Long Term Care and Chronic Illness Riders on Life Insurance
Long Term Care and Chronic Illness Accelerated Benefit Riders
What are these riders designed to do?
These riders are designed to provide early access to the death benefit in the event that the insured is chronically ill or has severe cognitive problems. The idea is that the money can help pay for extra care. The benefits are triggered when the insured needs help with two or more activities of daily living or is severely cognitively impaired.
How is the rider paid for?
These rider adds value to the policy. Therefore, it must be paid for: one way or the other. It is either paid up front with extra premium or at claim time with reductions. Lets take a look at both ways of paying for this benefit:
- Paid up front with extra premium: Extra premium is charged above the normal policy premium. The extra premium can add as much as 10 to 25% to the cost of the policy. When costs are born up front with extra premium then the proceeds that are paid out reduce the death benefit on a dollar for dollar basis. For example: a $500,000 policy with an acceleration of $100,000 will result in a $400,000 ultimate death benefit and the amount received will be $100,000.
- Paid at claim time with reductions: There are two main approaches:
- LIEN APPROACH – When the death benefit is accelerated a lien is created against the policy. This lien will accumulate at interest and will reduced the ultimate death benefit. Example: An acceleration of $100,000 could accumulate with interest to $125,000 in a few years thereby reducing the ultimate death benefit by $125,000.
- DISCOUNTED DEATH BENEFIT – The death benefit that is advanced will be discounted: hence the amount received will be less than the amount accelerated. The amount of discount may be determined by age, rate class, life expectancy, interest rate, etc. And the discounting details are not always spelled out clearly in the policy. Example: On a $500,000 policy an acceleration of $100,000 will reduce the death benefit to $400,000, but the amount received may only be $65,000.
How do the proceeds get paid out? Indemnity or Reimbursement
An indemnity-style rider can payout benefits as long as a triggers (the insured need assistance with two out of six activities of daily living or they are severely cognitively impaired) regardless of the expenses incurred.
A reimbursement-style rider requires that a trigger has been met AND there are actual qualified expenses incurred.
What happens after all the death benefit is used up?
Scenario 1: The rider is paid for at claim time. In this case the amount that can be accelerated will be limited to a certain percentage of the death benefit.
Scenario 2: If the rider is paid for with extra premium then the death benefit will be reduced dollar for dollar up the limit. The limiting factor could be the IRS Per Diem limit or limits in the amount that can be accelerated per the contract.
Remember that the ‘devil is in the details’
If you are not completely clear about the plan you are presenting feel free to forward a copy of the illustration to me for an analysis.