Critical Illness Insurance – A Really Bad Idea

It is a lovely summer day. You and your family are travelling the highways of this beautiful country, enjoying the scenery and your vacation. Suddenly, a green car tries to overtake you when an oncoming vehicle is spotted. Unable to pull back in safely, your car is forced off the road. Fortunately, no one in your car is seriously injured. Unfortunately, when you purchased your car insurance, you didn’t insure against accidents involving green cars!

Absurd? Impossible? Unthinkable? Irresponsible?

Fortunately, for purchasers of automobile insurance, no such “limited risk” policies (to the best of my knowledge) are sold by insurance companies. Unfortunately, the same does not apply to the issuers of Critical Illness Insurance. Under such policies, now widely being sold on both a group and individual basis, certain described “critical” illnesses are covered, while others are not. The insured may or may not be covered for benefits – depending on how the illness arose. Furthermore, pre-existing conditions or a history of the specific condition in the insured’s family often leads to exclusion of coverage. The protection which a person so desperately needs may, in fact, not exist. This highlights one of the greatest weaknesses of Critical Illness Insurance; namely, underwriting at the time of claim – when the insured is most vulnerable and in need of coverage, he finds, to his amazement and disappointment, that he is not covered for benefits.

Traditional life insurance, which has been issued for several hundred years, pays the promised benefit when the insured dies. There are certain (very limited) exclusions which apply – usually involving fraudulent misrepresentation at the time of issue or self-inflicted causes within two years of issue. Otherwise claims are paid. That is not the case with CII where claims can often be denied (or reduced) depending on findings at the time of claim.

The precursor to Critical Illness Insurance was probably the Accidental Death and Dismemberment (AD&D) benefit. For a very modest premium – usually only a few cents per month per thousand dollars of “coverage”, the insurance company would “pay off” if the insured perished as a consequence of an accident. Payments are also made for loss of limbs, sight etc. As Groucho Marx said in “Night at the Opera”: “If you lose a leg, we’ll help you look for it”. Pay offs under this type of insurance are remote, and insureds often have a false sense that they have genuine coverage. It is my opinion that Critical Illness is the next step along the road from AD&D.

Why has CII been so successful? In part, it is because of the “fear factor” associated with the mere mention of such dread conditions as cancer and heart disease. The emotional impact associated with these diseases strikes fear. Other fatal conditions seem to have a lesser impact, although their consequences are no less dramatic or life threatening.

Another “wrinkle” often added to Critical Illness is the “Return of Premium” feature. The ad touts: “Simply stay healthy, and all of your premiums will be refunded”. Such return of premium features have been added to other types of policies in the past. The actuarial calculation of this feature, which is often based on lapse-supported assumptions, is not very difficult to perform, and it further complicates an already confusing product. By adding the element of refund of contributions, the insurance company is often able to coerce the policyholder to retain the insurance in force, possibly long beyond the time when it may be needed.

I am not opposed to life insurance – to the contrary, as an actuary, I understand the role that insurance can and does play in protecting against the financial impact of premature death. However, in order for insurance to work as it is intended, it must protect against all possible causes of death - not just those that most feared. Whole life, term, universal life – whatever the variation, has one thing in common. The benefit is paid in full in the event from whatever cause. Underwriting of the policy is done at the time of issue – not at the time of claim. And no exclusions for green cars! er of the Board of Directors of the United Way of York Region and is currently serves on the Board of Surex Community Services. He is also a member of the pension committees of the Ontario March of Dimes, the Jewish Welfare Fund of Toronto and the Canadian Rabbinic Pension Plan