There are many strategies that can be used to help plan for and pay long-term care related expenses. In 2006 the Pension Protection Act opened the door for insurers to begin offering life insurance policies with riders that allow the death benefit to be accessed while alive to help pay expenses. As premium costs increase and fewer companies offer traditional long-term care insurance (LTCI) policies, these riders have become a popular alternative for people looking for a way to help pay expenses that could wipe out their financial security. (For more, see also: Choosing Long-Term Care Insurance: Which Is the Best?)
All life insurance riders pay a tax-free benefit which is an acceleration of the life insurance death benefit under Section 101(g) of the tax code. Unlike traditional LTCI, riders on life insurance policies have limitations that include no cost of living adjustment or tax deductions for premiums paid by individuals or employers. Monthly benefits, which have to be selected when applying for coverage, range from 1 – 5% of the policy death benefit, but cannot exceed the IRS per diem (daily benefit limit) which in 2015 is $330 a day or $9,900 a month.
However there are significant differences between Accelerated Death Benefit for Chronic Illness and a Long-Term Care Riders as well as the benefits offered on each insurer’s policy.
Accelerated Death Benefit for Chronic Illness
Policies offering an Accelerated Death Benefit for Chronic Illness rider do so through Section 101(g). Accelerated death benefit riders cannot be marketed as long-term care insurance. A physician does have to certify the chronic illness is non-recoverable and will likely last for the rest of an individual’s life. Temporary conditions would not qualify. Once the insured is eligible to make a claim the indemnity benefit is paid with no restrictions on how the funds are used and documentation of expenses is not required. These riders do not offer a residual death benefit.
Some policies do not require additional underwriting or charge for the rider until a claim is made. When a claim is submitted a lien is placed against the death benefit. However the actual benefit cannot be determined at the time of issue since the reduction of the death benefit is only calculated at the time of claim and based on several factors including age, sex, rating and current interest rates. Younger claimants may experience a greater discount. Interest may also be charged on the lien amount and there may be an administrative fee.
Discounts can be 30% or more of the policy death benefit leaving the insurer with significantly less risk than other riders of traditional LTCI. The cash value in the policy grows as if there were no lien, then at the death of the insured the lien amount is deducted from the death benefit. Other policies do have underwriting requirements as well as a monthly charge for the rider. The premium for these policies may be higher, but they offer the advantage of knowing what the benefit will be when the policy is issued. (For related reading, see: Do You Need Life Insurance After You Retire?)
Long-Term Care Riders
A qualified long-term care insurance rider attached to a life insurance policy satisfies Section 7702B of the tax code. The benefit amount is known at the time of policy issue and unlike 101(g), riders pay for both temporary and permanent benefits. To qualify a physician must certify the insured is unable to perform two out of six activities of daily living for a period of at least 90 days or suffers from severe cognitive impairment. These riders typically require underwriting, have separate charges that are deducted from the policy cash value and may offer a residual benefit in excess of the death benefit.
The main difference in 7702B riders is whether the benefit is indemnity or reimbursement. Indemnity riders pay the maximum benefit and require no documentation of expenses allowing for a wider range of use. Reimbursement riders only pay for actual qualifying expenses incurred. Documentation of expenses is required, receipts have to be submitted and some expenses may not be covered, such as home modifications or medical equipment.
Issues to Consider
Once you have decided on the kind of rider it’s also important to review the subtle differences in each insurer’s policy and rider. Some items to consider include:
- Is the elimination period in calendar or service days?
- Are benefit payments monthly or is a lump sum available?
- Does the policy offer lapse protection?
- What fees are waived when on claim?
- How often can the benefits be adjusted?
- Does the plan for care require a licensed care provider?
- Are alternative plans for care available?
- How often is recertification required?
- If there is a charge, and can the rider be eliminated after the policy has been issued?
- Can the policy be owned in an irrevocable trust and provide a benefit to the insured?
The Bottom Line
If you are concerned about how extended expenses for care could affect your retirement these policies offer a great alternative to traditional long-term care coverage. The key is understanding how the benefits work and selecting a policy that offers the best mix of benefits at the most competitive premium.