The Marketplace for Critical Illness Coverage August 2004 Presented by : Jerry Jacobs, CLU 5416 Yale Street Metairie, Louisiana Ph#(504) Fax#(504)

AGENDA  Introduction  What is Critical Illness Insurance?  U.S. Marketplace Trends  Need for Critical Illness Protection  Product Design  Marketing Applications  Global Perspective  U.S. Critical Illness Marketplace  Why Sell C.I.I.  Q&A/Discussion – Open Forum – Issues/Concerns

 Approximately 1.5 million Americans suffer a heart attack each year. Of these, 1.1 million survive at least three (3) years.  Over 40% of the population will develop breast, prostrate, or some form of cancer at some point in their lives.  The probability of surviving a critical illness before age 65 is almost twice as great as dying. Source: 1987 Employee Benefits News And Views Magazine FACTS

What Is Critical Illness Insurance?  Critical illness insurance (C.I.I.) has characteristics of both life insurance and health insurance.  C.I.I. pays a life insurance-type lump sum benefit, upon diagnosis of one of a number of critical illnesses rather than upon death.

C.I.I. Coverage  C.I.I. will pay a lump sum benefit after the insured is diagnosed with a critical illness. Virtually all products cover the “Big Three”:  Heart Attack  Stroke  Life Threatening Cancer  Nearly 70% of all deaths under age 75 are associated with heart disease, stroke and cancer.

The “Big Three”  Heart Attack Death of a portion of the heart muscle(myocardium) from a blockage of one or more coronary arteries.  Stroke Any acute cerebrovascular accident producing permanent neurological impairment resulting in at least thirty (30) days of paralysis or other measurable neurological deficit.

The “Big Three”  Life Threatening Cancer Only those types of cancer shown by the presence of a malignancy identified by the uncontrolled growth and spread of malignant cells and the invasion of tissue that could result in death.

World Growth  Concept developed by Marius Barnard  Introduced South Africa in 1980s United Kingdom Japan Continental Europe Australia Canada Ireland United States

Types of Critical Illnesses  Heart Attack  Stroke  Life Threatening Cancer  Coronary artery (bypass) Surgery  Angioplasty  Renal (kidney) Failure  Major Organ Transplant (heart, lung, liver, bone marrow)

Types of Critical Illnesses  Alzheimer Disease (before age 65)  Brain Damage  Coma  Loss of Hearing  Loss of Independent Existence (before age 65)  Loss of Sight  Loss of Speech

Types of Critical Illnesses  Loss of use of two or more limbs  Multiple Sclerosis  Muscular Dystrophy  Parkinson’s Disease  Rheumatoid Arthritis (before age 65)  Total Permanent Disability (before age 65)  Benign Brain Tumor  Diabetes

Illnesses Types of Critical  Emphysema (before age 65)  Heart Valve Surgery  Severe Burns  Terminal Illness

U.S. Marketplace Trends  Medical technology is keeping people alive longer  The concern today is not dying too soon – it’s living long

People Living Longer  65 year old male can expect to live to age 83  65 year old female can expect to live to age 87

Attitudinal Trends  Consumers have greater fears than premature death, such as: The cost of health care Cost of nursing homes Having enough income to retire

LIFE INSURANCE INDUSTRY TRENDS  Demographics favor living benefits over death benefits  THE RESULT: Individual life sales have declined 30% over the past ten (10) years. Source: Marketing Edit LIMRA 1997

Why C.I. Coverage?  Probability of surviving C.I. before age 65 is almost twice that of dying  Costs associated with C.I. are not covered by traditional insurance

Why C.I. Coverage?  EXAMPLE: Two-thirds of all cancer-related costs are indirect, non-medical expenses, such as: Lost income for C.I. Survivor Lost income and work time for spouse or care giver Housekeeping and child care expenses Home health care needs Home or car modifications Non-covered experimental treatments Expenses not covered by insurance (including co-payments and deductibles)

 Life Insurance – with rare exception, not available while the sufferer is alive. Intended for dependents or beneficiaries.  Health Insurance – Possible limited benefits deductibles/co-pays. May be limited in scope of portability if the sufferer leaves his/her employment. If you survive a critical illness, what will you do?

 Disability Insurance – pays a percentage of the sufferer’s monthly income and benefits are dependent upon ability to work.  Long Term Care – limited to a daily benefit available subject to a hospital stay or home nursing requirements.  Accumulation Products – intended to provide supplemental retirement income.

