Long-term care vs. chronic illness riders:
The overlooked differences

Long-term care riders classified under IRC §7702B offer more comprehensive coverage and must be compliant with the LTC Model Regulations of the National Association of Insurance Commissioners (NAIC).

• An LTC rider classified under this code receives favorable tax treatment and is intended to be a tax-qualified long-term care insurance contract
• Riders with this classification may be referred to as LTC products whether verbally or in marketing literature from an insurance company, or sales presentations from a financial or insurance professional
• LTC riders are underwritten separately from the base policy, and an additional fee is charged for the rider, which will add to the policy premium cost; the advantage to this is that LTC monthly benefits and cumulative total benefits are determined at issue, so the policyowner knows from day one what their benefits will be if an LTC claim occurs (assuming no loans or withdrawals were taken from the policy)
• Long-term care regulations require that both temporary and permanent LTC claims be covered by the policy
• Benefits may be paid either by cash indemnity, indemnity or reimbursement
  • Cash indemnity policies pay the full available LTC benefit amount with no restrictions from the insurance company
  • Reimbursement policies reimburse only actual expenses qualifying under the contract, up to the issued amount

Dollar for dollar reduction method: LTC monthly benefits are paid via the dollar for dollar reduction method, which means each dollar of LTC benefit paid reduces the death benefit by one dollar. With this method, every dollar is paid — either as LTC benefits and/or death benefit.

Riders in this category receive favorable tax treatment under IRC §101(g) and are generally referred to as “Accelerated Death Benefit for Chronic Illness” riders. These riders are usually built on NAIC Accelerated Death Benefit (ADB) Model Regulations, though states may differ on their interpretation of these regulations.

• With these products, the term “long-term care” cannot be used in insurance company marketing or sales literature, nor in sales presentations to clients; the term “chronic illness rider” must be used at all times
• These riders are not required to pay temporary claims, therefore some companies require that the insured’s condition be permanent, meaning that the condition must be certified as expected to likely continue for the rest of the insured’s life; or in other words, the condition must be nonrecoverable. People with conditions that are considered temporary — such as mild to moderate strokes, orthopedic repairs, physical complications from cancer recovery and other recoverable conditions — would not be eligible to go on claim; particular care should be taken to review the contract language so there is a thorough understanding of any limitations in coverage that should be disclosed to clients
• These riders all use the cash indemnity model to pay claims because reimbursement is not possible due to not being a long-term care product; they also cap benefit payments at the HIPAA per diem

Clarifying the various methods used to charge for a chronic illness rider
One common misconception is the belief that certain chronic illness riders are “free,” but that’s not the case. The main differentiator among chronic illness riders is how and when the rider is charged. Download the full-length article to learn more about the following methods:

• Dollar for dollar method — Additional charge to cost of insurance
• Discounted acceleration
• Reduction factor method
• Lien with interest method