INSURERS SEE PROFIT IN ILLNESS INSURANCE: HIGH HOPES FOR ‘CRITICAL’ SUCCESS

A critical-illness insurance product developed 15 years ago by a world-famous heart specialist and sold around the world finally has landed in the United States, just as insurers here are beginning to embrace the concept.

The product, which South Africa’s Dr. Marius Barnard developed in response to his patients’ medical cost crises, is being offered by the U.S. division of Toronto-based Canada Life Assurance Co., which already sells similar policies in Canada, Ireland and Britain.

The U.S. product, called Living Advantage, would pay out a lump-sum benefit of up to $2 million to policyholders who survive one of 12 “life-altering illnesses.” The policy, with premiums about double those of a cheap universal life product, covers heart attack, stroke, cancer, coronary artery bypass, coronary angioplasty, major organ transplant, Alzheimer’s disease, multiple sclerosis, renal failure, paralysis, blindness and deafness. It is available to individuals ages 20 to 64. A physical exam may be required.

According to a legal opinion obtained by $28.9 billion (U.S.) asset Canada Life, the lump sum payment is nontaxable, although the Internal Revenue Code doesn’t specifically address the critical-illness policy.

Medical science can save lives, but it can’t salvage lost bank balances, stresses Dr. Barnard, who assisted his late brother, Christiaan, during the first successful heart transplant operation. “In other words, we’ll keep you alive, but we won’t provide the money to support you,” Marius Barnard says, noting that patients may not be healthy enough to return to work and family members may have to reduce their work schedules to provide care.

The product is also being sold in Australia, Japan, and many other countries. More than 90% of the claims have been for heart attack, stroke or cancer, says Dr. Barnard. The average claimant is 41 years old.

While the Canada Life policy is the first U.S.-sold product to carry Dr. Barnard’s endorsement, a handful of U.S. insurers have launched critical-illness policies. Indianapolis-based Standard Life of Indiana, for instance, last year released a policy paying a 100% lump sum 30 days after diagnosis for heart attacks, strokes, cancer and paralysis patients, and 25% or less for other conditions or operations.

Off the radar screen

Even considering the stepped-up interest, the critical-illness-insurance concept hasn’t really caught on with U.S. insurers — who prefer to sell traditional life policies.

But Canada Life, buoyed by success overseas, hopes to give it the exposure it needs to take off here.

In Britain, $32 billion in critical-illness policies have been sold — 300,000 were issued in 1995, the last year for which figures are available, says certified life underwriter Jesse Slome. Mr. Slome, president of PromoWorks, a marketing company in Westlake Village, Calif., says critical-illness policies sell well there because the majority of the sales are linked to mortgage originations.

“That could be the bonanza for the U.S. marketplace,” he says. “If you get cancer or have a heart attack and are out of work for nine months, the insurance could pay off the mortgage. That’s where I see the potential” for U.S. insurers, who have had trouble selling life insurance to the vast pool of aging baby boomers.

similar riders offered

But traditional life insurance does offer a similar form of protection. A rider on a typical life insurance policy could entitle a critically ill patient to a payment of 2% of the policy per month until 50% of the policy is exhausted.

If asked, John Hancock Mutual Life Insurance Co. will provide a rider entitling a policyholder expected to die within 12 months to the policy amount save $25,000. Or the policyholder can get a 100% payout (less a discount charge) up to $1 million, says Steve Malter, brokerage manager for the Boston insurer’s Philadelphia general agency.

He says the Canada Life policy sounds “extremely sellable,” but wonders if the premiums the company charges will cover its costs. The $580-a-year premium for a 30-year-old man requesting $100,000 of coverage, or $5.80 per $1,000, is more than reasonable considering a cheap universal life policy would cost the same man $300 a year, Mr. Malter says.

Standard Life’s premium cost for that 30-year-old man is similar, about $286 a year for coverage of $50,000, according to George Nasser, senior vice president of marketing. He says sales have been brisk and insists the company isn’t losing money on the deal. And consumer interest in critical-illness policies will explode as players such as Canada Life enter the U.S. marketplace.

“I was involved in the introduction of universal life and that swept the nation,” Mr. Nasser says. “This is going to sweep the nation, too.”