All chronic illness riders aren't created equalArticle added by Rick Geiler on March 25, 2013
Rick Geiler

Rick Geiler

Scottsdale, AZ

Joined: March 07, 2012

All advisors would be wise to keep life products that offer estate planning and illness/LTC benefits in their cache. With a little self-education, agents can make sure they are offering advice about where the real value can be found in CI rider products.

With the population aging, health care costs rising and long-term care (LTC) options decreasing, chronic illness (CI) benefits on life insurance policies are becoming more important and more popular. They can provide an acceleration of death benefits to help pay the costs related to illness, injury and aging. In many cases, this death benefit acceleration is considered to be tax-free by professionals.

CI riders should not be confused with LTC riders, which are more expensive and create a second pool of funds for long-term care expenses. For the purpose of this discussion, we will focus on the common CI riders that are included as embedded features on some policies.

Specifics of CI riders vary widely from product to product. Generally speaking, lump sum style products tend to offer richer benefits than continuous/multiple pay products and are more suited to planning with funds set aside for health-related expenses and wealth transfer. Although there are some designs that effectively transition qualified monies for use in CI-linked products, non-qualified funds usually work best.

When evaluating a CI benefit and the value it will provide to a policyholder, many things need to be considered:

The process for accessing the benefit — Many riders use the two of six ADL trigger, but read the fine print: Does the condition need to be permanent? Do other conditions need to be present? Does the benefit need to be reapplied for after a period of time?

What the rider will pay for — The simplest (and richest) design pays the insured in cash to spend on whatever they deem necessary. The amounts available will be clearly spelled out in policies and are usually capped by the designer’s interpretation of maximum "indemnity" benefits allowable by the IRS. Other benefit designs reimburse for billed services or nursing home expenses subjec to limits. These are cheaper for the carriers to price but are often cumbersome to manage and understand.

How the accelerated payments affect the remaining death benefit — On some riders, benefits paid reduce the death benefit dollar for dollar; others have complicated formulas. Some CI benefits are lump-sum, one-time payments with triggers such as permanent nursing home confinement. Oftentimes, these are little more than terminal illness accelerations at a reduced amount.

All advisors would be wise to keep life products that offer estate planning and illness/LTC benefits in their cache. With a little self-education, agents can make sure they are offering advice about where the real value can be found in CI rider products.
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