LTC Riders In VL Policies:
The Design Works For Retirement Planning
By
Long term care acceleration riders for life insurance contracts have been prominent features in the insurance landscape for several years now.
Their incorporation into variable life insurance contracts, particularly those originally purchased to provide supplemental life insurance coverage, offers such policies enhanced flexibility to meet lifetime needs.
This is especially attractive to financial distribution channels such as banks, wire houses and investment-oriented financial planners, given these channels focus on investments.
Further, incorporating LTC acceleration riders into life policies that are sold as alternatives to certificates of deposit has special value for bank channel distribution. It provides these channels with new opportunities to offer distinctive and needed coverages to their customers.
The riders offer buyers the ability to access potentially the entire death benefit value of their life insurance contract in case they become chronically ill.
Contrast that to the usual situation in supplemental retirement life insurance coverages, in which withdrawals or loans are limited to available cash values, not death benefits. However, if the insured suffers a chronic illness, the presence of the rider means the insured can receive the life policys entire death benefit, not just an amount equal to the cash value. Thus, the LTC rider provides a real expansion of the supplemental retirement benefit.
Now, lets assume that the insured becomes chronically ill. Recall that Section 7702B of the Internal Revenue Code defines the term "qualified long term contracts" and the requirements that must be met by such contracts.
Our interest here is the outcome. If the LTC rider meets the requirements, then payments made under it are also income tax-free. The benefit payment structure sets the monthly payment basis as a percentage (typically 2% or 4%) of the death benefit.
