Cancer insurance from Family Heritage Life

Joe Martin opened his door one afternoon in late February and came face to face with Kevin, who was "going around the neighborhood talking about cancer."

It was an alarming idea that convinced Martin to open his Bloomington, Ill., home to a stranger.

Within minutes, Kevin was pitching Martin cancer insurance from Family Heritage Life Insurance Co. of America, promising that not only would Martin and his wife, Jessica, have coverage against the disease, but that they would get their premiums returned over time. The return of premiums struck Martin as "too good to be true;" cancer wasn't his primary concern — he was more interested in a more general supplement to protect against injury that would leave him or his wife unable to work — but he also didn't want to see sky-high bills if they got ill.

Martin describes himself as "one of those guys who reads the fine print about everything," but Kevin didn't have any fine print. There was paperwork to fill out, but no policy to review until after Martin agreed to the coverage. There was time to receive the policy and back out of the deal, so Martin agreed to sign up and give it a look-see.

It turned out to be a Stupid Investment of the Week.

Stupid Investment of the Week showcases the circumstances that make an investment less than ideal for the average consumer, in the hope that spotlighting trouble in one case makes it easier to recognize elsewhere. The column is not intended as an automatic sell signal, as dumping a problem investment sometimes compounds the trouble.

That's particularly true in cases involving insurance. Giving up on the Family Heritage Life cancer coverage after the initial money-back period is complete could result in forfeiting most of the return of premiums that was so critical to the initial purchase decision.

From a technical and regulatory standpoint, insurance generally is not an "investment." But Martin was laying out money for an expected return — both protection and cash back — so the Family Heritage cancer coverage qualifies as an investment for the purposes of this column.

Martin's deal on the coverage sounded great, until it became clear that he didn't need what he was purchasing.

The Family Heritage cancer policy Martin was sold comes in two flavors, full-cost and "light," with the difference being that the lesser coverage provides just 30 percent of the full benefits at roughly 70 percent of the cost.

Despite that imbalance of benefits and cost, Martin went "light," giving Kevin the first monthly premium payment of $117, which was based on the age of Joe (57) and Jessica (54).

The promised benefits cover a wide range of cancer benefits above and beyond what is covered by traditional health policies, including travel costs for a companion to accompany a patient to distant clinics and more.

"This is a supplemental-insurance policy, and it is recommended for people who already have major-medical coverage of some sort," says Jeff Morris, chief actuary for Family Heritage. "Like any type of critical-insurance coverage, it pays some of the extraordinary costs associated with treatment. We do some things in our policy for treatments in specialized cancer centers that someone might not be able to get in their traditional health coverage."

The return-of-premiums feature blurs the issues for consumers.

As Martin explained it: "The big selling point was that you get the premiums back in 25 years or when the younger partner turns 65. You can keep the policy for another 25 years at the same price, and then those premiums are returned."

Return-of-premium policies are becoming increasingly common and popular; effectively, they are an insurer saying it doesn't want your money, it just wants the use of it for 25 years.

The return of premium raises the consumer's cost; Morris noted that the give-back draws in some lower-risk clients, which helps to cut the base costs or the amount that would be paid without the return of premiums. Family Heritage does not sell cancer insurance without the premium-return feature.

While the consumer gets back his premiums, the earning power of those dollars is lost.

That's important because the policy is an indemnity policy, and its benefits are fixed. Family Heritage has a schedule of items it will pay for, but those dollars do not adjust for inflation. If a certain drug or treatment is covered in the policy today at $100, it will be covered at that same rate in a quarter-century.

Given advances in medicine, but also inflation in costs, it's a fairly safe bet that a supplemental amount paid out today could amount to next to nothing in two decades. And if new treatments or meds become the norm, the policy won't necessarily cover them.

What's more, with a 25-year policy, consumers must make sure their insurer will be around for decades to come.

Family Heritage carries a Best rating of B++ — the fifth-highest rating — and a Fitch rating of BBBq, the ninth-highest mark from that service; that puts them above the level where the companies are considered "vulnerable," but not by a lot when considering a 25-year policy.

"Cancer is a real risk, but if you don't have any family history of it, then the likelihood of collecting on the policy is minute," says David Bohannon, an insurance adviser in Louisville, Ky. "Most people would be better off paying for additional health insurance, rather than protecting themselves from one disease."

Not surprisingly, Morris disagrees: "So many people see themselves as paying for coverage for the length of the term, and they get to the end of the policy and feel like they didn't get value for their coverage," he says. "The return of premium makes it so that if they are less likely to have a claim, they at least know they will get through the insurance period and get something back."

Ultimately, Martin knew where his mistake was with the policy. It came from focusing on the premium structure, rather than the coverage being purchased.

"It sounded right because I'd get my money back," says Martin. "If I hadn't looked more closely, I would have bought it from the wrong reasons, and that would have been bad."

Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe's Stupid Investment of the Week or a comment about this week's column, you can reach him at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.