Key takeaways

Today’s options for long-term care protection offer consumers solutions that can avoid the loss of premium if the policy is not used.

A long-term care rider can be added to a life insurance policy; this allows for the full death benefit to be paid as LTC benefits, a death benefit, or a combination of both.

Chronic illness riders may be suitable for some consumers but they can be confusing, and may pay out less than the death benefit amount that was purchased.
A tight shot of a caregiver daughter lovingly holding her father's hands.

There was a time when the only long-term care (LTC) insurance solution was a traditional long-term care (LTCi) policy. But in the past couple of decades, a newer way to insure for LTC has taken over the marketplace, using permanent life insurance as a base and allowing the policyowner to accelerate the death benefit, while living, to pay for qualifying LTC expenses. These products can provide clients additional assurances with LTC planning such as:
  • Eliminating the fear of losing premium dollars if LTC benefits are not needed; the death benefit pays out in full, whether as LTC benefits, a death benefit or a combination of both
  • Premiums and benefits can be guaranteed by product chosen or by adding a specific rider
  • More value is added to permanent life insurance, providing family protection now; then over time, as life insurance needs decrease, the death benefit can transition to LTC protection

The addition of riders that provide some form of living benefits has become table stakes for life insurance companies. Thus, what followed was a similar type of rider entering the marketplace that provides benefits for a chronic illness (CI), but without the full regulatory protection required of true LTC products. And with the mass addition of those riders, confusion abounds. While these living benefit riders may appear to offer similar protection, there are many important differences to consider between LTC riders and chronic illness riders. This article will attempt to summarize similarities and differences to help provide answers to common questions.

What’s the difference between an LTC rider and a chronic illness rider?

Both long-term care and chronic illness riders provide living benefits; however, LTC riders cover temporary and permanent care needs, while CI riders cover permanent or terminal.
Long-term care riders

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.
Chronic illness riders

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
Other considerations
The full-length article includes additional details to consider, such as claim qualifications,
tax-free benefits and consumer protections.
Download full article