Understanding the Differences

According to Fidelity Benefits Consulting, the average 65-year-old couple will need approximately $300,000 to cover medical expenses through retirement. This figure (which has risen by $40,000 since 2016) does not include any long-term care costs the couple may incur. Accordingly, individuals should have a plan in place to protect their family and their assets in the event of a long-term care need.

In order to protect against the effects of a potential long-term care need, many individuals choose to purchase a life insurance policy with an accelerated death benefit rider. These benefits riders are generally provided at an additional cost. There are two types of accelerated death benefit riders – long-term care (LTC) and chronic illness (CI). These riders allow an insured to access the policy’s death benefit to pay for LTC or CI expenses. If the insured does not exhaust the death benefit during life, the balance is paid to the beneficiaries upon the insured’s death. Any portion of the death benefit paid to the beneficiaries is tax-free.

Before purchasing a life insurance policy with an accelerated death benefit rider, an individual must understand the similarities and differences between an LTC rider and a CI rider. Both types of rider allow an insured to file a claim when he or she cannot complete two or more activities of daily living (ADLs) or when he or she suffers from severe cognitive impairment. ADLs include eating, bathing, dressing, toileting, walking, and continence.

With an LTC rider, the inability to complete two or more ADLs or the cognitive impairment must be expected to last for at least 90 days. With a CI rider, most carriers require the condition to be permanent. In order to prove permanence, a physician must determine that the insured’s condition is “likely to last the rest of the insured’s life.” However, some carriers are doing away with the permanency requirement and allowing insureds to qualify for benefits when their condition is temporary (at least 90 days).

An LTC rider can pay benefits on an indemnity basis or reimbursement basis. A CI rider will only pay benefits on an indemnity basis. Benefits paid on an indemnity basis can be used to cover monthly expenses outside of qualifying costs, such as household bills and hired help. Benefits paid on a reimbursement basis can only be used to cover approved expenses. It is important to note that benefits received from a CI rider may be capped to ensure that a portion of the death benefit will be paid to beneficiaries upon the insured’s death.

Policy protection is vital when choosing between an LTC or CI rider. LTC riders are required to have consumer protection provisions. These provisions can help protect a policy owner from an unintentional lapse caused by a missed payment. This can ensure that the policy owner does not have to go through a difficult reinstatement process (underwriting) if a payment is missed. CI riders are not required to have consumer protection provisions. However, these protections may be available, depending on the product.

Before choosing between an LTC rider and a CI rider, an individual should meet with a tax advisor to discuss the potential tax consequences.

A life insurance policy with an accelerated death benefit rider can help individuals protect their family and their assets from the potential future costs of long-term care. Stifel’s Insurance & Annuities Solution team is ready to help you determine whether a life insurance policy with an accelerated death benefit rider is right for you.