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Life Health > Health Insurance > Life Insurance Strategies

Protecting wealth from long-term health costs

By Andrew Bucklee

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It’s no secret that the financial future continues to be uncertain for Americans. Across the country, people continue to feel the pressure of a healthcare industry undergoing seismic shifts, underfunded retirement plans requiring more personal contributions, layers of new taxes on earnings and overall long-term careers becoming a thing of the past.

With that as an economic backdrop, the most debilitating changes to income and lifestyle may result from an unanticipated health-related event. Knowledgeable advisors recognize the potential impact to a client’s portfolio from those developments, and the importance of a holistic planning strategy to help clients prepare for those types of challenges, while seeking to protect their assets and helping to ensure other long-term financial goals can be achieved.

Today’s insurance marketplace offers an increasing number of products that can help cushion against those types of unanticipated expenses, providing the financial resources that can help clients weather the most significant of storms. Each type of insurance policy can offer trade-offs in cost and benefits. Understanding the differences in these policies, and even when combinations of solutions make sense, can make the difference in achieving a clients’ financial outcome and meeting their desired lifestyle during retirement.

A Menu of Options

The options for reducing the risks associated with unanticipated long-term health costs have grown over the past several years to include traditional long-term care (LTC) insurance, Combination/Linked Benefit long-term care riders, and Accelerated Benefit Riders. 

There are significant differences between them, and advisors need to become more knowledgeable in what they cover and how they are triggered in order to make the best recommendations to their clients.

To start, traditional and linked benefit long-term care options will cover both recoverable and non-recoverable qualified long-term care situations. Chronic illness accelerated benefit riders only apply to non-recoverable qualified long-term care situations.

The variety of benefit riders and the choices of coverage available allow advisors to better help clients customize their coverage and protect client’s wealth. An advisor’s success in helping clients identify the right solution is based on their understanding of what the riders provide, the differences between them, and how combining those with an insurance policy can provide clients with better coverage and care.

Depending on a clients’ situation, planning may include single or multiple solutions. To ensure the most comprehensive wealth protection strategy, advisors need to be able to decipher the differences in long-term care and chronic illness care needs. In some instances, it may make sense to combine solutions to provide a range of benefits to address specific issues and offer flexibility that can help cover a much wider universe of ailments that may impact a person’s financial wealth.

Traditional & combo LTC products

According to the US Department of Health and Human Services nearly 70 percent of people turning age 65 can expect to use some form of long-term care during their lives. Clients cannot rely on Medicare to provide long-term care coverage. To help clients combat those realities, a long-term care solution should be considered.

Long-term care coverage comes in many different forms including a traditional insurance policy covering long-term care or a linked benefit rider that combines long-term care coverage with a universal life insurance policy or fixed annuity.

Policyholders initiating a long-term care claim must meet the definition of being chronically ill, with a licensed health care practitioner certifying that the insured is unable to perform at least two of the six activities of daily living (ADL) for at least 90 days.  Or they must suffer from a severe cognitive impairment, such as Alzheimer’s disease. 

For those who purchase a traditional long term care insurance policy and die before needing it, a death benefit is not typically paid and the premiums are not usually recoverable by the beneficiary. Because of this, clients are now exploring linked benefit solutions.

In fact, individual linked benefit riders have seen significant increases in the past few years, according to LIMRA, a non-profit research and development insurance and financial services organization. In 2013, LIMRA reported that sales of life products with long-term care or chronic illness linked benefit and acceleration riders grew 12 percent, the fifth consecutive year of double-digit growth.2

Linked benefit riders offer the flexibility of either increasing the total benefit amount for long term care costs, while keeping the death benefit amount the same, or lengthening the number of months the insurer will pay for benefits. The payments will reduce the overall amount of the death benefit, but the policies typically include benefit guarantees and return of partial premiums if the policy is not used. 

One potential upside to purchasing a linked benefit rider is that there are options available where the policyholder will not be subjected to premium increases. Most linked benefit riders are aimed at clients who want or need additional flexibility in their coverage. 

Accelerated Benefit Riders

In simplest terms, a standard accelerated benefit rider (ABR) or, “living benefit rider,” allows a policyholder to access some or all of the death benefit of his or her insurance policy, when certain circumstances are triggered. There are three types of ABR riders, critical illness, chronic illness and terminal illness. Of these, chronic illness is the only one that addresses long-term care issues covering non recoverable situations.

The rider pays a part, or all, of the policy’s death benefit amount of coverage in advance, in the event of a triggering event.  For instance, a $1 million policy could pay between $250,000 to $1 million, which is deducted from the death benefit amount that eventually goes to the beneficiaries when the policyholder dies.

Enhanced Accelerated Benefit Riders

Enhanced accelerated benefit riders go beyond a standard ABR and offer enhanced benefits, which may include chronic illness, critical illness and terminal illness coverage.  These riders typically do not include coverage for recoverable conditions for qualified expenses. 

Critical illness riders typically pay 50-80 percent of the death benefit upon the diagnosis of a major illness or injury. These can include: heart attack, stroke, major organ transplant, blindness, invasive cancer, major burns and loss of limbs. Policyholders typically pay an additional monthly charge for the rider enhancement.

Triggering a chronic illness rider usually requires a Licensed Health Care Practitioner physician’s certification that the need for services is expected to last for the rest of the policyholder’s life. The rider is triggered when the insured is unable to perform at least two out of six ADLs: eating, bathing, dressing, going to the bathroom, maintaining continence, and getting into and out of bed or a chair.

The policy also can be triggered if the insured has a severe cognitive impairment.  Policyholders usually pay for the chronic illness rider through an increase to the overall premium. Policyholders may receive the benefit in a lump sum or monthly benefits, which are deducted from the death benefit. The insured can use the funds, without restriction, for what they want.

To trigger a terminal illness benefit, the insured must have a life expectancy of a certain number of months, as specified in the rider by the carrier at issuance.

The Bottom Line

Accelerated Benefit Riders can be a convenient, tax efficient and versatile solution in helping clients meet their financial needs in the event of unexpected healthcare expenses.  They are accessible because there is no waiting period to receive benefits, once all eligibility conditions have been met. Receipts or reimbursements are not required, so policyholders can use the funds for whatever they want. 

Both standard and enhanced ABRs are designed and paid out as a tax-free acceleration of the death benefit, providing a tax-advantage option. And they are typically secure.  Depending on how it is structured, once a policyholder’s benefit payments begin, many policies have features preventing the policies from lapse.

A key point to remember is that these types of riders do not serve as full long-term care solutions. (Accelerated death benefits may have tax consequences and may affect public assistance eligibility.)

By offering clients a life insurance solution, coupled with the variety of accelerated benefit riders, combination/linked benefit and long term care options available, an advisor will go a long way toward protecting clients against the financial impact of premature death and excess estate taxes, unforeseen accidents, medical calamities, and the vagaries of life situations. The right solutions can help ensure clients and their families receive the best long-term outcome possible.

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