Critical Illness Insurance  Insured has options  The money provided by the C.I.I. empowers the insured to exercise choice.  C.I.I. is a consumerist product

Essentials  Essential ingredient of a life insurance product = probability of death (qx) Life Insurance Product Investment Expenses (qx)

Essentials  Essential ingredient of a C.I. insurance product = probability of diagnosis of a critical illness (ix) Critical Illness Product  Investment  Expenses  (ix)

Essentials  Any life insurance product design can, in principle, be be duplicated in a corresponding C.I.I. product by exchanging the key probability of death (qx) for the key probability of a diagnosis of critical illness (ix)

Basic Types of C.I.I. Coverage  Acceleration Benefit Rider Pays all or a portion (usually %) of the life face amount upon diagnosis of a critical illness.  Additional Benefit Rider Pays the rider face amount upon diagnosis of a critical illness.  Stand Alone A health product which pays a lump-sum benefit upon the diagnosis of a critical illness.

Product Design Options  Covered Diseases Definitions must be consistent with incidence rates used in pricing.  Waiting Period First diagnosis must be made following some specified time after the issue date of the policy.  Survival Period Built on assumptions that the purpose of C.I.I. coverage is to help cover the costs of living with a critical illness. Example: Must survive 30 days after after diagnosis to be eligible for C.I. benefit.

Product Design Options  Premium Guarantees  Acceleration Amount  Pre-Existing Conditions  Maximum Age  Maximum Face Amounts  Reduced Amounts

Family/Individual Perspective  Replace reduced earnings  Pay off personal debts  Cash for medical treatment or associated expenses  Education

Business Perspective  Buy/Sell Agreements Provide ill shareholder with benefit Enable working shareholders to buy out ill shareholder  Key Person Pay off creditors Executive perquisite Recruit replacement with similar talent

C.I.I. Product Critical Illness Insurance is Flexible  Life  Health  Disability  Other products

C.I.I. Global Perspective  South Africa Concept – Marius Bernard 1983 – introduced – Abbey Life

C.I.I. Global Perspective  U.K. Success Story 1987 – Introduced 1993 – 70 companies sell C.I. (12 billion in force in 1995) 1997 – 626,584 new policy sales (33% over 1996) Two million policies in force C.I. policy sales have increased in each of the last six years as a percentage of overall individual life sales (22% in 1997) 83% of sales are mortgage related Source: Financial Times 1998

C.I.I. Global Perspective  Australia 1990 – introduced 1997 – 31 out of 33 Australian Life Companies offer C.I.I.  Japan 1993 – introduced (sold over 500,000 policies in first 10 months) 1994 – over two million sold 1997 – over six million sold covering many more medical conditions since first introduced Source: Life Insurance Selling 1997

C.I.I. Global Perspective  Developing Asian Markets 1985 Singapore 1988 Hong Kong, Malaysia 1990 Taiwan, Thailand 1992 Indonesia

Total Dread Disease Policies 1997 Net Premiums written by U.S. Companies N = $5,161,545,733

United States C.I. Marketplace Individual Life Arena Product Type (advance payment of death benefit) U.S. Companies  Accelerated Benefits38  Accelerated Benefit Riders72  Accelerated Benefits for life- sustaining organ transplant 13  Accelerated Benefits to beneficiaries when insured is terminally ill 7  Accelerated Benefits to insured when insured is terminally ill 11  Accelerated Benefits to owners upon diagnosis of specific critical illness 12

United States C.I. Marketplace Product Type (advance payment of death benefit) U.S. Companies  Accelerated Benefits for life- sustaining organ transplant 5  Accelerated Benefits to beneficiary when insured is terminally ill 8  Accelerated Benefits to insured when insured is terminally ill 37  Accelerated Benefits to owner when insured is terminally ill 13 Group Health Arena

Why Sell C.I.I.?  Insurance Company Replace declining life sales Global sales success Fits into health, disability arenas Distribution channels Emphasis on living benefits..demographics Potential higher return on capital Leverage distribution GROWTHS$

Why Sell C.I.I?  Producer Fits marketing organizations (career, independent agencies, producer groups) Fits market segments Living Benefits (ex., LTC) Another financial planning tool for client Consumer appeal is growing – wide acceptance GROWTH$

Why Sell C.I.I.?  Consumer Choice Flexibility Fills gaps for calamitous events Concern about living longer vs. mortality Related to C.I.I. no matter what economic level Asset protection

Open Forum – Issues/Concerns Now ask yourself the question: Is there a market for C.I.I.?