All riders are not created equal

With long-term care and chronic illness riders, the devil is in the details. Know the differences before you recommend options to your clients.

As aging baby boomers expand the elder population, long-term care (LTC) will continue to escalate in importance as a segment of financial and retirement planning.

There was a time when the only way to insure the risk of long-term care expenses was through the purchase of a traditional stand-alone LTC policy. While a variety of features are offered allowing customization of a policy, apprehension exists with some consumers due to the potential “use it or lose it” nature of the product and the potential for rate increases with no cap.

Modernizing LTC solutions

A new way to insure long-term care uses permanent life insurance as a base and allows the policyholder to accelerate the death benefit to pay for qualifying LTC expenses of the insured. This modernized version of LTC coverage brings a more palatable solution for some consumers.

• Any benefit not needed for LTC needs will be paid as a death benefit to the beneficiaries.

• Products are available with guaranteed premiums.

• Life insurance has a new use — living benefits the insured can use if LTC needs arise.

But with this mass addition of riders, confusion abounds. While various companies may appear to offer the same protection, it is not the same by any means.

Understanding the differences

All LTC and chronic illness riders on life insurance pay benefits as a tax-free acceleration of death benefit via 101(g). However, that’s where the similarities end. The differentiators determine which types of claims qualify for benefits, how benefits are paid out and how riders are charged. Understanding these differences is extremely important, and an insurance professional can present clients with a clear picture of what they are actually purchasing.

Long-term care riders classified as 7702B: Riders with the classification of 7702B offer more comprehensive coverage. To qualify for a claim, the client needs to meet the basic requirements related to chronic illness. That means a physician must certify that the insured, for a period of at least 90 days, is unable to perform at least two Activities of Daily Living (ADLs) or suffers from severe cognitive impairment. This definition allows temporary claims to be covered as well, so conditions such as mild strokes, orthopedic repairs, side effects of certain cancers, etc., would qualify for a LTC claim on this type policy. Keep in mind, LTC riders are available for an additional charge, generally require underwriting and will add to the policy premium cost.

The main differentiator among 7702B LTC riders is whether the rider pays by an indemnity model or reimbursement model. Reimbursement plans, no matter what the stated maximum benefit is, will never pay more than the qualifying LTC expenses incurred. Qualifying expenses in reimbursement plans do not include the costs of home modification, medical equipment (i.e., walkers) and other potential expenses that go along with LTC needs.

Indemnity plans pay the maximum benefit the policy allows, regardless of, and without reference to, expenses. While some plans may require a licensed service to be involved in the care, no bills or receipts are needed to justify the cost of care. Indemnity plans allow for a wide array of flexible solutions because excess benefits not needed to pay for care can be used for any purpose.

Chronic illness riders classified only as 101(g): Some riders are classified as 101(g) only. These riders all use the indemnity model of benefit payment. However, the term “long-term care” may not be used in marketing these products. Thus, you will see these riders generally referred to as “accelerated death benefit for chronic illness” riders. In addition, the physician must certify the chronic illness “is likely to last the rest of the insured’s life.” In other words, the condition must be non-recoverable. For this reason, temporary conditions would not be eligible for claim.

The main differentiator among chronic illness riders is whether the rider is paid for by an additional charge added to the policy or is included as a policy feature with no underwriting, discounting the total death benefit to provide the chronic illness benefit.

Some companies “include” a chronic illness rider feature as part of the policy, with no underwriting and at no additional charge. But keep in mind, no charge does not equate to free. Instead of charging for the rider, the death benefit is discounted when the rider benefits are actually needed. Because of this, benefits cannot be determined until a claim is filed. The discounting of benefits is based on several variables, including age, sex of the insured, premium class, as well as current interest rates and policy cash values at time of claim. The younger you are when filing a claim, the more the death benefit is discounted. While some may argue this method spares people never needing qualifying chronic care services from paying rider charges, those needing benefits may not understand at the time of the claim why the total policy death benefit paid is not the amount at policy issue.

Other chronic illness products assign a cost of insurance to the rider and take monthly deductions from policy values — essentially the same way the base policy premium is charged. While this does increase the premium for the overall life insurance policy, charging for the rider provides a client with the advantage of knowing from day one exactly how much death benefit and chronic illness acceleration they will be entitled to, no matter when the need arises.

 By Shawn Britt from the November 1, 2012 issue of Life Insurance Selling. Shawn Britt, CLU, is director of advanced sales with Nationwide Financial Services in Columbus, Ohio.

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