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Hidden value: Long-term care riders on life insurance

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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.

Related: 4 ways for LTCI specialists to reach out

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.

Unintentional lapse

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.

Reinstatement provision

All LTC policies and LTC riders are required to have this feature.

The reinstatement provision on a LTC policy or LTC rider has more liberal standards than the reinstatement provision of a life insurance policy. Under the reinstatement provision of a LTC policy or LTC rider, when the insured is incapacitated, reinstatement must be available for a period of time without any evidence of insurability. The reinstatement must be requested within five months of the date of policy termination and reasonable evidence must be shown that the insured either had a functional incapacity or a cognitive reason for being unable to pay the premium due that would have kept the policy in force.

As part of the reinstatement procedure, premiums will need to be paid and the policy brought back into good order. Upon reinstatement requirements being met, the policy is considered back in force with all rights and provisions available. Interestingly, when a LTC rider is added to a life insurance policy, the strict requirements of the reinstatement provision of the life insurance policy are softened by the more liberal standard required of the LTC rider, which is a positive benefit for the policy owner.

Chronic illness riders, which are governed by life insurance regulations, are not required to offer the same standards for reinstatement required of a LTC policy or LTC rider. Thus you will want to carefully check the terms of the chronic illness rider contract to see if the reinstatement provision of the rider is tied to the more stringent reinstatement provision of the life insurance policy. If so, the provision will allow for the reinstatement of a terminated policy and the attached chronic illness rider, but only with new evidence of insurability.

The potential danger of a reinstatement provision requiring evidence of insurability is that, if the policy unintentionally lapses due to the insured having functional incapacity or a cognitive reason, it may also result in the insured being unable to pass the underwriting requirements needed to show evidence of insurability. Therefore, the policy and chronic illness rider would remain lapsed.

Extension of benefits

All LTC policies and LTC riders are required to have this feature.

The extension of benefit provision is a protection that allows for LTC benefits to still be paid if the insured can prove he or she would have qualified for benefits prior to the date their policy was terminated. When a LTC rider is added to a life insurance policy, this provision allows the policy owner to go back and capture LTC benefits the insured would have qualified for on their policy if they had applied for their rider benefits while the policy was still in force. The policy is still considered lapsed for purposes of the death benefit; therefore the only benefits that will be paid are the LTC benefits the insured would have qualified for prior to the termination of the policy. 

Chronic illness riders are not required to offer this feature.  Thus, if the insured would have qualified for chronic illness rider benefits prior to policy lapse, there would be no contractual right to recapture benefits.

In the end, the client’s interest should always be of first consideration when helping a client choose a solution for potential long-term care or chronic illness needs. Making sure your client understands the LTC or chronic illness coverage they are purchasing will potentially lead to a better experience for all if and when a claim eventually arises. Consumer protections on a policy can add that last finishing touch to help secure the claims experience. 


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