One does not have to research much to find that the most common reason for filing for bankruptcy protection is expensive medical bills caused by an illness or disability. According to the American Journal of Public Health Report in 2019, 66% of all US bankruptcies are medical issue related.
Are you like me? Are you not thinking enough about the financial and emotional burdens related to a critical illness diagnosis? With a 15-month-old toddler barely up on two feet, a wonderful wife working full-time from the kitchen table at a very demanding job, and all the taxing adjustments afforded to us by Covid-19 (such as my new office-in-the-bedroom set-up), what time do we have available to think about the effects related to a critical illness? Life as we knew it, less than a year ago, is gone forever, and most of us are still trying to adjust and stay flexible while we wait for the new normal to settle in. Our lives are full. There is no time for concern. Not to mention, if we do not have a critical illness, we will never get one, right?! We are all invincible until it happens. So, we are then left kicking ourselves for not preparing. Or worse, filing for bankruptcy.
This is my take on the level of awareness critical illnesses are considered by most. As Americans, we do not think about the consequences of a potential critical illness diagnosis. The pandemic has brought to light this reality; bad things can and do happen. It is upon us, as advisors, to inform and educate our clients on the solutions for this risk. The message should be, there IS a better way to avoid this added financial burden.
As a partner, and sales director, at EMG Insurance Brokerage in Austin, I feel great pride in communicating critical illness awareness to everyone. Particularly those that can help get the word out. If you are a financial advisor or an insurance professional of any specialty, your help could make all the difference should one of your clients experience a critical illness. It is incumbent on us to make sure our clients are aware of the risks and more importantly, how to plan for them. There are ways to prepare. We should all take note from those who have suffered through surviving the catastrophic effects of critical illness – none of us are invincible.
What is a critical illness?
So, what is a critical illness, and what solutions are available? Since I have been in the insurance industry for over a decade, my definition of critical illness has changed. Asking myself that same question 15 years ago, I probably would have expounded a lengthy, overlapping, and distorted answer achieving 50%-75% accuracy. With 12 years under my belt assisting advisors, my answer is much more precise today. A critical illness is an illness that is usually sudden, never expected, requires medical attention immediately, and often for an ongoing period. The three most common and costly illnesses that fall into the category of being critical are heart attack, stroke, and cancer (invasive or noninvasive). Major organ transplant, coronary bypass surgery, coma, advanced kidney failure are less frequent common critical illnesses. All of these can cause a prohibitive impact on someone’s ability to work and earn an income and fast absorption of one’s savings.
How much does critical illness cost?
Just as important are what the associated medical bills are for each illness. Costs associated with a critical illness diagnosis often include deductibles and copays or coinsurance. With every individuals’ diagnosis, treatment plans and health insurance plans differ, and the actual out-of-pocket cost will vary greatly. The medical bills associated with these illnesses are the number one cause of bankruptcy. That is clear, as patients do not receive free treatment. As advisors, I think it is imperative to look outside of the financial ramifications and bring to light the indirect cost of a critical illness: mental health services, job loss, childcare, caregiving costs, and much more. The need for having a plan is real.
The first and best way to help your clients is educating them on the risk and the ramifications of not preparing a plan for protection. What are some takeaways about critical illnesses to share with your clients? Below are a few that I found to be enlightening, if not just straight scary:
- 60% of Americans do not have savings to cover an unexpected $1,000 expense. (Bankrate’s Financial Security Index, January 2019)
- 75% of insured people who had problems paying medical bills said their copays, deductibles, or coinsurance cost more than they could afford. (Kaiser Family Foundation/New York Times Survey, January 2016)
- The median cost of hospitalizations from a heart attack is more than $53,000. (American Heart Association, November 2017)
- Patients experience the highest out-of-pocket costs in the first 2-3 months after being screened and diagnosed with cancer. (American Cancer Society, Cost of Care Report, April 2017)
- Thousands turn to crowdfunding websites like GoFundMe for help; but, only one in 10 meets their dollar goal.
The statistics speak for themselves. We need to communicate to clients about critical illness planning.
How do we help clients plan for a critical illness?
There are two ways to plan for a critical illness event. The first option would include deciding to set up a “rainy day” fund or divert income into health savings or flexible spending accounts. You can classify these options under the “self-insure” banner. The second option is to transfer a portion of the risk to an insurance carrier by purchasing a critical illness policy.
