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Chronic Illness Rider vs Long-Term Care

Long-Term Care insurance helps seniors with end-of-life expenses such as time spent in a hospice care or assisted living facility. Most plan benefits are triggered when an insured needs help with at least two of the six activities of daily living or ADLs. These are;

  • Bathing
  • Dressing
  • Eating
  • Transferring
  • Continence
  • Toileting

Or if the insured has a cognitive condition that requires substantial supervision & protection from threats to health and safety.

Once an insured qualifies for benefits there is normally a 90-day elimination period that works just like a waiting period before benefits pay out. So from the time a senior qualifies, to the time a benefit period begins there is normally a 90-day wait. The amount paid out depends on:

  • How much coverage was initially purchased
  • If there is any inflationary protection included
  • When the insured files claim

But what if an insured senior never ends up needing the Long-Term Care purchased? There is a 30% chance that a senior will not qualify for long-term care. If this happens any premiums paid are essentially wasted, baring a few plan type exceptions.

An alternative choice to traditional long-term care is the Chronic Illness Rider. If a senior needs Life Insurance they oftenly can then add a LTC-like benefit with the Chronic Illness Rider. Here is how the rider works.

The Chronic Illness Rider is triggered with the same requirements as traditional LTC; when an insured needs help with at least two of the six ADLs or has a cognitive impairment that requires supervision due health and safety. The rider then allows the insured to accelerate or advance a portion of their death benefit to use while living on a tax-free basis each month. This amount is normally between 2%-5% per month of Life Insurance coverage amount and is chosen at point of purchase. Let’s use an example to help illustrate how this might work.

Meet Bob

Bob had purchased a $250,000 life insurance policy with the Chronic Illness Rider that allows a 4% acceleration 20 years ago. Today Bob is 75 and needs help with bathing and dressing. So with his doctor’s help Bob files a claim to his insurance company to use his Chronic Illness benefits. Bob knows he can request up to $10,000/mn but decides he only needs $8,000. So after his 90-day elimination period (waiting period) is over, Bob gets $8,000/mn tax-free and his policy does not need any additional payments while Bob is on claim. Bob decides to use $6,000 for in-home care and $2,000 to pay his mortgage since he does not need to show receipts of usage with his plan.

After 12 months Bob still needs help, so his plan requires him to go back to his doctor who re-certifies that Bob qualifies for benefits. The insurance company continues to pay Bob his $8,000/mn tax-free without any payments required and Bob does not have to do another elimination period again.

After 22 months of receiving benefits Bob passes away in his sleep. His wife then files a death claim with the insurance company who determine that Bob used $176,000 ($8,0000 x 22) of his $250,000 death benefit. Now since Bob had the paid version of the Chronic Illness rider Bob’s wife is awarded $74,000 tax-free.

Now this example worked out perfectly for Bob and his wife but there is one important distinction; Bob had the paid version of the Chronic Illness Rider. Keep reading because it is imperative that you know the next few crucial details.

There are in two versions of the Chronic Illness Rider;

  • The paid rider
  • The free rider

Just understanding this could save you tens of thousands of dollars or more. If an applicant is serious about using the coverage offered by the rider they should always have the paid version of the rider.

Here is why;

The paid rider means that when the rider benefits are advanced the exact same amount is deducted from the death benefit dollar-for-dollar. So in Bob’s example the $176,000 that he used is deducted from his $250,000 death benefit resulting in $74,000 to his wife. Fairly straight-forward, right?

The “free” rider is a bit more complicated and much more vague. If Bob had the free rider, his request for $8,000 would go through underwriting at his insurance company. Underwriting would then determine the amount approved based on his age and health at that time. I have never seen a clear way to determine how much this might be and it seems impossible to really predict but for the the sake of example let’s say they approve $4,000 off the $8,000 requested. Now there are two disadvantages here; 1. Bob is getting a reduced amount while he needs help under his compromised health condition and 2. Bob’s wife will still get $74,000 even though Bob only received a total of $88,000 ($4,000 X 22mns)! So Bob lost an incredible $88,000 with the “free” rider. This is because the “free rider” discounts the amount awarded for acceleration but then deducts the full amount requested from the death benefit. So the “free” chronic illness rider really is not-so-free after all if used. I am sure many insured seniors along with insurance agents do not know about the discounting of benefits that go on with these “free” Chronic Illness Riders. And WARNING: there are way more “free” Chronic Illness riders out there than paid ones!

