Living Benefits Riders Get Fancy, But Could Use More Flexibility

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In trying to attract new life insurance sales, many companies have added various new features through the use of riders. The development in this area is not over yet.

For example, the great interest in long term care made acceleration riders–whose benefit is triggered by chronic illness–a very popular rider offering in life policies. Not only did such a policy-rider combination provide protection against the two main financial risks facing seniors, it did so at a lower cost than two stand-alone insurance policies.

The exuberance over this coverage resulted in the development of extended long term care riders. Used in combination with the regular acceleration riders, these riders provide maximum payouts that are two or three times the amount of the base policy death benefit.

After the initial excitement over these riders tempered, insurance experts started realizing that use of such features could jeopardize the original purpose of the life insurance policy–providing for the beneficiary.

True, most of the riders reimbursed for actual expenses incurred by the insured, and so met a client need. Nonetheless, good financial planning recognized that the surviving spouse or child would still have needs that must be met.

Such thinking gave rise to the residual death benefit rider. This provides that a residual death benefit would be paid to the beneficiary, even if the whole base policy death benefit had been paid out in long term care benefits. This residual death benefit might equal 10% of the policy face amount or potentially some higher percentage.

Many acceleration riders have been attached to universal life type products, where declared interest crediting and mortality deductions allow the account value to grow with time.

Once the policy reaches the tax law corridor, the policy death benefit also increases. In many acceleration riders, this extra death benefit can be used to provide for the higher long term care costs associated with inflation.

Another approach toward providing for the beneficiary is to limit the long term care benefits to the original policy face amount (or some multiple thereof), with any excess death benefit payable only upon death.

There are some acceleration riders that explicitly limit the amount that can be accelerated to 50% of the policy death benefit, with the remainder payable only upon death. Under this approach, when the long term care claims begin, the death benefit starts reducing dollar for dollar.

Alternatively, the client can purchase two insurance policies, one with an acceleration rider and one without. This assures that, at a minimum, the beneficiary will receive the death benefits of the policy without the rider.

Another option could be available, too, if manufacturers were to create an acceleration rider that reduces the death benefit by one dollar for every two that the rider pays out in long term care benefits.

While all of the above are attempts to use riders to broaden the scope of life insurance to provide some long term care coverage as well, the various approaches make it so agents must try to fit the insureds needs into available structures that have a certain rigidity.

What the industry needs to create is a product that can combine life insurance, long term care insurance through acceleration of the life insurance, and also straight long term care insurance.

It should be noted that these considerations lend themselves also to riders that cover other benefits, notably critical illness, and in fact such riders can transition from covering critical illness during a policyholders working lifetime to providing long term care coverage during retirement.

The specific mix would be based on the need for the four types of protection shown in the chart.

Such plans would need to include consideration for the fact that the clients needs will likely change over time, and also address the costs associated with providing such protection.

In my view, a universal life account value mechanism is a good candidate upon which to build such a plan. It can allow for mortality, long term care acceleration, and straight long term care monthly deductions.

With such product in their portfolio, agents would have more flexibility. They can sit down with clients and tailor the product to each clients precise financial planning needs.

, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. E-mail him at caryl@actstrat.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.