Replacing disability, critical illness coverage is now very often the first choice among brokers when it comes to buy and sell agreements. The clear-cut definitions and rapid claim payouts make CI enticing to all. But disability experts warn brokers to not be so quick make the switch.
Buy and sell agreements are typically sold to business partners to help fund the buy-out of a partner’s shares in the case of disability.
The popularity of recommending critical illness coverage instead of disability was observed by Unum when it merged with Provident in 1999. “Before the merge, buy and sell products comprised a good 15% to 20% of Unum’s disability sales. Now, Provident’s critical illness and wage insurance have moved in,” comments Kim Oliphant, Senior Sales Advisor at Unum.
Sophia Zito, Internal Marketing Advisor, and an expert in living benefits at Maritime Life says that disability insurance has been “shoved into a corner” by critical illness in this market. “Brokers’ passion for critical illness products is palpable. Those who were reticent to sign buy and sell disability agreements are now taking the plunge with critical illness,” Ms. Zito says. Conference lunches with brokers are filled with talk of buy and sell in critical illness, she ads, but these days there is not much interest in disability buy and sell. She asserts, however, that it is too soon to evaluate the impact of critical illness on buy and sell. “The critical illness product has been available only since October.”
Ms. Oliphant says that the critical illness product is less restrictive for a good reason. “In buy and sell, critical illness insurance is shaping up to be a major trend. That’s because in terms of risk selection, there are fewer restrictive criteria. Brokers appreciate having an easier time selling the products to their clients. In addition, clients can purchase face amounts that are quite higher than those of disability insurance.”
Illnesses that pay off
Proteck Financial Network is a Quebec MGA that specializes in disability insurance. Jacques Blais, Vice-President of Proteck, notes that in traditional buy and sell agreements, “insurers appraise the value of a company according to a very strict and in-depth analysis. Clients are not always entitled to the amounts they want. It is here that buy and sell in case of critical illness can become worthwhile.” If a partner needs $500,000 to buy the other’s share and would only obtain $300,000 from the disability insurance, then an additional amount of $200,000 of critical illness could be purchased, Mr. Blais explains. “Of course, the additional amount is payable only for covered illnesses, but they don’t have a choice. It’s that or nothing.”
The well-defined risk selection is attracting many brokers to critical illness when the time comes to suggest a buy and sell agreement to company partners. Stéphane Rochon, Living Benefits Development Director at Groupe Cloutier, a large MGA in Quebec and subsidiary of BRM, points out that the danger of exclusions is non-existent with critical illness. “The advantage with critical illness is that companies will use the additional premium mainly for aggravated risks. In disability, we usually tend to exclude one case or another.”
Naming a bunch of particular cases, Mr. Rochon says that exclusions come fast and furious in disability. “A golf-playing partner who previously developed tendinitis, or who went to see a chiropractor for his back, even if only once, will have exclusions in his policy. And if one of these ailments recurs, he will not be paid.” With critical illness, there are much fewer rejections, but there may be additional premiums, he adds.
Ms. Zito says she is still a fervent believer in buy and sell in case of disability, yet she acknowledges that there are uncircumventable restrictions on this product. “For example, we cannot usually sell this product to a client aged 65 or over.” Also, young companies cannot easily access this product. Mr. Rochon agrees, and claims that most insurers demand that a company be in existence for at least three years before it qualifies for buy and sell in case of disability.
To pay or not to pay
Another advantage of critical illness buy and sell: payment of claims. Mr. Rochon says he believes buy and sell disability does not pay. “The problem is that companies insist on a waiting period of 12 to 24 months in disability buy and sell. What executive would be totally disabled and unable to return to work at the company for one year, even for only one hour a day? To my knowledge, I have never seen one cheque issued for a buy and sell disability claim.”
Stephen Bickford, Director of Living Benefit Claims at Maritime Life, admits that he has not sold too many disability buy and sell policies. “But we pay one or two claims a year.”
