With baby boomers planning their retirement and all of the talk about the rising cost of medical care for seniors, conventional wisdom would suggest that sales of long-term-care insurance would be on the upswing.
Not so. According to LIMRA, sales of long-term-care insurance among the 45 leading carriers fell 30% in the first half of last year to the lowest level in nearly 20 years.
Consumers cited cost as the most significant barrier to purchasing LTC insurance in a study by the American Health Insurance Plans. Another reason may be that consumers don't like the use-it-or-lose-it nature of the transaction; die without using the coverage, and the premiums will have provided no financial benefit.
At the same time, sales of life insurance policies sold with either an optional long-term-care rider or a chronic-illness accelerated-death-benefit rider are on the rise. In 2008, sales of life insurance policies with a long-term-care rider were up 6% over 2007 among 16 top carriers.
The reason for the interest in these riders may be that consumers like the fact that the addition of the rider to the policy helps address a secondary need. They get the death benefit protection and a potential source of funds in the event they become chronically ill.
Both LTC riders and chronic-illness ADB riders require the insured to be diagnosed as such by a licensed physician. Someone is chronically ill if they cannot perform at least two activities of daily living without substantial assistance or if they are cognitively impaired.
Chronic-illness ADB riders also require that a physician certify that the insured's condition is likely to be permanent. People who have strokes or Alzheimer's, for example, are often permanently chronically ill. In many cases, the insured can typically begin receiving benefit payments after a 90-day waiting period. Both LTC and chronic-illness ADB riders can be offered with a no-lapse guarantee.
A key difference between the two types of riders is that the chronic-illness ADB rider is a life insurance benefit, whereas the LTC rider is a health insurance benefit. The chronic-illness ADB rider accelerates (pays early) the death benefit of the life insurance policy when the insured becomes chronically ill, whereas most LTC riders pay a benefit to reimburse for expenses incurred for the treatment of being chronically ill.
If benefits are paid under a chronic-illness ADB rider, the death benefit of the policy is reduced by those payments. Since LTC riders are health benefits, they can be paid without reducing the death benefit. In both instances, the conditions for eligibility must be certified and recertified by a physician or other licensed health care practitioner annually. While these riders also are available from some providers on variable-universal-life-insurance policies, the majority of policies sold with one are universal-life policies purchased with a single premium instead of an annual premium.
In the case of long-term-care riders, consumers can purchase coverage that's very similar to that which they would receive from a traditional stand-alone LTC insurance policy. Similar to stand-alone LTC policies, most LTC riders are designed as reimbursement benefits in which the policy owner submits receipts for care expenses. Typically, with an LTC rider, the policyholder can use the benefits to pay only for certain types of qualified expenses, such as hospice, intermediate, skilled-nursing and adult day care.
Many chronic-illness ADB riders, however, are designed to pay benefits on a per-diem basis without regard to actual expenses incurred. Under this design, policyholders can receive as much as $290 a day (the Internal Revenue Service per-diem limit), or $8,820 per month. While an ADB rider can be used to pay for many of the same expenses as an LTC rider, it can also be used for other expenses at the policyholder's discretion. They could, for example, be used to pay a son or daughter to care for the policyholder so he or she can stay at home longer. And policyholders don't need preapproval from the carrier or have to submit receipts.
Hypothetically, a policyholder who has a $529,200 death benefit and becomes chronically ill, and is otherwise qualified under the terms of the ADB rider, could receive benefits equal to the current maximum IRS per-diem amount for five years.
In general, policyholders should expect to pay an additional 5% to 15% in premiums when purchasing a life insurance policy with a chronic-illness ADB rider.
Mike Roscoe is senior vice president of new-product development and actuary for the individual-life division of The Hartford Financial Services Group Inc.
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