The need for supplemental health insurance policies has never been greater than it is today in 2012. Over the past twenty years working Americans have seen the costs for their medical coverage skyrocket. Even in cases where the employer pays 100% of the employee-only premium for medical insurance, the cost for dependents has increased significantly. To combat these increases most working Americans have seen their financial exposure increase through higher deductibles and coinsurance as well as the elimination of co-payments. Today it is not unusual to see individual out-of-pocket exposure as high as $5000 or more and in many cases it is as much as $10,000.
While a potential out-of-pocket exposure of $5,000 may not appear to be financially devastating, the facts tell a very different story. According to a Cambridge Hospital / Harvard University 2007 study 62.1% of all bankruptcies were directly related to a medical event. That is up by 50% since the same study was done in 2001. What is striking is that 75% of these bankruptcies were individuals that were college educated and had medical insurance. And despite what many insurance agents and financial may think disability income would not have been much help. Very often the problem is the medical condition of a spouse or child that results in the primary breadwinner missing work. But this only explains why a critical illness policy may have value.
The Statistics about Critical Illnesses
In order to justify the sale of critical illness insurance most agents use these statistics:
- 1 out of 2 people will be diagnosed with cancer
- 5 million people will suffer a heart attack each year
- Every 20 seconds someone has a heart attack
But these statistics belie a more important truth,most people will not be diagnosed with cancer than will. For people under 35 years of age the risk of cancer is 1out of 69. Consider this fact from the Heart Foundation: there are 8 million women living with heart disease but only 35,000 are under age 55.
Those statistics do not mean that an individual should not buy critical illness insurance, because they most definitely should since there is no way to know whether you are that 1 in 69 that will be diagnosed with cancer this year or that you are in the 35,000 women that will be diagnosed with heart disease. And that is why return of premium policies are so important!
ROP – A Great Buy
As I stated earlier, the position of most financial advisors is that the return of premium rider does not make good financial sense. I will tell you that they are dead wrong! Working Americans would be hard pressed to find a better use of their insurance dollars. It is true that the rider generally increases the base premium for any supplemental health policy by 40% to 50%. But that ignores the fact that is the individual does not get diagnosed with a qualifying medical condition he will receive a check for 100% of the premiums paid, less any claims. With one of my carriers that check is paid every twenty years and the insured still retains the policy at the initial premium. Here is an example from one insurance company:
A male non-smoker under age 39 can purchase a $10,000 Critical Illness policy for a low $76.80 annually. That same policy with return of premium would be $121.20, a difference of $44 annually. At the end of twenty years assuming no claims that individual would receive a check for $2424. If the insured had invested that $44 annually he would have had to have earned more than 10% on that money to generate the same $2424 he will receive. Since the average Working American is living paycheck to paycheck, return of premium insurance provides the best of all possible outcomes.
There is a huge need for critical illness insurance and even greater need to have a policy where the insured benefits financially regardless of outcome.