The last few years have seen increased activity, then diminished activity, in the area of acceleration riders for life insurance contracts.
Over the past year, and especially over the last 6 months, product development in this area again has been noticeable and consistent. So has development of such vehicles for deferred annuities and single premium immediate annuities. This article focuses on the life offerings, but the annuity trend should not be overlooked.
By now, the basic features of these vehicles are known. (See box.) These are general rules; the specific ones vary a bit.
For example, the most common acceleration rider is a long term care rider. That may well be because the Internal Revenue Code provides a roadmap under which payment of benefits from such contracts can be received income tax-free as a pre-payment of the death benefit. What is perhaps unique here is that the Code grants tax-favored treatment to a stepped-up value. Other than life insurance, in which the IRC allows the death benefit to be received income tax-free, such favored treatment is unusual. Of course, in the acceleration rider, the IRC effectively puts limits on how fast the life death benefit can be paid, but it’s still a fruitful benefit.
For these acceleration vehicles, the IRC defines qualifying conditions which must be satisfied, and how they must be satisfied. Other portions of the Code are applicable, so when riders are attached to a life contract, they must, for tax purposes, effectively be treated as a separate contract.
Thus, in universal life applications, if the rider’s charges are paid out of policy value, taxable income may result. This is more likely if the UL is a modified endowment contract but could still happen if it is not.
What is the market rationale for such policies, and why do individuals favor these riders?
The primary demographic is the retiree or near retiree. Many retirees, for example, take monies that might ordinarily sit in bank certificates of deposit and buy single premium UL contracts with acceleration riders. There is typically a guarantee that the cash value will never be less than the premium. So, immediately the insured has an investment that would pay out a stepped-up value on either death or qualifying LTC illnesses or conditions.
At age 65, for example, the proceeds from a $50,000 CD might well buy a $125,000 life contract. If the person should never become chronically ill, then the death benefits will be payable to heirs. But if the insured does get sick, he (or she) will receive a significant stepped-up benefit.
The kicker, if you will, is that this type of contract guarantees a return to the owner greater than the premium the owner originally paid. Unlike a stand-alone LTC, a return is assured. There is no use-it-or-lose-it issue as exists with stand-alone LTC.
Another market consideration relates to the ongoing public concern about the solvency of Medicaid. This should increase demand for providing for LTC benefits through other means.
From an insurer perspective, there is benefit as well. Insureds who buy stand-alone LTC policies have a significant incentive to make sure they get to receive policy benefits when living, as the stand-alone policy doesn’t pay anything at death. This invites some selection against the issuing LTC insurer–something one would not expect to see in an integrated life and LTC acceleration product.
Another acceleration trend is the addition of critical illness riders to life insurance contracts. These riders pay a benefit upon the occurrence of a critical illness, such as cancer, stroke or heart attack. The benefit is generally a lump sum and either can be an acceleration of a base policy death benefit or a benefit payable in addition to base policy life insurance coverage.
The demographic center for these CI riders is the younger insured, one, say, between ages 30 and 65. This tendency reflects a couple of factors. First, the cost can be prohibitive at older ages, and second, one purpose of the benefit at younger ages is to provide for medical care options that might not otherwise be covered by health insurance.
Insurers also are investigating combination LTC and CI coverages that transition from one to the other as life needs change. These can be stand-alone or as riders to life plans.
All these plans represent a focus on coverages reflective of critical demographic needs, both today and in the near future.
Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. His e-mail address is firstname.lastname@example.org.
Insurers also are investigating combination LTC and CI coverages that transition from one to the other as life needs change
Acceleration From Life Insurance Checklist
?The insured must incur a qualifying medical or physical condition.
?The contract pays the death benefit, or a defined share of it, as long as the insured’s condition continues.
?The payment may be on a reimbursement basis, or a per diem basis unrelated to charges that the insured might incur.
Source: Cary Lakenbach, Actuarial Strategies, Inc., Bloomfield, Conn.