Beware of "Chronic Illness" Riders
Sometimes getting "something for nothing"
means getting "nothing for nothing"!
"Chronic illness" riders on life insurance are NOT the same as LTC insurance and are often misrepresented - and misunderstood - by the agents and "advisors" selling them.
As a specialist in extended care planning and LTC insurance with more than 30 years of experience, the "chronic illness" rider marketplace is really starting to make me angry! I just looked at a definition in a new policy, and it ONLY pays for help with physical "Activities of Daily Living" (ADLs); there is NO provision for cognitive impairments like Alzheimer's or dementia! An insurance company can get away with this because a "chronic illness" benefit is NOT subject to strict federal and state LTC insurance regulations.
As a specialist in extended care planning and LTC insurance with more than 30 years of experience, the "chronic illness" rider marketplace is really starting to make me angry! I just looked at a definition in a new policy, and it ONLY pays for help with physical "Activities of Daily Living" (ADLs); there is NO provision for cognitive impairments like Alzheimer's or dementia! An insurance company can get away with this because a "chronic illness" benefit is NOT subject to strict federal and state LTC insurance regulations.
Buying insurance to cover "long-term care" needs that excludes Alzheimer's and other "cognitive impairments" is like buying car insurance that will only cover accidents that don’t involve other vehicles!
Thankfully, that is not a common exclusion, but the fact that it was recently presented, sold, and bought as solution to covering future long-term care needs is truly frightening. The agent who inappropriately sold it even held the prestigious CFP® designation! "Chronic illness" riders or "living benefit" riders are exploding across the life insurance industry with most of them having significant limitations on the benefits that are actually payable.
BUYER BEWARE OF CHRONIC ILLNESS RIDERS ON LIFE INSURANCE!
More than half of all "combination" (or "hybrid" or "linked-benefit" or "asset based") life insurance policies sold include the most-problematic form of these "chronic illness" riders. If the "chronic illness" rider (or "living benefits" rider) is "FREE!" or built-in - with no separate, up-front charge for the rider's benefit - then it likely will not provide the benefits you may need and want - nor what the agent or "advisor" says it will pay out for care.
THE MOST COMMON PROBLEM WITH "FREE" CHRONIC ILLNESS RIDERS:
You cannot know what your "chronic illness" benefit will actually be since the "free" rider is based on a discounted (reduced) death benefit (or a "lien" against your death benefit) calculated at the time of claim. Your payout will be much less than the total death benefit, and when you buy a plan like this you cannot know or plan for exactly what your benefit will be in the future!
BUYER BEWARE OF CHRONIC ILLNESS RIDERS ON LIFE INSURANCE!
More than half of all "combination" (or "hybrid" or "linked-benefit" or "asset based") life insurance policies sold include the most-problematic form of these "chronic illness" riders. If the "chronic illness" rider (or "living benefits" rider) is "FREE!" or built-in - with no separate, up-front charge for the rider's benefit - then it likely will not provide the benefits you may need and want - nor what the agent or "advisor" says it will pay out for care.
THE MOST COMMON PROBLEM WITH "FREE" CHRONIC ILLNESS RIDERS:
You cannot know what your "chronic illness" benefit will actually be since the "free" rider is based on a discounted (reduced) death benefit (or a "lien" against your death benefit) calculated at the time of claim. Your payout will be much less than the total death benefit, and when you buy a plan like this you cannot know or plan for exactly what your benefit will be in the future!
It is NOT "free." Nothing ever is. This is potentially the most-expensive insurance benefit you may ever buy!
FOR EXAMPLE: You buy a $300,000 life insurance policy with a "free," built-in "chronic illness" benefit that appears to promise to accelerate the full death benefit if you have a "chronic illness." Most "chronic illness" rider definitions do look like "long-term care insurance" as they allow for accelerated benefit payments if you need help with two of six physical ADLs or supervision for a cognitive impairment, but they ultimately will pay much less than "real" LTC riders which are federally "tax-qualified."
HERE IS THE PROBLEM: At the time of the "chronic illness" claim, based on your age and the type of impairments you have, the company "discounts" or reduces the death benefit available to accelerate for the "chronic illness." You will not get what you think you are being promised!
If the "chronic illness" rider provides for a 2% per month acceleration you may think that means you receive $6,000/month for your care ($300,000 x 2%). NO! If the death benefit is "discounted" 50%, for example, then only $150,000 is available to accelerate and you get only $3,000/month for care - half of what is usually assumed. In most cases you also LOSE the balance of the death benefit if you accelerate for "chronic illness"!
In an extreme documented example, on a $300,000 death benefit, only $30,000 would be available for "chronic illness" acceleration with the loss of all of the rest of the death benefit! So the "free" rider actually cost $240,000! And if your need for care starts at a younger age with an expectation that you could continue to live a long time with the limitations, you may not get any "chronic illness" benefit at all!
Here’s a typical disclaimer on an illustration for one of these policies:
"The accelerated death benefit payment will be less than the amount of death benefit requested because it is reduced by an amount calculated based on evaluation of the insured’s future expected mortality at the time the benefit is exercised as well as an administrative fee when the benefits are elected."
Your long-term care plans and any insurance benefits to pay for extended care should be knowable and predictable. "Chronic illness" riders that are "free" are neither.
HERE IS THE PROBLEM: At the time of the "chronic illness" claim, based on your age and the type of impairments you have, the company "discounts" or reduces the death benefit available to accelerate for the "chronic illness." You will not get what you think you are being promised!
If the "chronic illness" rider provides for a 2% per month acceleration you may think that means you receive $6,000/month for your care ($300,000 x 2%). NO! If the death benefit is "discounted" 50%, for example, then only $150,000 is available to accelerate and you get only $3,000/month for care - half of what is usually assumed. In most cases you also LOSE the balance of the death benefit if you accelerate for "chronic illness"!
