Many workers have grown accustomed to “copay creep,” the steady increase in what they pay when they visit the doctor under their employer’s health-insurance plans. Add that to rising premiums and growing deductibles, and the patient’s share of medical costs is becoming a growing concern even for people with good health coverage. Critical illness cover.
Now, more employers are offering a product called critical-illness insurance that’s designed to fill some coverage gaps for people with certain costly ailments. But is such insurance the right financial solution for boomers?
Health-care costs have risen faster than inflation, and to cope employers have been requiring workers to foot more of the bill for their care. The total employee share of health-care costs, including premiums and out-of-pocket costs, has climbed to almost 37% from about 34% in 2011, according to a recent survey by benefits consultant Towers Watson and the National Business Group on Health, a membership group that advises large employers on benefits. This means that for every $1,000 in total health care expenses in 2013, employees pay $369 for premiums and out-of-pocket costs. The report projected that the average employee premium contribution for 2013 would be $2,888, up 8.7% from last year.
What’s more, there’s a growing sense that the tiered insurance coverage introduced for individuals under the Affordable Care Act will migrate to the workplace, and increase employees’ costs further. Under certain of those plans, an employee’s total out-of-pocket costs for medical care can be as high as 40%, up to an annual maximum of $6,350 for an individual and $12,700 for a family in 2014. “There is a unanimous opinion that the cost burden is shifting to the employee,” said J. Keith Pellerin, vice president of management and innovation at Aflac, which sells critical illness policies. And that burden will likely weigh more heavily on older employees, who tend to use health care more than their younger counterparts.
As these trends play out, it’s no coincidence that the number of employers offering critical-illness insurance is rising, experts say. This insurance pays a lump sum if a policyholder gets specific, serious ailments, often including cancer, heart attack and stroke; employees can use the money to pay out-of-pocket medical costs and to defray nonmedical costs associated with their treatment, such as child care or transportation. Typically, critical illness coverage is offered as a so-called voluntary benefit, a type of coverage for which the employee bears the full cost (albeit while getting a discounted group rate). Some 35% of midsize and large companies offer critical illness coverage, according to a Towers Watson survey released yesterday; this is up from 12% in 2002, according to Prudential, which sells various kinds of critical illness and other types of voluntary benefit insurance.
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Americans’ abysmal savings habits make this type of coverage all the more needed, proponents say. About half of U.S. households have savings of less than $10,000, according to Prudential. Meanwhile, the average out-of-pocket medical cost for critical illnesses is $7,575, according to an analysis by Sun Life Financial of its insurance claims data. (Heart attacks incurred a whopping $14,234.) Roughly 60% of all U.S. bankruptcies stem from medical costs, and that number includes many people with health insurance.
The most basic critical-illness coverage offers relatively modest payouts for modest premiums. In a sample policy offered through Prudential Group Insurance, for example, a 50-year-old would pay $13.96 monthly for $10,000 of coverage that could be claimed if the insured gets cancer, has a stroke or heart attack, kidney failure, or coronary artery bypass surgery. Through a sample MetLife policy, a 50-year-old would pay $25.80 for $15,000 of coverage for cancer, heart attack, stroke, kidney failure, major organ transplants, and 20-some additional diseases, including ALS, also known as Lou Gehrig’s disease (but excluding the very common diabetes). Historically, critical illness plans have focused on acute, not chronic illness, and since much of the market remains focused on the former potential customers should look carefully at what their policy covers.
While baseline coverage offered by employers generally doesn’t require medical underwriting, some policies give the option of additional coverage to workers who pass underwriting. Prudential, for example, requires those who want $100,000 in coverage to answer “no” to questions including whether the applicant has ever been diagnosed with or treated for a variety of conditions, including chest pain and elevated prostate specific antigen (PSA), and whether the applicant has ever had, or been advised to have, an organ transplant, including a bone marrow or stem cell transplant. (Prudential’s questions don't include any about family history, but other companies do ask about it for those who want additional coverage.) Coverage of that level can cost can cost as much as $300 per month, depending on the customer’s age.
As with any other financial product, it’s important to read the fine print when evaluating a critical illness plan. Perhaps most important, patients must meet the policy’s definition of illness.
Under Prudential’s policy, for example, patients receive the full benefit for invasive cancer, defined as any malignant tumor “positively diagnosed with histological confirmation and characterized by the uncontrolled growth of malignant cells and invasion of tissue.” Partial benefits go to those with cancer in situ, which is generally microscopic and localized and includes tumors of the prostate classified as stage 1 or stage 2, provided that they are treated with a prostatectomy or radiotherapy. So-called indolent cancers, slow-growing types that may not prove harmful during the patient’s lifetime, may not be covered. In other words, you could contract what you consider a critical illness—and what may be listed in large print on your policy as a covered condition—and still not qualify for benefits.
There are other important technicalities, as well. Some policies have what are known as “age reduction schedules,” with payouts that decline as the policyholder gets older. Policies are generally portable if the employee switches jobs, retires, gets laid off or fired, but it’s worth double-checking. Lump sum payments aren't taxed if the employee pays the full premium, but they are taxed if the employer pays part of the cost (some employers choose to pay for a baseline amount of coverage).
Beyond these considerations, the question becomes whether there are better ways to prepare for potential acute sickness. Many experts agree that, for most disciplined savers, the answer is yes. A tax-advantaged flexible spending account or health savings account can work for non-reimbursed medical costs, while nonmedical costs can be paid out of a rainy-day savings account, said Nancy Metcalf, a health-care expert with Consumer Reports. With those approaches, the money could be available to workers even if they don’t get a serious illness.
Those who aren’t disciplined about putting money aside might stand to benefit more from having a critical illness policy whose premium is automatically deducted from their salary, said Abby Rosen, a financial adviser at Brinton Eaton, a wealth manager in Madison, N.J. Other good candidates might be sole-breadwinners, those who just got out of debt and have paltry savings, or those who don’t earn enough to easily save, advisers say.
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Those with adequate disability coverage are less likely to need critical illness coverage, experts say. Many advisers recommend disability coverage that replaces 60% to 70% of a worker’s salary. Policies vary, but policies paid for by individuals directly are generally not taxed at withdrawal, and 60% to 70% would replace most of a high-earner’s taxable income, Rosen said. (Disability awards from policies paid for entirely by employers are taxed.) Purchased individually, disability policies generally have higher premiums than commensurate critical illness insurance, but they also tend to cover more ailments that prevent someone from working, such as a back injury and mental health conditions. A 50-year-old male professional buying individual coverage on his own could pay $166 per month for $4,000 of monthly disability coverage that lasts up to age 67, according to a sample quote from Mutual of Omaha.
The decision to buy critical illness coverage also depends on individual risk tolerance, advisers say. Mitch Reiner, an investment adviser in Atlanta, said most people are probably best off self-insuring against critical illnesses. However, he wouldn’t try to dissuade a client who would truly sleep better at night with that additional coverage.