The population of the United States is aging as the baby boomer generation approaches retirement age. One of the things concerning this population is health care, specifically long-term health care. It’s expensive, and if you and your spouse need long-term care, you can easily drain your retirement savings. If you have traditional long-term care insurance or hybrid long-term care insurance, your retirement savings are protected. But these policies are expensive, especially if you buy them when you are old. Be sure to shop around using our guides to the best traditional long-term care insurance companies and the best hybrid long-term care insurance companies to find the best policy for you.
One way that has become more and more popular these days is to fund long-term care through riders on your permanent life insurance policy. You may be wondering which rider you should purchase, a long-term care rider or a chronic illness rider. You may also be wondering if any of them are included with your life insurance policy. Let’s take a look at these riders so you can decide which one is right for you.
- Long-Term Care Rider in Permanent Life Insurance Policies
- Who Offers Long-Term Care Rider in Their Permanent Life Insurance Policies?
- Chronic Illness Rider in Permanent Life Insurance Policies
- Who Offers Chronic Illness Rider?
- Consumer Protections on Long-Term Care Riders
- Similarities Between Long-Term Care and Chronic Illness Riders
- Differences Between Long-Term Care and Chronic Illness Riders
Long-Term Care Rider in Permanent Life Insurance Policies
Both long-term care riders and chronic illness riders are types of accelerated death benefits riders. Both of these riders pay out some of your benefits while you’re still alive. Generally, you need long-term care if you have trouble with two out of six activities of daily living (ADL’s):
For your long-term care rider benefits to kick in, you must have difficulty with at least 2 of these things for at least 90 days. You can also qualify for long-term care if you have significant cognitive impairment, such as with Alzheimer’s or other types of dementia (which are the leading cause of needing long-term care).
Long-term care riders are part of hybrid insurance policies, and many companies offer these policies. If you need long-term care, you get to tap into the long-term care benefits and if you don’t, your loved ones get a nice, tax-free death benefit. The long term care money is usually a larger pool of money than the death benefit, sometimes two or three times the amount.
With a long-term care rider, you can receive your benefits either by reimbursement or cash indemnity. Reimbursement means you’ll collect receipts every month to submit to the insurance company and then be reimbursed for those expenses. Cash indemnity means the insurance company gives you an agreed-upon amount of cash every month—no receipts necessary.
Long-term care benefits can be triggered by a temporary condition, although it has to be predicted to last longer than 90 days (the elimination period).
Most companies offer long-term care riders with an up-front cost. For these, you can usually tap into somewhere between 2% and 4% of the death benefit per month. You will reduce the death benefit by doing this and can even use up the entire policy. If you have heirs who need the death benefit, (like special needs children) you should consider alternative sources of payment or perhaps traditional long-term care insurance.
Another thing to be aware of is that a LTC rider won’t cover things like doctor’s appointments and surgeries. You’ll have to pay for those on your own.
Who Offers Long-Term Care Rider in Their Permanent Life Insurance Policies?
The amount of death benefit that can be accessed varies by companies, typically it is either 2% or 4% of the face amount per month. You can select the % when you buy the policy. Different amount will have different additional cost in your premiums.
To qualify to use the rider the insured must be unable to perform 2 of the 6 ADL’s or have significant cognitive impairment. The condition needs to be documented by a medical professional.
For these 4 companies, the benefit is a reimbursement-based payout so the insured needs submit receipts for the cost of care. Because it is a reimbursement based benefit this approach doesn’t work quite as well for informal caregiver situations.
Chronic Illness Rider in Permanent Life Insurance Policies
Unlike an LTC rider, a chronic illness rider can only be triggered for an illness you are not predicted to recover from—in other words, a permanent condition. You also need to be unable to perform two out of six ADL’s or be diagnosed with a severe cognitive impairment. So, someone who suffers a heart attack might qualify for long-term care benefits but not chronic illness benefits. Someone diagnosed with cancer would probably be able to access long-term care benefits, but not chronic illness benefits unless the cancer is terminal.
All chronic illness riders pay out as cash indemnity benefits. You are free to do whatever you want with this money.
Traditionally, these riders were only offered on permanent life insurance policies, but Prudential actually offers a living benefit rider on term insurance, which is similar to a chronic illness rider. There may be other companies that do this as well.
Some companies offer chronic illness rider free-of-charge in their permanent life policies. However, some offers it with additional cost in the premium.
Who Offers Chronic Illness Rider?
|Companies that offer chronic illness rider, free-of-charge||Companies that offer chronic illness rider, with additional cost in premiums|
|– American National|
– United of Omaha
– North American
– Lincoln Financial
|– Lincoln Financial|
– Minnesota Life or Securian Financial
– Brighthouse (formerly MetLife)
– Cincinnati Life
To qualify to use the rider, either the free version or the paid one, the insured must be unable to perform 2 of the 6 ADL’s or have significant cognitive impairment. The condition needs to be documented by a medical professional.
The benefit is an indemnity based pay out so there is no need to submit receipts for the cost of care.
Consumer Protections on Long-Term Care Riders
One huge advantage of long-term care riders as opposed to chronic illness riders is that there are a number of consumer protections that are required with LTC riders. They are:
- Unintentional lapse protection
- Reinstatement provision
- Extension of benefits provision
If you’ve ever known anyone with Alzheimer’s or dementia, you know that they become forgetful long before an official diagnosis is made. This could cause them to forget to pay the premiums on their policy, causing the policy to lapse. Unintentional lapse protection requires that the insured have the opportunity to have a third party appointed. If the policy is in danger of lapsing, the insurance company must let this person know. Reinstatement provision requires that an opportunity is given to reinstate the policy within five months, and extension of benefits requires that benefits are still paid if the insured can prove they would have qualified for benefits before the policy was terminated.
Chronic illness riders do not have these consumer protections included.
Similarities Between Long-Term Care and Chronic Illness Riders
- Client must have difficulty with at least two out of six ADL’s
- Both have 90 day elimination periods
- Both are tax-favored if they meet the IRS’s per diem requirements
Differences Between Long-Term Care and Chronic Illness Riders
- Chronic illness is something you cannot recover from
- Chronic illness riders don’t have consumer protections attached
- Most long-term care riders are reimbursement-based whereas chronic illness rider is always cash indemnity
- Sometimes chronic illness riders are included in the policy with no upfront cost whereas long-term care rider always additional cost in the premiums
- Long-term care riders can provide far more money than the death benefit would indicate
These riders are similar, so it’s easy to get confused. Basically, a LTC rider is now marketed as a hybrid policy, and allows you to tap into a larger pool of money that could come in handy. In addition, you could have a severe but temporary condition that requires care. A chronic illness rider is only able to be accessed if you are permanently ill. With so many seniors needing long-term care eventually, either of these could be helpful.