In an extreme documented example, on a $300,000 death benefit, only $30,000 would be available for "chronic illness" acceleration with the loss of all of the rest of the death benefit! So the "free" rider actually cost $240,000! And if your need for care starts at a younger age with an expectation that you could continue to live a long time with the limitations, you may not get any "chronic illness" benefit at all!
Here’s a typical disclaimer on an illustration for one of these policies:
"The accelerated death benefit payment will be less than the amount of death benefit requested because it is reduced by an amount calculated based on evaluation of the insured’s future expected mortality at the time the benefit is exercised as well as an administrative fee when the benefits are elected."
Your long-term care plans and any insurance benefits to pay for extended care should be knowable and predictable. "Chronic illness" riders that are "free" are neither.
YOUR AGENT LIKELY HAS NO CLUE EITHER!
Most agents or "advisors" selling these problematic "chronic illness" riders either do not really know how they work or are selling them because they do not have the proper state-certification to sell REAL, federal and state-regulated "tax qualified" LTC insurance coverage. It is technically illegal to sell a "chronic illness" benefit as "long-term care" insurance, but that is exactly how it is usually misleadingly presented.
If you are not working with someone who specializes in LTC insurance representing ALL of the different types of coverage and riders (including "chronic illness" riders), then you cannot receive the best advice regarding what type of policy to buy. [Click here to review the 5-Tips for Choosing a LTC Specialist]
Most agents or "advisors" selling these problematic "chronic illness" riders either do not really know how they work or are selling them because they do not have the proper state-certification to sell REAL, federal and state-regulated "tax qualified" LTC insurance coverage. It is technically illegal to sell a "chronic illness" benefit as "long-term care" insurance, but that is exactly how it is usually misleadingly presented.
If you are not working with someone who specializes in LTC insurance representing ALL of the different types of coverage and riders (including "chronic illness" riders), then you cannot receive the best advice regarding what type of policy to buy. [Click here to review the 5-Tips for Choosing a LTC Specialist]
The # 1 question to ask before buying a "chronic illness" rider for LTC needs:
"Are you state-certified to sell any/all types of LTC insurance products?"
If, "No," RUN AWAY!
Any agent who advises a client on long-term/extended care planning WITHOUT a LTC training certification - that is an agent who can ONLY sell life insurance with a "chronic illness" rider - CANNOT act in your best interest by even the lowest of standards.
If he answers, "Yes," ask to see a copy of the agent's current (within two years) LTC/Partnership CE training certificate. AND ask to see quotes for a "real" LTC policy or LTC rider. If you are not shown either, again, RUN AWAY!
If he answers, "Yes," ask to see a copy of the agent's current (within two years) LTC/Partnership CE training certificate. AND ask to see quotes for a "real" LTC policy or LTC rider. If you are not shown either, again, RUN AWAY!
WHEN A "CHRONIC ILLNESS RIDER MAY BE A GOOD IDEA:
- If you have a health issue that would make it impossible to get real LTC insurance, but you could still health-qualify for a life policy. The "free," built-in "chronic illness" riders are not separately underwritten for the long-term care "morbidity" ("disability") risks. This may be your only option for some type of "extended care" coverage.
- If the "chronic illness" benefit is not the main reason you are buying the coverage. If you need life insurance - the death benefit - to provide income for a surviving spouse or other "estate planning" needs and the policy happens to include a built-in "chronic illness" rider, so what? Remember, if you use the policy for a "chronic illness" you also use up the death benefit.
- If the "chronic illness" rider is separate, with a clear, contractually-defined benefit AND up-front premium charges with separate underwriting for the "disability" risk, then it likely WILL accelerate the full death benefit or a clearly-defined percentage of the death benefit. But these are a small minority (~10%) of the "chronic illness" options being sold.
- If you have a health issue that would make it impossible to get real LTC insurance, but you could still health-qualify for a life policy. The "free," built-in "chronic illness" riders are not separately underwritten for the long-term care "morbidity" ("disability") risks. This may be your only option for some type of "extended care" coverage.
- If the "chronic illness" benefit is not the main reason you are buying the coverage. If you need life insurance - the death benefit - to provide income for a surviving spouse or other "estate planning" needs and the policy happens to include a built-in "chronic illness" rider, so what? Remember, if you use the policy for a "chronic illness" you also use up the death benefit.
- If the "chronic illness" rider is separate, with a clear, contractually-defined benefit AND up-front premium charges with separate underwriting for the "disability" risk, then it likely WILL accelerate the full death benefit or a clearly-defined percentage of the death benefit. But these are a small minority (~10%) of the "chronic illness" options being sold.
Ultimately a "chronic illness" rider is not a plan for care, it is an afterthought.
- Kerry Peabody
IF YOU ARE PLANNING FOR LONG-TERM CARE, BUY REAL LTC INSURANCE!
If you need a plan to pay for long-term care, you are better off with a policy specifically designed to do that.
There is a place for life insurance policies with "chronic illness" riders. But it is NOT "long-term care" insurance; beware of "chronic illness" riders as they do not offer the same federal and state consumer protection features that LTC insurance does, and the benefits at claim time could well be only a fraction of what you thought you were buying.
If you need a plan to pay for long-term care, you are better off with a policy specifically designed to do that.
There is a place for life insurance policies with "chronic illness" riders. But it is NOT "long-term care" insurance; beware of "chronic illness" riders as they do not offer the same federal and state consumer protection features that LTC insurance does, and the benefits at claim time could well be only a fraction of what you thought you were buying.
UPDATED 11/28/2023
(c)2020-2023 William E. Comfort, Comfort Long Term Care
