While the value of hybrid life insurance policies that also provide living benefits may be old news, new developments in the health insurance market mean that many clients may need these policies more than ever today. The rising cost of health care has collided with one increasingly prominent trend: employer-provided health coverage is often being scaled back to satisfy the mandates of the Affordable Care Act (the ACA, or 'Obamacare')—creating a coverage gap that life insurance can now fill.
Despite this, the today's new crop of options—from life insurance with built-in chronic care provisions to linked LTC-life insurance benefits—can be difficult for even the most experienced of advisors to navigate. Though the primary goals of these products may be similar, the results can vary dramatically—so that understanding the difference between linked and built-in living benefits can be the key to ensuring that your clients have the tools necessary to fill their coverage gaps.
LTC-Insurance Products: The Features
Critical illness riders that are built in to a client's traditional permanent life insurance policy allow the client to access the policy value if the client suffers from a certain specified, critical illness. Typically, the specified illnesses are either terminal diseases or chronic illness that will require continuous care over an extended period, such as heart attacks, strokes and cancer.
When the client is diagnosed, he or she is given the option of receiving the living benefits under the policy. This allows the client to choose whether the proceeds are needed to fund current expenses or whether he would prefer that the entire benefit remain available to the policy beneficiaries as a traditional death benefit. Payment of the accelerated benefit reduces the available death benefit—possibly to zero, depending upon the level of benefits that the client actually receives.
The amount of the accelerated benefit that will be made available depends upon a number of factors, including the diagnosis and the insured's life expectancy at the time of the diagnosis. The insurance carrier providing the policy calculates the accelerated benefit based on medical information provided by the insured's physicians.
Typically, the accelerated benefit is calculated as a percentage of the eventual death benefit that would be available under the policy—often in the range of 40% to 70%. Some policies also require that the policy be in effect for a certain period of time before the accelerated benefit becomes available.
Products that provide LTC benefits that are "linked" to the basic life insurance policy allow the client to create a pool of funds to pay for LTC expenses immediately, while simultaneously creating a death benefit "pool" that will be available to beneficiaries. Clients are able to design these products to determine the level of funds available through each pool of funds.
With a linked benefit, a set monthly payment (depending upon the amount that the client invests) is made from the death benefit pool of funds to the client for a set period of time should he or she have a qualifying LTC claim.
However, if the LTC need continues after this time period has expired, the client can tap into the pool of LTC funds to continue the benefit for an additional term. If the client never taps the policy for LTC needs, the death benefit is paid to his or her beneficiaries (tax-free) just like a traditional life insurance policy.
