"7 out of 10 People age 65 or older will require some form of long term care," according to LongTermCare.gov.
What are LTC and Chronic Illness Riders?
Life insurance policies can provide more than just a death benefit. They can also offer living benefits that can help you pay for expenses related to long term care (LTC) or chronic illness. LTC and chronic illness riders are optional features that you can add to your life insurance policy for an additional cost or a reduced benefit. They allow you to access a portion of your death benefit in advance if you become chronically ill or need long term care services. This can help you cover the costs of care and protect your assets and income from being depleted.
What is the Difference Between LTC and Chronic Illness Riders?
LTC and chronic illness riders are similar in many ways, but they also have some key differences. LTC riders are designed to meet the standards of the Health Insurance Portability and Accountability Act (HIPAA), which means they offer tax advantages and consumer protections. To qualify for an LTC rider benefit, you must be certified by a licensed health care practitioner as being unable to perform at least two of the six activities of daily living (ADLs) or having a severe cognitive impairment. LTC riders typically pay benefits on a reimbursement basis, which means you have to submit receipts for your actual expenses and get reimbursed up to a monthly or daily limit. LTC riders may also include features such as care coordination, third-party notification, extension of benefits, and reinstatement.
Chronic illness riders are not subject to the same HIPAA standards as LTC riders, which means they may have different tax implications and less consumer protections. To qualify for a chronic illness rider benefit, you must be diagnosed with a chronic illness that is expected to last for the rest of your life and that limits your ability to perform ADLs or requires substantial supervision. Chronic illness riders typically pay benefits on an indemnity basis, which means you receive a lump sum or a percentage of your death benefit without having to submit receipts or prove your expenses. Chronic illness riders may use different methods to calculate the benefit amount and the impact on the death benefit, such as the discount method or the lien method.
Why Should You Consider LTC and Chronic Illness Riders for Your Life Insurance Policy?
LTC and chronic illness riders can provide several benefits for you and your family. Here are some reasons why you should consider adding these riders to your life insurance policy:
They can help you pay for the rising costs of long term care and chronic illness, which can range from thousands to tens of thousands of dollars per month, depending on the type and level of care you need.
They can help you preserve your assets and income for your retirement, your spouse, your children, or your other beneficiaries, instead of spending them down to qualify for Medicaid or other public assistance programs.
They can give you more flexibility and choice in how and where you receive care, whether it is at home, in an assisted living facility, in a nursing home, or in another setting.
They can provide peace of mind and reduce the emotional and financial stress on you and your loved ones, knowing that you have a plan in place to cover your care needs.
They can enhance the value and utility of your life insurance policy, by allowing you to use it for both living and death benefits.
Why Consider Using One Over the Other?
While both LTC and chronic illness riders can offer valuable living benefits, they may not suit everyone's needs and preferences. Here are some factors to consider when choosing between them:
Rule of Thumb - Long Term Care Riders pay all chronic illness claims, but Chronic Illness Riders do not pay all long term care claims. This means that LTC riders may cover more scenarios and situations than chronic illness riders, but they may also cost more.
LTC Riders
Greater benefit pool desired - LTC riders may provide a larger benefit pool than chronic illness riders, depending on the policy face amount and the benefit percentage. For example, if you have a $500,000 policy with a 2% LTC rider, you can access up to $10,000 per month for your care expenses, whereas if you have a 90% chronic illness rider, you can access up to $450,000 in total.
Guaranteed ability to use for temporary needs - LTC riders may allow you to use the benefit for temporary or intermittent care needs, such as recovering from an injury or surgery, as long as you meet the eligibility criteria. Chronic illness riders may only pay benefits for permanent and irreversible conditions.
Potentially less stringent underwriting for the rider for clients who can’t qualify for stand -alone LTC insurance - LTC riders may have simpler and shorter underwriting processes than stand-alone LTC insurance, which may make them more accessible for clients who have health issues or are older. Chronic illness riders may have similar or more stringent underwriting requirements than LTC riders, depending on the carrier and the product.
Includes additional consumer protections – unintentional lapse protections, policy reinstatement provisions, and extension of benefits. LTC riders may offer more consumer protections than chronic illness riders, such as preventing the policy from lapsing due to non-payment of premiums while on claim, allowing the policy to be reinstated within a certain period if it lapses due to cognitive impairment, and extending the benefits beyond the policy expiration date if the claim starts before the policy ends.
Chronic Illness Riders
An option to consider if cost is an issue - Chronic illness riders may be more affordable than LTC riders, depending on the policy design and the benefit calculation method. For example, if you have a $500,000 policy with a 90% chronic illness rider that uses the discount method, you may pay a lower premium than if you have a 2% LTC rider, but you may also receive a lower benefit amount.
