Health Insurance – Possible limited benefits

deductibles/co-pays. May be limited in scope of portability if the

sufferer leaves his/her employment.

If you survive a critical illness, what will you do?

If you survive a critical illness, what will you do?

Disability Insurance – pays a percentage of the sufferer’s

monthly income and benefits are dependent upon ability to

work.

Long Term Care – limited to a daily benefit available subject

to a hospital stay or home nursing requirements.

Accumulation Products – intended to provide supplemental

retirement income.

Critical Illness Insurance

Insured has options

The money provided by the C.I.I. empowers the insured

to exercise choice.

C.I.I. is a consumerist product

Essentials

Essential ingredient of a life insurance product = probability

of death (qx)

Life Insurance Product

• Investment

• Expenses

• (qx)

Essentials

Essential ingredient of a C.I. insurance product = probability of

diagnosis of a critical illness (ix)

Critical Illness Product

Investment

Expenses

(ix)

Essentials

Any life insurance product design can, in principle, be

be duplicated in a corresponding C.I.I. product by

exchanging the key probability of death (qx) for the key

probability of a diagnosis of critical illness (ix)

Basic Types of C.I.I. Coverage Acceleration Benefit Rider

• Pays all or a portion (usually 25-100%) of the life face amount

upon diagnosis of a critical illness.

Additional Benefit Rider

• Pays the rider face amount upon diagnosis of a critical illness.

Stand Alone

• A health product which pays a lump-sum benefit upon the

diagnosis of a critical illness.

Product Design Options Covered Diseases

• Definitions must be consistent with incidence rates used in

pricing. Waiting Period

• First diagnosis must be made following some specified

time after the issue date of the policy. Survival Period

• Built on assumptions that the purpose of C.I.I.

coverage is to help cover the costs of living with a

critical illness. Example: Must survive 30 days after

after diagnosis to be eligible for C.I. benefit.

Product Design Options

Premium Guarantees

Acceleration Amount

Pre-Existing Conditions

Maximum Age

Maximum Face Amounts

Reduced Amounts

Family/Individual Perspective

Replace reduced earnings

Pay off personal debts

Cash for medical treatment or associated expenses

Education

Business Perspective Buy/Sell Agreements

• Provide ill shareholder with benefit

• Enable working shareholders to buy out ill shareholder

Key Person

• Pay off creditors

• Executive perquisite

• Recruit replacement with similar talent

C.I.I. ProductCritical Illness Insurance is Flexible

Life

Health

Disability

Other products

C.I.I. Global Perspective

South Africa

• Concept – Marius Bernard

• 1983 – introduced – Abbey Life

C.I.I. Global Perspective U.K. Success Story

• 1987 – Introduced

• 1993 – 70 companies sell C.I.

(12 billion in force in 1995)

• 1997 – 626,584 new policy sales (33% over 1996)

• Two million policies in force

• C.I. policy sales have increased in each of the last six years as

a percentage of overall individual life sales (22% in 1997)

• 83% of sales are mortgage relatedSource: Financial Times 1998

C.I.I. Global Perspective Australia

• 1990 – introduced

• 1997 – 31 out of 33 Australian Life Companies offer C.I.I. Japan

• 1993 – introduced

(sold over 500,000 policies in first 10 months)

• 1994 – over two million sold

• 1997 – over six million sold covering many more medical

conditions since first introduced

Source: Life Insurance Selling 1997

C.I.I. Global Perspective

Developing Asian Markets

• 1985 Singapore

• 1988 Hong Kong, Malaysia

• 1990 Taiwan, Thailand

• 1992 Indonesia

Total Dread Disease Policies1997 Net Premiums written by U.S. Companies

N = $5,161,545,733

United States C.I. MarketplaceIndividual Life Arena

Product Type

(advance payment of death benefit)

U.S. Companies

Accelerated Benefits 38

Accelerated Benefit Riders 72

Accelerated Benefits for life-

sustaining organ transplant

13

Accelerated Benefits to beneficiaries

when insured is terminally ill

7

Accelerated Benefits to insured when

insured is terminally ill

11

Accelerated Benefits to owners upon

diagnosis of specific critical illness

12

United States C.I. Marketplace

Product Type

(advance payment of death benefit)

U.S. Companies

Accelerated Benefits for life-

sustaining organ transplant

5

Accelerated Benefits to beneficiary

when insured is terminally ill

8

Accelerated Benefits to insured when

insured is terminally ill

37

Accelerated Benefits to owner when

insured is terminally ill

13

Group Health Arena

Why Sell C.I.I.? Insurance Company

• Replace declining life sales

• Global sales success

• Fits into health, disability arenas

• Distribution channels

• Emphasis on living benefits..demographics

• Potential higher return on capital

• Leverage distribution

• GROWTHS$

Why Sell C.I.I? Producer

• Fits marketing organizations (career,

independent agencies, producer groups)

• Fits market segments

• Living Benefits (ex., LTC)

• Another financial planning tool for client

• Consumer appeal is growing – wide acceptance

• GROWTH$

Why Sell C.I.I.? Consumer

• Choice

• Flexibility

• Fills gaps for calamitous events

• Concern about living longer vs. mortality

• Related to C.I.I. no matter what economic level

• Asset protection

Open Forum – Issues/Concerns

Now ask yourself the question:

Is there a market for C.I.I.?