LTCI riders for life insurance policies

By Ronald J. Pawlikowski


Although long-term care insurance has been around since the 1970s, LTCI riders for life insurance policies are relatively new. I’m not referring to Lincoln’s Money Guard product that was introduced in the late 1980s, because that always seemed to me to be an LTCI contract that paid a death claim if the LTCI went unused. In other words, the riders were part and parcel of the contract itself; people weren’t buying the base universal life plan without the riders.

On the other hand, the new LTCI riders are just that, a rider that can, at the applicant’s discretion, be attached to a life insurance policy. Although the riders vary from company to company, they all function in the same manner; that is, they will accelerate the death benefit when triggered. That point is vitally important. It is not a benefit in addition to the death benefit, but rather the acceleration of the death benefit to pay LTC expenses.

No policy will pay more than the death benefit. It may be paid upon death, or it may be paid while living (or some combination thereof), but the total amount paid will never exceed the death benefit.

A problem that I see with the rider is its potential to compromise the death benefit. If there is a need for life insurance, but there is none at death because it was all used for LTC expenses, that could present problems. The riders don’t provide an additional benefit, but rather, an optional benefit. So if they’re sold as an LTCI policy, with a death benefit if the LTC benefits are not needed, that’s fine. But if the policy is sold because a permanent need for a death benefit has been identified and agreed to, then I don’t believe the rider is appropriate.

The riders that I’ve researched are actually quite good. They can create a pool of money, ranging from 10 percent to 100 percent of the policy’s face amount, that could be available for LTC expenses. How that pool of money is paid out varies among the policies, as does the elimination period (from zero to 100 days). Some are paid via the indemnity method, while others use the reimbursement method. All of them generate benefits that are generally income tax free, but not all of them are deductible.

They do not provide as much flexibility as an individual LTCI contract does, and there could be some tax issues with third-party ownership, but the riders I reviewed (Guardian, MassMutual, AXA, John Hancock, Nationwide and Pacific Life) I found to be sound.

So if giving up some flexibility in exchange for a death benefit should the LTCI not be needed appeals to some of your clients, you should educate yourself on the pros and cons of LTC riders. However, I urge caution in attaching the rider to a policy where a permanent life insurance need has been identified, because these riders have the potential of using the entire policy for LTC expenses, leaving no (or at best, a very small) death benefit.