One of the most rapidly growing trends in the insurance marketplace is the development of life insurance with living benefits. More carriers are adding accelerated benefit riders. The most common is a chronic care rider, similar to a long-term care (LTC) rider. Some carriers have not only a chronic/LTC rider, but also a critical illness rider.
With all the different variations, advisors are finding it challenging to understand the plans and terminology. Unfortunately, the industry has not settled on an agreed-upon terminology and that adds to the confusion. Here is a guide to this growing product line.
Hybrid Plans: Life Insurance with a Chronic or LTC Rider
Most carriers are calling these riders accelerated benefit riders. To most veteran advisors this means a terminal illness rider. This provides access to the death benefit if the insured is deemed terminally ill, with a life expectancy of 24 months or less. To me, the term “accelerated benefit riders” is home office terminology that does not work with the general public. I prefer the term “living benefits,” and several carriers are using similar phrasing. The term “hybrid plans” is also acceptable. This is often classified as permanent insurance built on a universal or whole life chassis, with flexible premiums that can be ongoing or short paid.
Still, advisors are unsure who has what riders and plan designs. For example, a few carriers now provide a chronic care rider built into their life insurance coverage. There is no additional charge for the rider. However, nothing good is free. Where charges begin is at claim time should the client need to make a chronic care claim. I do not suggest this is a bad rider, but it should be understood by both advisor and client.
At claim time, built-in riders will allow a percentage of the death benefit to be accessible for chronic care needs such as home health care, assisted living or nursing home care. Every plan design I’ve seen factors in a formula to determine how much is actually available. For example, one carrier allows 24 percent of the face value to be accessed each year. If the client has a $300,000 life policy, 24 percent equates to $72,000 for that year. But that does not mean the entire $72,000 is available.
From there, a formula is calculated to determine actual payout. In simplest terms, if the client is 60 years old, approximately 60 percent of the $72,000 is available, or $43,200. The other $28,800 is forfeited. The formula changes as the client gets older. If the client is 74 at claim time, about 74 percent or $53,280 is available, with $18,720 forfeited. The challenging aspect for advisors is reaching a solid idea for planning for LTC needs. Because the actual payout is not determined until there is a claim, it’s hard to pinpoint actual dollars to be received. Still, having something available for a claim is better than nothing.
If you would like to know how much is available for a chronic/LTC claim, perhaps it is better to obtain a hybrid plan where the rider is optional and has a planned premium. The amount available at claim is known, and in most cases the entire death benefit is available for either death or a claim for chronic/LTC. For example, a $300,000 face value policy with a 2 percent chronic/LTC rider would pay out $6,000 per month for 50 months, or until the entire $300,000 face value is used. Any unused death benefit for a chronic/LTC claim is paid as life insurance to the beneficiary.
For underwriting, it is possible for the client to be approved for life insurance but rated or declined for the rider. Underwriting varies from company to company, so it’s best to do your homework and perhaps prequalify clients who have health issues.
Linked Benefits: Life Insurance or Fixed Annuities with an LTC Pool of Money
Linked benefits have been around for a long time but have grown dramatically over the past several years. Although there are only a handful of companies in this marketplace, they are top-rated companies with household names.
Typically, these are single-premium products with client sweet spots being those between the ages of 55 and 70. These clients have a lump sum to invest, ideally $100,000 or more, although decent planning can be done with as little as $70,000. Obviously, the higher the deposit the more benefit is available. Clients who have certificates of deposit, larger savings or money markets, stock redemptions or even 1035 exchanges are candidates for these products. Clients without these types of assets may be better suited for a hybrid plan.
With life-based linked benefits, the deposit creates a death benefit and a pool of money that can be tapped, should an LTC claim be necessary. Plan design can be very flexible. If the client wants more death benefit than long-term care, that can be designed into the plan. The opposite can be true, designing higher long-term care dollars and lower life face into the plan.
For example, a 60-year-old woman deposits $100,000 into a life-based linked benefit. She would get $225,000 of life insurance with a $9,350 monthly LTC benefit should she go on claim. When the life insurance is paid out in claim in 24 months, she would still have an additional $448,000 in her LTC pool of money, paid out at $9,350 for 48 more months. Her $100,000 deposit gets her $225,000 of life insurance, with $673,000 available for LTC needs. And to top that off, many life-based linked benefits have a return-of-premium rider. Should she change her mind, she can get her $100,000 back with no surrender charges.
If there is a qualifying claim, the money received comes from the death benefit first (account value for annuity based) and, when that is exhausted, an additional pool of money for LTC needs. Any death benefit or account value not used for claims is paid to beneficiaries. If all death benefit is used and the client has dipped into the pool of LTC money and then passes, there is a residual death benefit that is typically 10 percent of the original face amount that is paid to the beneficiaries. Annuity-based linked benefits typically do not have a residual death benefit.
Annuity-based linked benefits will also provide a pool of money available for LTC needs that may provide double, triple or lifetime benefits over the original deposit. There usually are surrender charges and when the client passes, there normally will be no residual benefit and taxes may have to be paid. Still, these are fantastic options for those who already hold annuities that do not have LTC riders. You can exchange the plan under Section 1035 into linked benefits, and any withdrawals taken for LTC expenses are tax free, even avoiding gain in the old contract.
Living Benefits: Life with Critical Illness and Chronic/LTC Built In
The newest version of life insurance with living benefits adds a critical illness rider. This rider provides access to the death benefit should the insured suffer a critical illness such as a heart attack, stroke, cancer, multiple sclerosis, Parkinson’s disease, renal failure or any one of up to 16 different illnesses.
Suppose you suffer a heart attack at age 44. You’re going to survive, but you’ll have a rough recovery period. The life insurance company will obtain your medical records to determine the severity of the attack. If it is considered a moderate heart attack, they might offer you 35 percent to 40 percent of the death benefit. That could be $100,000 of a $250,000 policy. If the heart attack is considered severe, 50 to 70 percent might be available.
Take, for example, an insured who is stricken with breast cancer and needs chemotherapy, or another who is diagnosed with Parkinson’s disease, which, over time, will diminish her ability to work. How helpful would it be to those people if they could tap into the death benefits of their life insurance policies to ease their financial burdens while they are alive?
How much of the death benefit can be accessed by the insured? There is no easy answer to this question. It depends upon the severity of the triggering event and a formula the carrier calculates, which takes into account past and future premiums, life expectancy of the insured and the type of coverage held.
If it is considered a moderate impairment, the carrier might offer 35 percent to 40 percent of the death benefit. That could be $100,000 of a $250,000 policy. If it is considered severe, 50 to 70 percent might be available. Life expectancy is the key. The shorter the life expectancy, the more dollars available.
There are a couple of different plan designs if the client accepts the payment. Some carriers will terminate the policy if the client accepts the payment, while others will allow the death benefit to continue, but at a reduced amount.
This could include a remaining death benefit that is lower than the original, minus the living benefit payment. The key point? In either design, the policy owner has the final say. If he does not accept the living benefit payment, the policy continues as normal. If he chooses to accept payment, he could terminate the remaining coverage or keep a reduced amount.
Living benefits can be found in both term and permanent insurance. Many consumers find living benefits to be highly desirable. They provide an answer to the question most of them have: “What’s in it for me?” Most people can relate to having a heart attack, cancer or other critical illness, or they have a family member or friend who has suffered from a critical illness or needed LTC services.