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In trying to attract new sales, many life insurers have added various new features to their life policies through the use of riders.

A prime example is the addition of long term care acceleration riders to life policies. These pay benefits in the event the insured needs long term care due to chronic illness or other event. (The benefits provided by riders can alternatively be structured as integral parts of the life contract, but care is required to assure compliance with Internal Revenue Code requirements for LTC insurance.)

Not only does such a policy-rider combination provide protection against the 2 main financial risks facing seniors, it does so at a lower cost than 2 stand-alone insurance policies (one life and one LTC policy).

Such lower cost does not arise as a result of actuarial insight, but rather because the insurer is ultimately paying out only one benefit, the life benefit, at either death or during chronic illness.

A number of insurance companies have been especially successful in marketing this concept and show no signs of letup. The marketing story addresses buyer objectives such as those in the accompanying box.

The basic design of such contracts is quite simple. If you become chronically ill, the company will pay 4% (or another percentage) of the death benefit for up to 25 months. Such a time frame encompasses a significant percentage of the duration that LTC benefits will be needed.

If the insured should die earlier, then a significant percentage of assets will pass on to heirs.

If the insured survives the entire period, then the “extended LTC rider” (if the contract has one) provides a continuation of LTC payouts either for another 25 months, or for lifetime.

Also, such contracts can address the needs of a surviving spouse or child, provided the contract has a rider that includes a residual death benefit. This provides that, even if the entire death benefit of the base policy has been paid out in LTC benefits, the residual death benefitsuch as 10% of the policy face amountwill be paid to the beneficiary.

Can this basic design structure potentially be expanded?

Yes. Here is how. There is an inherent conflict between the reduced cost and reduced benefit. Not all buyers want the reduced cost if it means drastically lessening the amount going to heirs. Often, producers position this sale as utilizing assets that the buyer indicates are a “swing asset” (to be used for the first application where needed).

Still, designs can be developed that reduce the death benefit by a stated percentage of the LTC payout. While higher in cost, this provides useful flexibility to the producer and client. By allowing the “Stated Percentage” to vary, say in 10% increments, the agent and buyer are in a position to choose what best fits the buyers needs.

What should be clear by now is that such a structure avoids the all-too-frequent situation in which a producer tries to fit the insureds needs into available yet rigid structures. Insurers offering such a design should have illustrative and descriptive tools that present the flexibility in a systematic, easy-to-understand presentation that explains but does not overwhelm.

The specific blend chosen would be based on the relative importance of death benefit protection, coverage of LTC expenses, estate protection and a minimal survivor benefit.

With such a flexible but manageable product in their portfolio, agents can sit down with clients and optimally 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 Edition, June 4, 2004. Copyright 2004 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.