Living for the Long Run: A Look at Living Benefits

by Ami Amega, Product Analyst

If this year has shown us anything, it is the unfortunate truth that big things happen with little to no prompting that can change the entire course of our lives. We in the life insurance industry know this far too well and have made it our mission to prepare people for events that are unforeseen and life changing. Still though, there is a gap of knowledge when it comes to awareness and understanding the many benefits that insurers have to offer in case something unexpected comes up. With this in mind, and with Long-Term Care Awareness month coming up, we felt now is a great time to look at the many options available through living benefits.¹

Most life insurance products offer some form of living benefit riders. These riders can either be built into the policy or made available as an add-on. Their main function is to protect against the costs associated with illnesses that may require round-the-clock care, and they do this by paying out or accelerating a portion of the policy’s death benefit once an insured goes on claim. There are so many riders on the market that it can be a bit of a challenge to make comparisons. Even so, there are a few key questions that can help start the process.

What do living benefit riders cover? There are four main types of living benefit riders, Critical, Chronic, Terminal, and Long-Term Care (LTC). Aside from LTC riders, which usually cover cases of chronic illness and are subject to different regulation and tax criteria, each of these rider types describe the kind of illness that must occur to trigger a claim. While underlying illnesses can be loosely defined on a case-by-case basis, the longevity and level of impairment is what sets them apart. Here is a brief overview of the main types of illnesses that are covered.

    1. Critical Illness – There many types of critical illnesses. Some of the more common ones include heart attack, stroke, and some forms of late-stage cancers.
    2. Chronic Illness – Typically, for a person to be deemed chronically ill, they must be unable to perform at least 2 of the 6 Activities of Daily Living (eating, bathing, continence, toileting, transferring, and dressing) without substantial assistance for a certain period of time that is usually referred to as an elimination period.
    3. Terminal Illness – Just as it sounds, a condition is deemed terminal if a certified physician reasonably expects it to result in death in a matter of 6-24 months, depending on the rider.

What are the costs? Here at LifeTrends, we separate riders into two main categories. The first category represents riders that come at an upfront cost. The second category is comprised of riders that cost nothing upfront do but rack up charges to the death benefit once on claim, often in the form of an interest-bearing lien. For those that come at an upfront cost, we have found in past studies that rider charges tend to have little effect on the competitive positioning of products.² When it comes to the second category of riders, because costs are not stated in the policies beforehand, dollar for dollar comparisons are nearly impossible.

How much of my death benefit is available for acceleration? Death benefit accelerations are subject to maximums that are usually based on the type of rider and illness. Riders that have upfront costs tend to offer the highest percentage of death benefit acceleration, around 90% – 100%. Riders without upfront costs cover different types of illnesses, so their maximums vary quite a bit.

How will I be compensated? Riders pay out in one of two ways, either indemnity or reimbursement. The reimbursement method is just as it sounds. Once on claim, the insured is required to submit receipts for qualifying services in order to be reimbursed. Indemnity is the more widely used method. With indemnity, the insurer pays out money that can go towards things like medical expenses, housing, food, or any other expenses that the insured might have. The important thing to note is that in both cases of payment, the insured can be required to follow a physician’s prescribed plan of care.

What are some other things to consider? There are many bells and whistles that insurers might add on to these riders. Some of the more common ones include, waiving rider or premium charges while on claim, providing lapse protection, couples discounts, and much, more!

Too often, the cost of care places significant burdens on clients and their families. Our industry has done the part of building protections, but knowing the facts is key to guiding people towards solutions that can make a world of difference. While these are some of the main topics, there are many other options and caveats associated with living benefits riders. For a more in depth look, feel free to check out the Living Benefits Rider Guide available through the LifeTrends client portal.

1. Last year for LTC Awareness month, we examined hybrid products, so this year we thought it would be fitting to look at living benefit riders. Please see the article titled “The Best of Both Worlds” for more on LTC hybrid products
2. See the article titled “TLC for LTC” for more on the positioning of LTC and CI riders.