Swiss army knives: not just for camping anymore

By Adam Stohlman

Stohlman Financial Services, LLC


In recent years, there has been a trend in the life insurance arena toward the creation of "combination policies" -- for instance, those that combine life insurance with disability coverage under one contract. At first glance, this may not seem like the best idea. After all, life insurance and disability insurance are designed to do two totally different things. How can both exposures possibly be adequately addressed in one contract? Moreover, as the death benefit is normally reduced or could even be exhausted by the amount of any disability claim paid, the life insurance need may end up not being addressed at all. However, particularly considering the current economic times we find ourselves in, a second glance may prove that such policies are not necessarily the worst idea, either. For individuals or families that cannot afford to address all their needs at once -- or even more than one at once, though they have exposures on several key fronts, a combination policy may serve a very useful purpose, temporarily, or, if that is all the prospect can handle, permanently. Again we should be reminded that some coverage is always better than none. Like it or not, that venerable old saw is still undeniably valid.

Much more recently, some forward-looking carriers have developed or are developing combination policies that do much more than include life insurance and disability insurance protection in one contract. Indeed, these new policies aim to do much more. Some, like AGLA's Quality of Life policy, combine life insurance, disability, illness or chronic condition, and long term care coverage, all in one contract. Further, some of these policies may include other twists to appeal to certain kinds of consumers, prospects in different stages of life, or groups of potential insureds with different kinds of needs. The Quality of Life contract, for example, has four different versions of its four-coverages-in-one policy, with each version designed specifically to serve four different kinds of potential policyholder groups in their own unique areas of need.

So, let's take a look at these newer, more sophisticated types of combination plans and consider more closely this "swiss army knife" approach to covering key personal insurance exposures.

As we've already discussed, all of these plans generally combine at least life insurance and disability coverage in one contract. The disability component is commonly limited to either a two-year or five-year option. Elimination periods are often not optional, usually 90 days on a two year plan, and as much as 180 days on a five-year plan. Issue ages are normally between 21 and 55, and sometimes as high as 60 years of age. There is typically a minimum monthly benefit amount of around $500. The maximum monthly benefit is higher on the two-year option and lower on the five-year, topping out around $5,000 maximum on the two year plan, but it is also subject, in most cases, to a "lesser of" clause. This means the disability component of the policy will pay the lesser of the maximum monthly benefit amount or "X" percentage of the life insurance face amount, or alternatively, "X" dollar amount per $1,000 of life insurance purchased, or, finally, a percentage of gross monthly income.

Again, whichever of these three measures is lowest is the maximum monthly benefit the disability coverage will pay. Of course, the monthly DI benefit is also reduced by any other sources of disability income, including other personal DI coverage, employer-provided DI, federal or state DI benefits, union benefits, etc. Normally, premium waiver is also included. Total maximum benefit is limited to a certain percentage of the life insurance face amount, or the total specified amount of the contract. Some carriers may even include the DI on term life policies, which is remarkable, though AGLA is the only company I know of that does so presently.

As mentioned earlier, another tool in these new policies is the illness or chronic condition coverage. This component of the contract is designed to pay in the event the policyholder has a heart attack, stroke, cancer, loss of sight, speech or hearing, or even a major organ transplant. Number and types of illness or condition will vary. This coverage usually pays a sum, to help the insured pay their major medical deductibles, pay the costs of expensive treatments or other care, aid in covering expenses that may be excluded from their major medical coverage, or even pay their monthly mortgage payments, etc. The sum is paid to the insured to cover whatever he or she may need as a result of being stricken with a chronic illness or condition. The maximum benefit amounts can range anywhere from $10,000 up to as much as $500,000, and can be limited in time to something like 10, 15 or 20 year coverage periods. Or, the insured can choose to have this protection "for life," which is usually to age 65 or even 70. Benefit extension riders can multiply the coverage to more than one occurrence or chronic illness or condition, return of premium riders may be added, and family coverage or even prescription drug savings may also be available for additional premiums with this coverage. Needless to say, the illness or chronic condition coverage can dovetail well with major medical, disability and long term care coverages, making it a very desirable component of these newer combination policies.

The latest tool being offered is the long term care component. As in a stand-alone or dedicated long term care plan, the monthly benefit amount is chosen by the insured at time of application. The minimum monthly benefit amount that must be chosen is generally around $1,000, while the maximum can go as high as $8,000, or even more. Payout periods are limited, and normally range from two years to five years. Considering that the average stay in a nursing home is under three years, a three or five-year option would cover that average period of time. Further, an extension of benefits rider may be added for additional premium, extending the maximum benefit period for another two, three or four years. The benefit is paid directly to the insured once claim is made based upon the inability to perform a given number of ADL's (two to three out of six or seven, as in traditional LTC plans) as specified in the policy. The insured may spend the benefit on care in any form -- nursing home, assisted living, even home health care. There is no restriction. Both payment direct to the insured and no qualifications on the type of care chosen give maximum control over care to the policyholder.

Surprisingly, intensive actuarial analysis and strategic policy design allows these swiss army knife policies to include the illness and long term care tools we've mentioned in total policy premiums for no additional charge, excepting when the insured chooses terms and options that go beyond the basic ones spelled out in the policy. Disability, however, is extra. Even more surprisingly, these contracts are usually quite affordable, competitive with many "life only" insurance contracts, and extremely competitive compared to having separate life, disability, illness and long term care plans. For this reason, they are likely to be the choice of many who cannot afford having several different dedicated plans -- or even many who simply do not wish to. Obviously, being limited by the specified amount of the policy is a critical consideration, as is the fact that if you utilize the policy for one type of covered loss, it is either diminished or exhausted, and so limited or unavailable to cover any other type of loss. This must be made crystal clear to the insured before the application is written.

As to the components themselves, is the coverage they provide adequate for the potential exposures they are designed to address? Yes and no. Coverage is specific, but also not necessarily narrow, and benefit amounts are generally very comparable to stand-alone plans. At the same time, some coverage limitations, and especially benefit period and maximum benefit limitations, make it difficult for such plans to provide all the same coverage and benefits as separate plans do. Still, these plans may make sense for many prospects -- especially those with limited budgets -- and undoubtedly will make sense to many prospects. One thing is for sure, no matter what you may think of these new, swiss army knives of personal insurance, they are far from "here today, gone tomorrow" gadgets. These types of plans will increasingly be offered, evolve to do more and more things better and better, and be sought after by more and more consumers. So, the question for today's adviser is, when will you begin packing these multi-purpose policies in your sales gear?

Copyright 2009 by Adam Stohlman. All rights reserved.

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