May 23, 2022
In order for the life insurance companies to remain competitive, they have had to invent new types of life policy products for consumers that can do things that traditional life insurance policies could not. The biggest drawback of traditional life insurance was that in order to collect the death benefit, the insured (who was also usually the policy owner) had to die.
But a new wave of policies has appeared in the marketplace, and they are effectively rewriting the types of coverage that life insurance policies can now offer. Accelerated death benefits are becoming increasingly commonplace, with their popularity growing rapidly among Baby Boomers especially.
What is an accelerated death benefit?
In a nutshell, an accelerated death benefit (ADB) is a life insurance benefit paid by a life insurance policy to the insured while the insured is still living. The benefit is drawn from a portion of the death benefit, and the amount of accelerated benefits that are paid on the insured’s behalf will reduce the death benefit accordingly.
There are several types of accelerated benefits designed to cover various types of needs. Accelerated benefit riders are available with both universal life insurance and whole life insurance policies. Even annuities have a version of this for annuitants under certain circumstances.
What is an accelerated death benefit rider?
An accelerated death benefit rider is either built into a cash value life insurance policy or else available as an optional rider for an additional cost. The rider will determine how much of the policy’s death benefit can be paid to the insured and under what conditions the insured qualifies to receive this form of payment. The rider does not impact policy values.
Some accelerated riders stipulate that only half of the death benefit at most can be paid out, while others allow the entire face value to be paid out in an accelerated fashion.
There are four main types of accelerated death benefit riders: long-term care, chronic illness, critical illness and disability. These riders will only cover expenses that are not covered by traditional health insurance, Medicare, other insurance coverage.
What qualifies as a chronic illness?
A chronic illness as defined by the life insurance industry is any illness that materially impacts the ability of an insured to live a normal daily life. A chronic illness prevents the insured from being able to accomplish ordinary tasks, which the life insurance industry refers to as the six activities of daily living (ADLs). These activities include…
- transferring (as in from a wheelchair to a bed)
If an insured is deemed to be permanently unable to perform at least two out of these six activities by a doctor, then he or she will most likely become eligible to receive chronic illness insurance benefits, assuming that they have that kind of coverage in place.
Common chronic illnesses include…
- heart attack
- multiple sclerosis
- organ failure
Even Alzheimer’s disease or other forms of severe cognitive impairment may qualify the insured for the chronic illness rider. Insureds who have a terminal illness will also usually qualify for this benefit. More information regarding chronic illness and the definition can be found at the website of the Centers for Disease Control.
What is a chronic illness rider?
A chronic illness accelerated death benefit rider pays the insured a regular monthly benefit amount up to certain limits if they are diagnosed as being chronically ill. For example, a chronic illness rider may pay the insured a monthly benefit payment for a given period of time until half of the life insurance policy’s death benefit has been paid out.
As with all other types of accelerated benefit riders, this rider may be already built into the life insurance policy, may come at an additional cost or may be added to a policy with no charge.
The insured usually chooses whether or not to include this rider when the underlying life insurance policy is purchased, although they may be able to add this rider later on as long as they haven’t already become unable to perform at least two out of the six ADLs.
The underwriting process for chronic illness riders is fairly simple. If the insured can’t perform at least two out of the six activities of daily living (ADLs), then they will usually qualify for benefits. Some insurers require that the insured must also be terminally ill and have a life expectancy of two years or less. A statement to this effect that is signed by a doctor or other licensed health care practitioner is usually acceptable proof.
The monthly living benefit that is paid to the insured under a chronic illness rider can be used for any purpose that the insured needs or desires. Chronic illness riders can help chronically and terminally ill patients to live more comfortable lives and possibly receive a higher level of medical care than they could otherwise. It can also replace the insured’s earned income if he or she becomes unable to work because of a chronic condition.
Unlike standalone long-term care policies, the benefits that are paid from a chronic illness rider or standalone chronic illness insurance policy are almost always tax-free. For this reason, many financial planners advise their clients to choose an amount of coverage that equals approximately 60% of their pretax earnings. This way they will have about the same amount coming in as they did after taxes. Conversely, the premiums paid in to a life insurance policy with an accelerated death benefit rider are not tax deductible, as the premiums on a standalone policy may be.
What is long-term care?
Long-term care refers to care that is provided to an insured for an extended period of time, such as a year or longer. This form of care differs from medical care in that the insured may not necessarily be ill. He or she may simply be too old to perform at least two out of the six activities of daily living (ADLs).
Long-term care can mean home health care, hospice care for terminally ill insureds or in-home care for those who need a certain level of care but do not need to be in a nursing home.
In-home care can consist of a number of daily chores, such as…
- meal preparation
- trash removal
- pet care
- dispensing medications
But, of course, nursing home care is one of the chief forms of long-term care. Assisted living facilities can also qualify an insured for long-term care benefits.
What is a long-term care rider?
A long-term care rider is another type of accelerated death benefit rider. It is similar to a chronic illness rider except that the benefits from a long-term care rider are often not paid directly to the insured.
Long-term care riders are used to pay for qualified long-term care costs, such as home health care, adult daycare, assisted living facilities, and nursing home care. They can essentially pay for any expense that standalone long-term care coverage can cover.
The triggers for long-term care riders are usually much the same as they are for chronic illness riders. In most cases, the insured must be unable to perform at least two out of the six activities of daily living as certified by a doctor.
Critical Illness Rider
A critical illness rider will pay a lump sum of cash to the insured if they get diagnosed with a major ailment such as cancer, heart disease, lupus, cirrhosis of the liver, or other critical illnesses. Critical illness riders are often piggybacked on top of chronic illness riders to provide a more complete form of coverage.