Ms. Oliphant says Unum does not keep statistics on claims per product. She adds that she has seen her company honour disability buy and sell claims. “It is not that common, but we do pay.”
The long waiting period between diagnosis of the disability and payment for buy and sell of the partner’s share accounts for the rarity of claims. “The grace period is particularly long for large insurance amounts; it often reaches two years, which eliminates many claims,” comments Ms. Zito . By purchasing a critical illness product instead, the client can shorten this period from two years to one month. “And that’s nothing to sneeze at!”
Mr. Rochon recognizes that clients “very much appreciate receiving a cheque after 31 days.” Evidently, people do not become a business partner to buy back the other person’s share in case of disaster, he says. “Two people are partners because they respect each other. If one of them has a heart attack, the agreement would not consist in buying their share, but rather in accelerating their recovery. You can’t do that with classic buy and sell because of the waiting period.”
Two types are better than one
These specialists, however, warn brokers who would be tempted to totally shelve disability in favour of critical illness buy and sell. “The situations in which critical illness benefits will be paid are much more restricted than with disability insurance. Critical illness should be recommended only to people who don’t qualify for disability,” says Mr. Bickford.
The problem, according to Ms. Zito is that “85% of disability insurance claims originate from causes that would not be covered by critical illness insurance.” Illnesses resulting from an accident may not be covered by a critical illness policy, she warns. Mr. Rochon explains: “if you have a car accident and you are in a brain-dead state for 18 months, critical illness insurance will not indemnify you.”
Mr. Blais says that brokers who are ready to drop disability in favour of critical illness haven’t acquired enough experience. They make the mistake because “they don’t sign agreements very often. They have to understand that the two products are pursuing two distinct and complementary objectives. One does not replace the other.” It’s true that being paid within 30 days is quicker than being paid one year later, he admits. “But the safest product is disability insurance because it covers every situation.”
One is not better than the other, explains Mr. Rochon. “Ideally, brokers should offer a combination of the two.” He says he firmly believes that most agreements will feature both products “until one company issues both types of coverage on the same policy.” But this won’t happen tomorrow or the day after, Mr. Rochon comments. “The volume of critical illness premiums is not enormous in Quebec and buy and sell is merely 5% to 10% of sales of living benefits to companies.”
Yet when Mr. Rochon presents the two solutions to brokers or clients interested in buy and sell, he notices that they are much more interested in critical illness than disability. “I admit that I have a bias toward critical illness insurance, which I find more important in terms of buy and sell. Just watch how many will have a heart attack before age 65!”
Mr. Rochon is also banking on the product’s flexibility. He says a critical illness policy can be used not only for buy and sell but also in key-person coverage, for buy and sell from the partner without disability, or obligatory buy and sell after 18 months only. “With disability insurance, you can only do buy and sell for a predetermined period,” he says. All these reasons are steering people toward critical illness buy and sell, he concludes.
Jacinthe Collin, Vice-President of Vandewinkel Financial Group – another MGA that specializes in disability – says that she always sells both types of insurance. She bristles at the idea that disability insurance may not pay in some cases. “If a contract does not pay if its holder becomes disabled, you have to ask whether the right product was sold. Why do you always have to sell the cheapest product?” she asks. “Do you see a lot of Ladas in parking lots? No! You see Hondas, Nissans, Toyotas…because they are reliable.” According to Ms. Collin, problems with claims mainly arise” when a broker has sold at a smaller premium instead of going for good coverage”
Ms. Collin says she makes sure that the contract pays in all situations regardless of the premiums. For example, she says she considers residual disability indispensable coverage “for someone who pushes pencils all day long. If that’s you, your chances of becoming totally disabled are slim. However, you may be forced to reduce your workload, and may have to hire somebody else to compensate.” Residual disability will offset the difference because it is based on the loss of income caused by a disability. “But it is costly. That’s why brokers who are used to selling at the lowest premium must be made aware of the importance of this coverage,” she says.