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Living Benefit Riders Open Up Possibilities for Your Client

About a year ago, I wrote an article about living benefit riders that are attached to life insurance contracts. As most of you know, living benefits are long-term care, critical illness and terminal illness riders that allow the insured to access the death benefit of his life policy should he need long-term care services, suffer a critical illness such as a heart attack or cancer, or have a terminal condition with death likely to occur in a year or less. In most cases, any claim for living benefits is considered an accelerated advance of the death benefit and is tax-free.

These riders are available on both term and permanent life insurance coverage and vary between carriers. I would like to present my findings on living benefit riders and provide a sales idea I discovered over the past year for one of them – the long-term care/chronic illness rider. 


Long-Term Care/Chronic Illness Riders

More insurance carriers have introduced a living benefit to new policies since I last wrote about living benefits. The most common is a long-term care (LTC) version actually filed as a chronic illness rider under Internal Revenue Service (IRS) Code 101(g). These chronic illness riders must not be marketed as long-term care insurance (LTCi) and must have indemnity payments if there is a claim. While it is similar to a true LTC rider, there are important differences, such as:


» A true LTC rider is filed under IRS Code 7702B and 101(g), can be marketed as LTCi and is typically an expense reimbursement plan. The advisor is required to hold a health license and be LTC trained and certified in order to sell it. On the other hand, selling a chronic illness rider does not require a health license or training.


» Both the chronic illness and the LTC riders have similar triggers to warrant a claim, including a cognitive impairment or an inability to perform two of the six activities of daily living (ADL). However, it is possible for someone to not qualify for a claim under the chronic illness rider even though he is eligible under the LTC definition.


For example, suppose your client is working in his yard, slips off a ladder and falls. He breaks his back and leg, but he will recover. He cannot perform two ADLs, but because he is expected to recover, he is not considered to have a chronic condition. Therefore, he is not eligible for a claim. On the other hand, a true LTC rider would provide a benefit to him provided the elimination periods are met, even if he is expected to recover. It is important that this aspect is understood by your prospect or client when sharing benefits and features with him.

The plan design for LTC/chronic illness riders varies according to carriers. Some have the rider optional and underwritten. It is possible to qualify for life insurance but be declined or rated for the LTC/chronic illness rider. 

The rider does have an additional premium cost. Usually, the client chooses a percentage of the death benefit to be available monthly at claim time. For example, a $300,000 universal life (UL) insurance policy could have a 2 percent LTC rider, which could be used to help cover LTC expenses. Two percent of $300,000 equals $6,000 of monthly benefits, which can be used to reimburse or cover LTC services as needed by the insured.

A second plan design has the LTC/chronic illness rider automatically included in the policy with no additional underwriting or premium cost. However, the actual amount of dollars available for LTC services is unknown until claim time. One carrier, for example, allows for an annual withdrawal of 24 percent of the death benefit. 

But then a formula is calculated and the actual amount of available dollars becomes known. Consider another $300,000 UL policy, for example. Twenty-four percent of $300,000 is $72,000, or about $6,000 per month. But then the formula kicks in. If the client is 60 years old at the time of the claim, he will receive about 60 percent of the $72,000 per year, or $43,200. The remaining $28,800 of the eligible benefit for that year is forfeited. 

An 80-year-old making a similar claim would receive 80 percent of the $72,000, or about $57,000 for LTC services, with the other $14,000 forfeited. The formula is somewhat age-based. The older the client is at the time of the claim, the more favorable the actual benefit will be. It is more challenging to plan for the exact amount of dollars to be available for an LTC/chronic illness claim, but the rider is built in and does not require an additional premium.


Michael Smith is president of CPS Horizon Financial, a BGA in Milwaukee, and speaks on the topic of linked benefits and living benefits. Contact him at [email protected] .

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