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Employers' growing adoption of consumer-driven health plans is helping to drive sales of critical illness insurance as a supplement to help with employees' higher out-of-pocket costs, experts say.
In fact, critical illness insurance has been identified as the potentially top-selling voluntary benefit product over the next two to three years, according to the “Worksite/Voluntary Product Trends 2012 Frontline Report” by Eastbridge Consulting Group Inc. of Avon, Conn.
Critical illness insurance sales increased 20% in 2011, totaling $243 million, according to Eastbridge, a marketing advisory firm serving insurance and financial services organizations in the United States and Canada.
“The implementation of consumer-driven health plans has very much helped employers to get comfortable with voluntary benefits in the workplace because they see them as a way to provide employees with gap protection,” said Alyssa Williamson, a consultant in Mercer L.L.C.'s integrated benefits practice in Atlanta.
Usually offered as a voluntary product to employees, most critical illness policies pay a lump sum following the diagnosis of any specified illness, such as cancer, heart attack, stroke, paralysis or kidney failure. In addition to an indemnity payment, some policies also provide a daily benefit during treatment. Others pay a per-diem benefit while a covered individual is hospitalized.
Because workers purchase most critical illness policies on an after-tax basis, even in cases when the premium is paid via payroll deduction, the benefits are not subject to federal or state income tax.
When purchased on an individual basis, critical illness insurance is typically underwritten to reflect the risks of the individual buying the coverage. However, it is generally available on a guaranteed-issue basis to employer groups with at least 100 employees. Typically, 10% to 15% of employees enroll in the coverage, which can cost anywhere from $20 to $40 a month for about $15,000 in coverage, depending on group demographics.
The benefits under a critical illness policy are paid directly to the insured and can be used for any purpose, such as covering deductibles or medical copayments, travel expenses or other out-of-pocket costs associated with treating a covered illness. These include paying for child care expenses while an individual receives cancer treatment or for home modifications made necessary for an individual whose mobility is impaired following a stroke.
Although employees historically have paid the full cost of the voluntary benefit, some employers in recent years have picked up part of the tab for critical illness insurance to encourage employees to enroll in consumer-driven health plans.
“We're actually seeing a lot more interest in employer-paid products,” said Lydia Jilek, head of voluntary products and strategies at ING U.S. in Minneapolis. “There can be an employer-paid base level of coverage — say $3,000 or $5,000 — and then a base buy-up, typically in $1,000 increments.”
As consumer-driven health plans gain in popularity, some of the health insurers administering these products have begun branching out into the critical illness insurance market.
“We made a decision to partner with American Heritage Life Insurance Co., a division of The Allstate Corp. that had the paper, filing and underwriting expertise for the product, to make critical illness insurance available to Aetna plan members,” said Jeff Brown, head of voluntary benefits and consumer services at Hartford, Conn.-based Aetna Inc. “This product is worth more to consumers when deployed with one of our medical plans. We're also able to position it as part of a broader-based consumer-directed strategy.”
Brokers and benefits consultants also are increasingly recommending critical illness insurance to their group health benefits clients as insurers cut back on broker compensation in response to new minimum medical loss ratio requirements set by the Patient Protection and Affordable Care Act.
Under the law, insurers that underwrite group health insurance for employers with 100 or more employees must spend 85% of premiums collected on health care and health improvement expenses, reducing the amount available to pay as commissions to brokers. Critical illness insurance and other voluntary benefits products are exempt from this minimum medical-loss ratio requirement.
Critical illness insurance is one of a handful of supplemental health insurance policies that workers covered by high-deductible health plans linked with health savings accounts can purchase under Internal Revenue Service rules.