But for a moderate premium increase, say 15-19%, an insured can get the paid version of the rider and have a dollar-for-dollar benefit. It makes sense if an insured is looking for at least $100,000 of Life Insurance but wants a long-term-care-like benefit as an add-on. When does this not make sense? If someone does NOT need life insurance and only needs long-term care.

While the Chronic Illness rider can be attached to term life insurance plans, if an insured is intent on using the benefit it makes much more sense to utilize it with a permanent plan. This ensures coverage will not expire before life expectancy. The lowest-priced way to do this is with Guaranteed Universal Life plan. This allows the plan to be designed to last as long as seems seems appropriate; age 85, 90, 105, etc without a premium increase over time.

Advantages vs Disadvantages

Here are the possible advantages of the Chronic Illness rider vs many traditional LTC plans;

  • If an insured does not end up needing the coverage the benefit passes as life insurance
  • The premiums will not increase if designed correctly with a permanent plan
  • An insured does not have to be in a facility or show receipts of usage.
  • The policy premium is waived once on claim

Here are the possible disadvantages of using the Chronic Illness rider vs a traditional LTC plan

  • The premiums will be higher than a stand-along long-term plan
  • There is no inflation protection available so the coverage amount needs to planned in advance for rising costs.
  • There often is an annual re-certification with a doctor that needs to be done to verify that the insured still qualifies.

Putting it all together

The Chronic Illness Rider needs three components to be utilized correctly. Those are;

  1. A quality A-Grade company
  2. The paid version of the rider
  3. The right product & design

Here are a two choices that can accomplish this.

  • GRADE: A+
  • PRODUCT: PROTECTOR
  • RIDER: BAR

Prudential has been around for over 140 years and has stellar financial grades across all the rating agencies. They also have a Guaranteed Universal Life plan called the PROTECTOR that can be designed as for out as age 121. This plan has proven popular for seniors looking for coverage amounts of $100,000+. Pru also has long been an aggressive carrier for getting competitive rates for those that may have had a history of sleep apnea, obesity, or a variety of other health problems. Furthermore Prudential really shines for smokeless tobacco users or cigar applicants as they can be awarded non-smoker rates!

Pru has a paid Chronic Illness Rider known as the BAR rider or Benefit Access Rider. This rider does not do any benefit discounting as discussed earlier. The rider does not need an insured to show receipts for usage. It does allow acceleration of all the death benefit up to $25,000 and allows a max 4% acceleration outside California or 2% in California. Also all California applicants must be deemed to have a permanent need for help with ADLs or cognitive issues but there is no elimination or waiting period in CA. Everywhere else there is a 90 day elimination.

  • GRADE: A+
  • PRODUCT: ADVANTAGE CHOICE
  • RIDER: EXTEND CARE

Protective Life is one of the most efficient fully underwriting carries on the market awarding average approvals within 30 days. They also enjoy A+ grades across all the financial agencies and have over 100 years of history. They pride themselves on outstanding customer service.

Protective has a Guaranteed Universal Life plan called the ADVANTAGE CHOICE. This allows the insured to design the plan to last up to age 121. For applicants who feel age 90 or 95 is appropriate the premiums will be slightly reduced.

Protective offers a paid (non-discounted) Chronic Illness Rider called the EXTEND CARE. This rider is available in all states but California unfortunately. Extend Care allows the insured to design the rider to pay out 2% or 4% of the total coverage amount monthly or even up to the current IRS limit if the coverage amount is large enough. Currently the limit is $11,800.

So in summary; know there are no free lunches. The Chronic Illness rider can be great if you are also looking at permanent life insurance of at least $100,000, with the right plan, and the paid rider version. Be aware though of the limitations and know it will not replace a traditional LTC plan for many individuals.

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