An option for clients not concerned with needing coverage for temporary claims - Chronic illness riders may be suitable for clients who are only interested in covering permanent and catastrophic care needs, such as terminal illness, stroke, or Alzheimer's disease. LTC riders may be more comprehensive and cover more types of care needs, but they may also be more expensive.
An alternative option for clients who can’t qualify for LTC insurance or LTC rider - Chronic illness riders may be available for clients who are unable to qualify for LTC insurance or LTC rider due to their health conditions or age, depending on the carrier and the product. However, chronic illness riders may also have stricter eligibility criteria and benefit triggers than LTC riders, so clients should compare the options carefully.
FAQs about LTC and Chronic Illness Riders
1. How do I add LTC and chronic illness riders to my life insurance policy?
To add LTC and chronic illness riders to your life insurance policy, you must do so when you apply for the policy and choose a product that offers these riders, as not all life insurance products have them. You may also have to answer some additional health questions, undergo a medical exam, or provide evidence of insurability to qualify for these riders. The cost and availability of these riders may vary depending on your age, health, policy type, and carrier. You should compare different options and consult with a licensed agent before adding these riders to your policy.
2. What are the tax implications of LTC and chronic illness riders?
The tax treatment of LTC and chronic illness riders may vary depending on the type of rider, the type of policy, and the IRS guidelines. Generally speaking, LTC riders are subject to HIPAA standards, which means that the premiums may be deductible as medical expenses, and the benefits may be received tax-free, up to certain limits. Chronic illness riders are not subject to HIPAA standards, which means that the premiums are not deductible, and the benefits may be taxable, depending on the benefit calculation method and the cost basis of the policy. You should consult with a tax professional before adding or using these riders.
3. How do I qualify for LTC and chronic illness rider benefits?
To qualify for LTC and chronic illness rider benefits, you must meet the eligibility criteria specified in your policy. Typically, this involves being certified by a licensed health care practitioner as chronically ill, which means that you are unable to perform at least two out of six activities of daily living (ADLs) without substantial assistance, or that you require substantial supervision due to a severe cognitive impairment. Additionally, LTC riders may require that your condition is expected to last for at least 90 days, while chronic illness riders may require that your condition is expected to last for the rest of your life.
4. How do I access LTC and chronic illness rider benefits?
To access LTC and chronic illness rider benefits, you must submit a claim to your insurance carrier, along with the required documentation, such as a copy of your policy, a proof of loss form, a physician's statement, and any receipts or invoices for your care expenses. Depending on the type of rider and the benefit payment method, you may receive reimbursement for your actual expenses, up to the benefit limit, or you may receive a lump sum or a percentage of your death benefit, regardless of your expenses. You should review your policy and contact your carrier for more details on how to file a claim and receive your benefits.
5. How do LTC and chronic illness rider benefits affect my death benefit and cash value?
LTC and chronic illness rider benefits are usually paid by accelerating your death benefit, which means that they reduce the amount of money that your beneficiaries will receive when you die. The amount and the timing of the reduction may depend on the type of rider and the benefit calculation method. For example, some riders may use the discount method, which reduces your death benefit by more than the amount of the benefit you receive, to account for the time value of money and the lost interest. Some riders may use the lien method, which reduces your death benefit by the same amount of the benefit you receive, plus any accrued interest. Some riders may use the dollar-for-dollar method, which reduces your death benefit by the same amount of the benefit you receive, without any interest. Additionally, some riders may also reduce your cash value in proportion to your death benefit, while some riders may not affect your cash value at all. You should check your policy and consult with your carrier to understand how your rider benefits will impact your death benefit and cash value.
6. Can I cancel or remove LTC and chronic illness riders from my life insurance policy?
Whether you can cancel or remove LTC and chronic illness riders from your life insurance policy may depend on the type of rider, the type of policy, and the carrier's rules. Some riders may be optional and flexible, which means that you can add or remove them at any time, subject to certain conditions and fees. Some riders may be mandatory and fixed, which means that they are part of your policy and cannot be changed or removed. Some riders may also have a return of premium option, which allows you to receive a partial or full refund of your rider premiums if you cancel the rider or surrender the policy, subject to certain terms and limitations. You should review your policy and contact your carrier to find out if you can cancel or remove your riders and what the consequences and costs will be.
A SPECIAL BONUS, here's an insider look at our LifeInsuranceReview.com (LIR) Internal Comparison Guide of Top Life Insurance Carriers who offer LTC and Chronic Illness Riders, which we tracked and upon which we based our comparative review analysis.
