The huge hole in chronic and critical care riders
By Jeff Reed
Kestler Financial Group
Contracts are a funny thing. The presence of one word can completely change the meaning of a section, or even the contract in its entirety. Given that insurance policies are, at their core, simply contracts between the insurance company and the policy owner, the presence of one word can have a dramatic impact on the provided coverage. Case in point: chronic and critical care riders. They are quite different from a true long-term care product, and that difference can be devastating for the insured.
In the past, I've talked about the Pitta case, and made reference to a potential hole in these contracts. Quite simply, we can now remove the word "potential," as the hole is quite real. Further, that hole is based on the presence of one word in the rider language. The word is "permanently," and the unfortunate truth is that most policy owners (and agents) have no idea how exposed they truly are by this one word.
If you recall the facts of the Pitta case, the long-term care event was finite in nature. The individual in question was injured in a car accident, and the need for care was based on her recovery from her injuries. By its very nature, this was a temporary situation.
By now, most of you see the problem. If Mr. Pitta's mother was an insured expecting coverage for this event under the chronic and critical illness accelerated death benefit provisions of most policies, she was in for a rude awakening. Based on the temporary nature of the need for care, most chronic and critical care riders would pay exactly zero dollars.
Further, even if we throw that aside and assume she would be eligible for coverage, there is the issue of how much she would have been able to accelerate. A cursory read of the glossy propaganda that accompanies most sales would talk about a percentage of the face amount. Some are as high as 25 percent.
The reality, however, is much different. It turns out that the majority of these riders have a mortality component associated with the benefit calculation. While the mechanism varies, the bottom line is that the max percentage is only part of the equation, and a discount factor based on mortality is also applied. The result is that the actual percentage of the face amount an insured can access via a claim can be reduced by as much as 50 percent. This means the maximum a policy owner can access may be as low as 12.5 percent. While this is still better than nothing, it is a far cry from the expectation. If this is not discovered until claim time, make sure your E&O is paid up and your lawyer is on speed dial.
So, how to deal with all of this? Is my point that all of the chronic and critical care riders should be avoided? Absolutely not. They serve a purpose in a sound risk management strategy. However, they are far from a complete solution, and the purchaser needs to understand both that there are events that will be excluded, and there is significant variability in the calculation of benefits. If the prospective buyer is uncomfortable with the large gaps in coverage, it's time to think about a more robust solution. There are options out there that would have actually paid a claim on this one.