The differences between long-term care riders and chronic illness riders have long been a subject of confusion for many advisors and other industry professionals. In the past, one of the main differentiators was that a claim under a chronic illness rider required certification that “care services will likely be needed the rest of the insured’s life.” In other words: The condition had to be deemed non-recoverable.
The Interstate Compact is a group comprised of most but not all states. The participating states have agreed to use a unified set of standards for approving insurance products. Effective as of December 2014, the Interstate Compact revised member states’ standards for chronic illness riders, which receive tax-favored treatment as an accelerated life insurance benefit under Internal Revenue Code Section 101(g). The new compact standards allow for approval of chronic illness riders that include the option of paying temporary chronic illness claims.
Note that these revised standards provide the option for an insurance company to include benefit triggers for temporary claims, but the standards do not require a company to do so.
This recent change may have made the lines between chronic illness riders and LTC riders even less clear. In spite of the changes in the Interstate Compact regulations, there are still many chronic illness riders that pay benefits only for permanent claims. But one might ask the following question: If you compare an LTC rider with a chronic illness rider, in a situation in which the insurance company underwrites for the chronic illness rider and charges for the chronic illness rider, and includes the option for the insured to collect on a temporary chronic illness rider claim, are there any differences left between the two riders?
The answer is a resounding yes. The differences center around LTC consumer protections.
LTC riders on life insurance have the mandatory built-in features that are required of all traditional stand-alone long-term care insurance policies, or riders, on any type of product, sold as “long-term care insurance” coverage. Currently, Alzheimer’s disease and dementia are the leading cause of a LTC claim for people over the age of 65. Consumer protection provisions provide important solutions that protect policy owners from situations that may unintentionally arise due to a physical or cognitive incapacitation, resulting in an individual’s LTC coverage being put in jeopardy. These provisions help protect the consumer from an unintended policy lapse, and even possible loss of benefits on an already lapsed policy.
These same consumer protections are not required of chronic illness riders, so, without careful reading of the specific terms of the chronic illness contract intended for purchase, one cannot be sure if some or any consumer protections are included with the policy.
For a look at important consumer protection features to watch for, read on.
The following is a description of consumer protection features that can make a real difference in protecting the ability for claims payments to be received, if payments are ever needed.
This is not a complete list of LTC consumer protections, but, rather, a list of protections that specifically help protect the policy from unintended lapse or the insured from loss of benefits.
All LTC policies and LTC riders are required to have this feature.
The unintentional lapse feature requires that the insurance company provide the opportunity for the policy owner to set up an authorized representative, or third party contact. If the policy is in danger of lapse, notice must be sent to both the policy owner and the authorized representative, if a representative is assigned, within 30 days of lapse. The notice must inform both the owner and the authorized representative that the policy is in danger of lapse and premium needs to be paid to keep the policy in force. The opportunity to assign an authorized representative must be offered to the policy owner at policy issue and every two years thereafter. This feature does not guarantee the policy will not lapse, but it’s meant to help prevent unintended lapse due to a policy owner’s functional incapacity or a cognitive reason that leaves the own unable to pay the premiums.
Chronic illness riders are not required to offer this feature. The consequences of not having an unintentional lapse feature on a policy could potentially be further compounded by the following two features that are also not required on a chronic illness rider.