As mentioned earlier, one can choose to accept 100% of the risk and self-insure. This can be done by doing nothing (not recommended), or by directing income into a “rainy day” account like funding a health savings account or flexible spending account that offers pretax income to be used for qualified health care expenses. The problem with self-insuring is most of our clients are not in a financial position to allocate enough money to this savings account to make a big enough impact in the event of a critical illness. The health savings or health spending accounts are great, but the IRS significantly limits your contributions into them and how the funds can be spent. Key features of a health savings account include:
- Allows individuals to set aside pre-tax income that can be used for qualified health care costs.
- Only allowed if an individual has a qualifying health care plan.
- Maximum contribution is limited to $3550 for individuals and $7100 for families (if age 55 or older, an additional $1000 catch-up contribution is allowed).
- Contributions are NOT required to be used; funds set aside and not used roll over to the next year with no penalty.
- To keep the advantage of staying pre-tax, the contributions are restricted for use to qualified medical expenses incurred by the individual or family.
My personal experience with a health savings account showed me just how fast the funds can go. For example, pregnancy and birth occur in consecutive years. In October of 2019, my wife and I had our first child. Overall, everything went very smoothly; meaning, there were no unforeseen medical issues that increased the out-of-pocket expenses. But, by the time our daughter was born, there was absolutely nothing left in our health savings account. That is two years’ worth of contributions into our health savings account spent on necessary medical bills, but left us with only our savings accounts and qualified plans in the event of a critical illness diagnosis.
Who offers Critical Illness Insurance?
The second option is one that advisors should talk about with their clients is a critical illness insurance policy. Critical Illness is an insurance policy that pays a lump sum benefit to the owner in the event of a critical illness diagnosis. The lump-sum coverage amounts range from $1,000 to $500,000, though most policies purchased are between $5,000 and $100,000 in benefit. The benefit is typically paid on a cash indemnity style basis. This allows for 100% flexibility in how to utilize the benefit.
There are two ways for clients to purchase a critical illness plan. They can be purchased through a voluntary employer-sponsored plan or by an individual plan through a private insurance carrier such as Assurity or Mutual of Omaha. The first option, employer-sponsored plans, are the common route for your clients to secure coverage, issuance is usually guaranteed, and the cost is deducted directly from the employee’s check. The other option for your clients is to purchase an individual policy with you. Individual plans are generally more costly than employer-sponsored plans; but, these plans are more customizable to your client’s specific needs, allowing you to plan more thoroughly for each situation.
It is integral to think about the customization allowed in the individual critical illness plans. For example, I have no heart disease of any kind in my family. However, I do have a family history of cancer on both my maternal and paternal sides. No family history of heart disease certainly does not preclude me from having heart issues, but my family history clearly shows I should be more worried about a cancer diagnosis. The individual plans can offer more benefits covering specific illnesses. Riders that allow for multiple benefit payouts (for each different critical illness covered) are available for an additional cost. A rider like this could be extremely beneficial should one experience subsequent bouts of cancer. These customizable individual plans need to be clearly understood. Communicate specific answers to all client questions, and explain all nuances of the contracts before delivery. Surprises in the insurance industry are not good for you and, especially, the client. Lastly, neither the insurance company nor the government has any say on how a benefit is utilized. Benefits may be used on personal expenses that are pertinent. Deductibles and copays or coinsurance, lost income from missed work, everyday expenses such as mortgage or rent payments, utilities, or childcare. Even costs associated with experimental treatments and travel are not excluded. This gives the insured the freedom to live the way they want to live and pay for the things they need.
Where can I find the experts on Critical Illness Insurance?
There is good news! EMG Insurance Brokerage is a full-service brokerage company based in Houston, Texas, with a sales office in Austin, Texas. Since 1987, we have been assisting financial advisors and independent insurance professionals in all 50 states. We provide risk protection through personalized client solutions, solving a variety of concerns for individuals and businesses. We know it is essential for advisors to have access to quality products, expert advice, and cost-effective solutions. We keep abreast of markets, trends and continually update our carrier offerings. I hope this information increases awareness concerning the huge risk underlying an abrupt critical illness diagnosis. Moreover, I hope that the information provided brings awareness to the solutions available. Do not let your clients go unprotected. Think about the difference a lump sum payment could make for one of your clients should they be diagnosed with a serious illness. There has never been a better time to sell critical illness insurance. Please reach out to EMG Insurance Brokerage today for guidance; we are here for you.
Charlie Archer, CLU®, ChFC®
Executive VP – Austin
EMG Insurance Brokerage