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Investopedia/Mark P. Cussen: How Accelerated Benefit Riders Fill Insurance Gaps

How Accelerated Benefit Riders Fill Insurance Gaps

By Mark P. Cussen, CFP®, CMFC, AFC | October 30, 2015 — 4:54 PM EDT

In the late 80s and early 90s, long-term care policies were the darling of the insurance industry. The forecast for the need for this type of care was very, very high and many carriers jumped on the bandwagon by offering policies that paid for all types of managed care. But the claim rate for this type of coverage eventually became so high that many insurers were forced out of the arena.

Today there are only a few companies left that offer any type of standalone coverage for this need. These policies are now more expensive than ever, and in many cases the coverage that they provide has eroded as well. Fortunately, the insurance industry has found what seems to be a much better solution to this dilemma. Accelerated benefit riders have become the new darlings in the financial marketplace, as they are able to provide much more flexible coverage for managed care at a reasonable cost.
History of Accelerated Benefit Riders

In the 1980s, segments began to appear on national TV about how some companies called viators were buying the life insurance policies of terminally ill patients so that they could collect the death benefit and the patients would have some money to use now for medical bills. But viatical settlements were largely unregulated and often fraught with peril for the sellers, who faced big income tax consequences in some cases.

But the insurance industry quickly recognized the need for policy holders to be able to access some of their life insurance policy benefits to pay for things like managed care before they died. This led to the advent of accelerated benefit riders, which fulfill this need. They allow policy holders to access some or all of the death benefit in their policy for critical or chronic illness, disability or long-term care. These policies have made life insurance much more relevant for a large segment of the marketplace, because these riders can provide significant protection against the staggering costs of long-term care without draining the policy holder’s wallet. (For more, see: A Closer Look At Accelerated Benefit Riders.)
Read the Fine Print

Although all accelerated benefit riders are designed to provide some form of immediate access to a policy’s death benefit, there are key differences between some types of riders, such as long-term care and chronic illness. The former type of rider is classified by the insurance company as a “7702B” rider that offers coverage that is generally more comprehensive. The benefits from this type of rider can be provided on either an indemnity basis, where the care provider is paid directly by the carrier, or on a reimbursement schedule that requires the insured to pony up for the costs of care first and then submit a claim.

Riders that pay by reimbursement are not as generous as indemnity riders because they will never pay out more than the actual costs incurred. There are also some expenses that they don’t cover, such as modifying one’s home to accommodate a disability and medical equipment like canes or walkers. Indemnity riders, on the other hand will pay out the maximum possible benefit that is allowed in the policy irrelevant of the amount of actual expenses that are incurred.

Either type of long-term care rider usually requires a doctor’s certification that the insured is either unable to perform at least two out of the six basic activities of daily living (ADLs), which include eating, bathing, toileting, transferring, dressing and grooming, or has a substantial cognitive impairment. Long-term care riders will also usually cover temporary periods of impairment that exceed the waiting period. (For more, see: LTC Coverage Not a No-Brainer.)

Chronic illness riders are classified by the insurance industry under section 101(g). These riders always pay out on an indemnity basis, and they are usually activated when the insured becomes terminally ill, or is beset with a disability that is expected to last for the rest of his or her life.

A third type of rider is the critical illness rider. This type of rider pays out a single lump-sum that is usually equal to at least half of the policy’s death benefit. It is paid upon the diagnosis of such ailments as cancer, heart disease, lupus or other major illnesses. (For more, see: Long-Term Care Insurance: Who Needs It?)

The cost of accelerated benefit riders is sometime built directly into the policy by the carrier, while at other times they are available as an add-on feature with a separate cost. They may also require separate underwriting, such as most riders that are specifically designed to pay for long-term care expenses. But any rider is going to increase the cost of the policy one way or another.
The Bottom Line

Although accelerated benefit riders will always come at an additional cost, they can still provide an effective measure of protection against critical and chronic illness, disability and long-term care expenses in addition to traditional life coverage. For more information on accelerated benefit riders and how they can benefit you, consult your life insurance agent or financial advisor. (For more, see: An Overview of Hybrid Long-Term Care Policies.)

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