I took a family vacation this week. We went to DC to meet up with my extended family on both sides. It was great to see both my mom and dad and though they both have some health challenges they are both getting around and doing well in their later years. This is particularly important to me since I live over 3,000 miles away from both of them. It got me thinking about my own “later years” and the idea of Long Term Care insurance. I have taken some action by purchasing LTC insurance. But there are so many options I thought it would be good to investigate them.
Lucky for me I have a great business partner who understands all of the different options. Steve Locko has been my partner at ISN since 2004. He has seen the evolution of the long-term care industry and the emergence of all of the different products and solutions surrounding the industry. Here is a snapshot, written by Steve, of how the different riders work and what to look for.
Living Benefits & Chronic Illness Riders (by Steve Locko)
Living benefits help clients plan for long-term care needs using life insurance chronic illness provisions. Why are they so important today? Clients won’t buy more costly long-term care policies that may never be used, and insurers recognized it was time to offer an alternative and better value proposition using life insurance.
Terminally ill people had limited access to life insurance proceeds as early as the mid ‘80s. Soon thereafter, Jackson National, Prudential and a few others found other countries offering critical illness and nursing home benefits, and began adding similar riders to life policies here in the early ‘90s.
So living benefits are not new. What is new is the explosive growth of marketing and sales of life products that offer living benefits. Clearly, offering access to life insurance for chronic illness – the topic we’ll cover today – has driven new life sales and helped our clients preplan for long-term care, more effectively and with less cost.
Sure, living benefits are a simple concept on first glance, but there is a very real complexity in how the moving parts of these policies work. We don’t need to talk about straightforward details like claim criteria or indemnity versus reimbursement benefits, but there are issues that deserve some attention: 1.) Long term care riders (LTCi) and chronic illness riders (CIR) use different underwriting and fees, 2.) Chronic illness benefits are paid on very different terms and, 3.) Your client’s life insurance and premiums are something to consider before, or while living benefits are used or exhausted.
LTCi riders are considered a LTC benefit, require LTC underwriting, and have a separate rider charge. Life policies using LTCi riders are more costly, but also are the most transparent because they disclose in advance a stated benefit amount and a benefit period; both correlate to provide substantially a “dollar for dollar” living benefit equal to your client’s life insurance amount.
CIR riders, because they usually “accelerate” death benefits, typically won’t underwrite for LTC or have a fee other than at claim. But be assured your client does pay a cost to access these benefits. That cost is a “black box” approach that, because clients are looking to access life benefits early insurers can and will discount available living benefits, and your client will likely be asked to surrender far more life insurance than they actually receive in chronic illness living benefits.
Simply put, your client may – for the majority of carriers offering CIR benefits – have no real idea what their chronic illness rider will actually provide in benefits when the time comes, or at what cost to their life insurance. But if cost is an issue and your client understands this important difference, who can argue that obtaining significant chronic illness benefits under this approach isn’t a very good idea?
Finally, recognize that most insurers view living benefits as a solution to end of life long-term care issues. Make sure your clients keep premium payments current, and know that while on claim for chronic illness, insurance and other costs continue and clients who come off of a claim may be facing a lapsed or nearly lapsed policy that will require significant premiums to ensure any remaining life insurance is available going forward.