As with all other types of accelerated death benefit riders, long-term care riders may be built directly into the insurance policy, added for an additional cost, or added at no charge to the insured. The actual cost varies by life insurance product type and carrier. Some riders are much more expensive than others and may provide a wider scope of care or have more lenient underwriting requirements.
Many long-term care riders require the insured to undergo a comprehensive medical exam with blood work in order to establish their eligibility for benefits. Qualifying prospective insureds who are healthy and in good physical condition can get coverage for lower premiums than those who have one or more major health conditions.
Some long-term care riders have a simplified underwriting process that merely requires the prospective insured to answer a series of health-related questions either via telephone or online. There can also be an indemnity clause built into the policy that exempts the insurance company from assuming liability for the insured under certain circumstances.
Long-term care riders may provide a lump sum payout of a certain diem limit that insureds can use to pay for every dollar of long-term care expenses that they incur. However, once that amount has been exhausted, all future long-term care expenses must be borne by the insured (or, commonly, by another family member). Or the policy may have an elimination period that requires the insured to initially pay for expenses out-of-pocket and then reimburse him or her after they submit their records showing what they paid the care provider plus the corresponding receipts.
Standalone long-term care policies are becoming increasingly hard to find, and the ones that are currently offered are almost always very expensive. This is because the cost of long-term care services has skyrocketed in recent years, growing much faster than the life and health industries had predicted. The average cost per month for a private room in a long-term care facility now stands at about $7,700.
This number varies substantially depending upon the level of care that is provided, the geographic location of the care facility, and other factors. But this is a good indication of just how much nursing home care can cost in today’s dollars.
Many long-term care insurance providers have been forced to double the cost of the premiums for their policies in order to keep pace with the cost-disease-riddled managed care industry. This has effectively forced many policy owners to abandon their policies and allow them to lapse because they can no longer afford to pay the higher premiums.
Are long-term care riders fixed cost?
The cost of a long-term care rider usually cannot increase once the life insurance policy has been issued. This is especially true for single premium life insurance policies. The American Association for Long-Term Care has estimated that the average cost for a single premium life insurance policy with a LTC rider is about $75,000. Some policies that are funded annually for a period of less than ten years also guarantee that the cost of the LTC rider can never increase.
Who are ABR benefits paid to?
In most cases, the ABRs will pay benefits directly to the healthcare provider. There are, however, some policies that still require payment upfront by the insured and then provide a reimbursement.
The income tax rules for long-term care policies and riders are not as clear-cut as they are for chronic illness policies. While the latter’s benefits are always tax-free, the benefits that are paid by some long-term care policies can be at least partially taxable, depending upon various circumstances.
But most long-term care policies are now classified as tax-qualified policies, which means that all benefits that are paid from these policies will be tax-free as long as the money is used to either directly provide or reimburse the insured for qualified long-term care expenses.
Also, be cognizant of the tax laws for LTC benefits in your state; the rules that apply in New York may be very different from those in Alabama, for example. Consult your tax advisor for more information on this topic. If you would like to find out more about the taxation of LTC and chronic illness benefits on your own, you can look this topic up in the Internal Revenue Code (IRC). Or you can visit the IRS website.
Chronic care rider benefit calculations
If an insured qualifies for a chronic care benefit under a chronic care rider, there are three main ways that the amount of the benefit that is paid can be calculated. They are listed as follows:
The discount method
This means that the rider can pay a lump sum out of the death benefit immediately, but this payment will reduce the death benefit by more than the dollar amount of the chronic illness benefit. For example, a $50,000 chronic illness benefit may lower the remaining death benefit of the life insurance policy by twice that amount.
The lien method
In this arrangement, the insurance company pays the insured a lump sum upfront and then places a lien on the remaining death benefit. The lien will charge interest on the amount that was paid so that the insured is essentially taking out a loan against the policy.
The dollar-for-dollar method
This is the most favorable of the three methods. The rider will pay out a lump sum to the insured, and it will only reduce the death benefit on a dollar-for-dollar basis. There is no discount calculation factored in.
The life settlement alternative
If you are at least 60 to 65 years old and own a permanent life insurance policy or a convertible term life insurance policy with a face amount of at least $50,000, then you probably qualify to sell your life insurance policy to a life settlement company. The company will examine your policy and all of your medical records and then make you an offer for what they are willing to pay.
If you accept the offer, then you’ll sign the ownership of your policy over to the settlement company but remain on the policy as the insured. The life settlement provider will pay the annual insurance premiums until you die and then collect the death benefit.
The life settlement alternative can get you a substantial amount of cash within a relatively short period of time, ranging from a few weeks to a few months. And it may be a viable substitute for a chronic illness rider if you never added this feature into your life insurance policy.
Just remember that your beneficiaries and loved ones will no longer receive the life insurance death benefit, so be sure to have an in-depth discussion of how this can impact them financially. But a life settlement can be a far superior alternative than other options such as trying to qualify for Medicaid.
Are chronic illness riders right for your clients?
Each client has their own particular needs based on their unique situation. You can provide the advice your clients need to make an informed decision about life insurance riders such as chronic illness riders, as well as other types of accelerated death benefit riders. These riders are helping thousands of policyholders pay for medical or long-term care expenses without going bankrupt. And life settlements are rapidly gaining in popularity as well. All types of life insurance can qualify for a life settlement transaction. You can find other articles for educational purposes on LCX Life’s Blog.
You can get an instant estimate of the value of your client’s life insurance policy by visiting the LCX Life calculator. You can also call LCX Life at 888-388-0988, contact us here, or email us firstname.lastname@example.org to discuss your client’s situation. Our team is available and ready to explain to you all that you would want to know about life settlements. Remember to visit our Life Settlement Genius portal for client materials and additional information.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!