On the heels of last month's Life Insurance Awareness Month, there's no better time to consider solutions for the most pressing needs of baby boomers, one of the most populous generations in America.
These consumers, born between 1946 and 1964, are on the precipice of retirement, if not retired already, and many are challenged with planning for future health care costs. Life insurance with a chronic illness (CI) living benefit rider may be the perfect financial solution for long-term care needs. However, not all boomers understand how CI riders differ from long-term care insurance (LTCI) or how recent innovation has impacted CI rider designs.
The need
Boomers have ample reason for concern about the potential need for long-term care. The following serious statistics show why:
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- Seven in 10 people turning age 65 can expect to use some form of long-term care during their lives, according to the Administration on Aging.
- On average, an American turning 65 today is projected to incur $138,000 in future long-term care services costs, according to the Centers for Disease Control (CDC).
- The CMS says Medicare pays $0 for services in a skilled nursing facility beyond 100 days.
- Eight in 10 people who need long-term care live in private homes and their informal care is usually provided by family members and close friends, according to the Congressional Budget Office.
- By 2050, when the youngest boomers reach age 86, the number of available family caregivers is projected to be 59 percent less than it was in 2013, according to the AARP Public Policy Institute.
Given the foregoing concerns about long-term care, boomer clients may ask about a traditional, stand-alone LTC policy, which pays benefits when qualified expenses occur. The triggers for benefit payment include a severe cognitive impairment or an inability to perform two of the six activities of daily living (eating, toileting, transferring, bathing, dressing, continence). The condition must be expected to affect the insured for at least 90 days. Insureds are supported throughout the healing process and may apply for more funding later. But stand-alone LTC policies aren't necessarily economical or easy to come by, for boomers or anyone else.
Market pressures on LTC
LTC insurance premiums have risen significantly since 2000. Many carriers have restricted their offerings or pulled out of the LTC insurance market, due to factors such as:
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- The products' use-it-or-lose-it nature: Consumers are more hesitant about paying for a product they may not use, especially when they're on limited budgets.
- Rising life expectancy and health care costs: Consumers are living longer and are more likely to use longterm care.
- Rising long-term care costs: The average annualized increase of U.S. nursing home costs from 2016-2022 is projected to be 6.3 percent, as CMS has reported.
- The prolonged low-interest-rate environment: Insurers need a 10-15 percent increase in premiums to offset every 1 percent decline in long-term interest rates and some insurers drop benefits to maintain the same premiums.
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Market pressures and resulting innovation led to the development of hybrid life products, or life insurance policies with CI riders or long-term care riders. (Photo: iStock)
Life combination products
The desing of hybrid life insurance products can make it difficult for some consumers to understand the various options. Before comparing and contrasting these types of products, let's review two key design types: reimbursement design and indemnity design.
Reimbursement products provide a benefit if the client meets the requirements of the policy and spends money on a qualified service. The upside of a reimbursement product is that clients receive a benefit equal to their total cost, up to a predetermined maximum. The downside is that a delay occurs between when expenses are incurred and when the insured gets paid. The insured has to incur expenses, then collect and submit receipts, before the carrier reviews and approves the receipts and issues payment. Furthermore, payments sometimes can only be made directly to the care provider.
Indemnity products provide clients with a benefit when they meet their policy's requirements. The advantage here is that they do not require clients to provide proof that their benefit spending is related to the chronic condition. The client can use the benefit to pay medical or nonmedical expenses or to enhance his or her savings. The distinctions between these two types of products are important. The indemnity design is more adaptable and offers flexibility. It allows for funds from the policy to be accessed for any need, without receipt, after the insured is certified as qualifying for coverage.
Also, with an indemnity design, the insured receives the full monthly benefit as long as he or she qualifies. With reimbursement riders, only the expenses incurred each month are paid. Therefore, an insured person who does not incur expenses that total up to his or her monthly benefit may not receive the maximum monthly benefit.
See also: All riders are not created equal
Removal of permanency requirements
Recent changes in the industry have affected the designs of some CI riders, particularly on some permanent life insurance products. Historically, like LTC riders, most CI riders required that, to accelerate the death benefit, the insured had to be unable to perform two of the six activities of daily living or suffer from a severe cognitive impairment. Most CI riders also required that the condition be certified as permanent by a licensed health care practitioner. Now, however, not all CI riders require permanency.
Another design aspect to review when comparing CI riders and LTC riders relates to consumer protection features. These are specific contractual provisions that can either help prevent a policy from lapsing due to missed payments or allow for reinstatement. The provisions are designed to address the concern that at the very time when an individual needs to activate a CI rider or an LTC rider, he or she may be suffering from a severe cognitive impairment, such as Alzheimer's, and forgetting to pay a life insurance premium might result in an issue.
Because of regulations regarding LTC rider designs, these riders are required to have consumer protection provisions. CI riders are not required to include such provisions, but some do. Be sure to check whether a CI rider has these provisions and share that detail with the client.
Also to consider are unintentional lapse provisions and reinstatement provisions. Unintentional lapse provisions are designed to protect people who may develop a cognitive impairment and unintentionally allow their policy and rider to lapse due to nonpayment of premiums. An unintentional lapse provision allows the policy owner to designate that a notification be sent to someone other than the insured if payments are missed and the policy is in danger of lapsing.
A reinstatement provision in an LTC rider or a CI rider allows the owner of a lapsed life insurance policy to reinstate without having to undergo underwriting again. Considerations, such as a time limit, exist and proof that the condition caused the policy lapse usually must be provided.
