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Should You Buy a Critical Care Rider?

Should You Buy a Critical Care Rider?

Copyright Joem Pollex, Getty Images  

In 1935, when Social Security was enacted, the life expectancy for a man who had reached the age of 65 was 78. Women would typically live to 80.

Today, a typical 65-year-old male is expected to live to 86.6, according to the Society of Actuaries’ mortality tables. A 65-year-old female will live to 88.8.

So yes, people who reach retirement age are living longer. And in danger of outliving the money they have set aside. This has become such an issue for investment professionals that Bank of America Merrill Lynch, for instance, has a full-time gerontologist on staff to educate advisors on the implications.

Of course the biggest concern is healthcare. Robert Pokorski, Prudential’s medical director, says that seven of ten clients over the age of 65 will need some type of long-term care. Unfortunately, the cost typically comes out of family members’ pockets. 

So more than 10 insurers, including American General, Prudential and Nationwide Guardian, have added chronic illness riders to their life insurance policies, according to published reports.

Typically, a chronically or critically ill policyholder will tap their death benefits to reimburse the family members that have paid for their health care or the facility where it was provided. The distributions are tax-free, up to a point. Any remaining funds go to beneficiaries upon the policyholder’s death.

Steve Roche, vice president with Prudential Individual Life Insurance, stresses that Prudential’s chronic illness rider doesn’t require qualified long-term care expenses for a client to be eligible for the accelerated benefit. Once money is disbursed, the cash can be used for any need, like paying unlicensed family caregivers or for medical or even non-medical expenses, he says. 

Of course, the riders aren’t free. Insurance company executives say a policyholder may pay 10% to 20% more for the policy. Plus, in many cases, death benefits paid out to seriously ill policyholders are limited to $330 per day, per the IRS. Over $330 per day is considered taxable income, according to “2014 Tax Facts on Insurance and Employee Benefits,” published by the National Underwriter Company.

Anthony Truino, financial planner with Barnum Wealth Management, Shelton, Conn., suggests that clients who can afford it might consider chronic or critical illness coverage along with long-term care coverage in a financial plan. Most clients, however, obtain just long-term care insurance, which covers both skilled and unskilled home health care, adult day care, assisted living and nursing home care.

John Deremo, executive vice president with AIG Financial Distributors, says he is experiencing a solid response to the firm’s universal life insurance rider. That can help policyholders pay for short-term and long-term care and related expenses typically not covered by traditional long-term care policies. The rider, on American General’s Secure Lifetime Guaranteed Universal Life insurance product, debuted in January, 

Roche, of Prudential Individual Life Insurance, says 40% of individuals buying universal life insurance policies this this year selected the chronic illness rider. One major reason is that the rider pays based on a condition, not for the specific care of a condition. Policyholders needn’t provide receipts to access money from the policy.

“The response to our BenefitAccess Rider has been overwhelmingly positive,” Roche says. “Financial professionals see the feature as a way to provide more value to their clients by offering not only the death benefit protection, but also the ability to access the death benefit should the insured become chronically ill or terminally ill.”

Other insurers are taking a different route to illness benefits. New York Life and Guardian recently added long-term care insurance riders to whole life policies.

Guardian’s Accelerated Death Benefit for Long-Term Care Services rider was introduced on whole life policies in late May 2013. It was expanded in February to its Limited Pay Series products, which let policyholders fully pay off the policy over a limited period.

Guardian spokesperson Jeanette Volpi says producers and customers have responded favorably. “The LTC Rider provides producers with a way to open discussions around the need for life insurance and longevity concerns with their clients,” she says. 

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