Protecting wealth from long-term health costs

One potential upside to purchasing a linked benefit rider is that there are options available where the policyholder will not be subjected to premium increases. Most linked benefit riders are aimed at clients who want or need additional flexibility in their coverage. 

Accelerated Benefit Riders

In simplest terms, a standard accelerated benefit rider (ABR) or, "living benefit rider," allows a policyholder to access some or all of the death benefit of his or her insurance policy, when certain circumstances are triggered. There are three types of ABR riders, critical illness, chronic illness and terminal illness. Of these, chronic illness is the only one that addresses long-term care issues covering non recoverable situations.

The rider pays a part, or all, of the policy's death benefit amount of coverage in advance, in the event of a triggering event.  For instance, a $1 million policy could pay between $250,000 to $1 million, which is deducted from the death benefit amount that eventually goes to the beneficiaries when the policyholder dies.

Enhanced Accelerated Benefit Riders

Enhanced accelerated benefit riders go beyond a standard ABR and offer enhanced benefits, which may include chronic illness, critical illness and terminal illness coverage.  These riders typically do not include coverage for recoverable conditions for qualified expenses. 

Critical illness riders typically pay 50-80 percent of the death benefit upon the diagnosis of a major illness or injury. These can include: heart attack, stroke, major organ transplant, blindness, invasive cancer, major burns and loss of limbs. Policyholders typically pay an additional monthly charge for the rider enhancement.

Triggering a chronic illness rider usually requires a Licensed Health Care Practitioner physician's certification that the need for services is expected to last for the rest of the policyholder's life. The rider is triggered when the insured is unable to perform at least two out of six ADLs: eating, bathing, dressing, going to the bathroom, maintaining continence, and getting into and out of bed or a chair.

The policy also can be triggered if the insured has a severe cognitive impairment.  Policyholders usually pay for the chronic illness rider through an increase to the overall premium. Policyholders may receive the benefit in a lump sum or monthly benefits, which are deducted from the death benefit. The insured can use the funds, without restriction, for what they want.

To trigger a terminal illness benefit, the insured must have a life expectancy of a certain number of months, as specified in the rider by the carrier at issuance.

The Bottom Line

Accelerated Benefit Riders can be a convenient, tax efficient and versatile solution in helping clients meet their financial needs in the event of unexpected healthcare expenses.  They are accessible because there is no waiting period to receive benefits, once all eligibility conditions have been met. Receipts or reimbursements are not required, so policyholders can use the funds for whatever they want. 

Both standard and enhanced ABRs are designed and paid out as a tax-free acceleration of the death benefit, providing a tax-advantage option. And they are typically secure.  Depending on how it is structured, once a policyholder's benefit payments begin, many policies have features preventing the policies from lapse.

A key point to remember is that these types of riders do not serve as full long-term care solutions. (Accelerated death benefits may have tax consequences and may affect public assistance eligibility.)

By offering clients a life insurance solution, coupled with the variety of accelerated benefit riders, combination/linked benefit and long term care options available, an advisor will go a long way toward protecting clients against the financial impact of premature death and excess estate taxes, unforeseen accidents, medical calamities, and the vagaries of life situations. The right solutions can help ensure clients and their families receive the best long-term outcome possible.