Living Benefits Riders Get Fancy, But Could Use More Flexibility
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.
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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.