Updated: Jan 31, 2019
10,000 Baby Boomers are turning age 65 every day for the next fourteen years. With this advent, the institutions of aging will likely transform just as it has done in other aspects of American life. One of the critical concerns of aging is care. As the elder population expands, Long Term Care will continue to escalate, ranking it among the top concerns. The big worry is what kind of Long Term Care (LTC) protection is available. With the introduction of various LTC solutions, it’s important to recognize the nuances and differences between long term care and chronic illness.
With the arrival of new methodologies for insuring long term care, it’s critical to understand that not all policies or solutions are created equal. What one needs to look out for is the types of claims which qualify for benefits, how the various benefits are paid out, and how the additional riders or add-ons are charged for.
The departure away from the traditional non-guaranteed annual premium LTC policies to the so-called hybrid LTC policies linked to a life insurance policy where a rider is attached to provide for LTC under Code Section 7702(b). 7702(b) offers a broader range of coverage than other riders offered by hybrid life policies described below. In order to qualify, all the client needs to do is meet basic requirements related to chronic illness. A physician must certify the insured is unable to perform two of the six Activities of Daily Living (ADLs) for a period of not less than 90 days or that the individual suffers from severe cognitive impairment. 7702(b) allows for temporary claims such as mild strokes, injuries and certain types of cancers to qualify for a LTC claim under 7702(b).
A significant difference between the various programs offering 7702(b) is will the company pay by indemnity or reimbursement. Reimbursement, by definition, will only pay up to the maximum policy benefits purchased while an indemnity plan will pay the maximum benefit allowable by the policy regardless of what the actual costs or expenses are. Naturally, the cost for an indemnity plan is exponentially higher than that of a reimbursement plan.
Another category of rider, often attached to the hybrid life policy, is known as a chronic illness rider and typically falls under 101(g). This type of policy rider, by law, is not allowed to use the words long-term care but instead can use terminology such as accelerated death benefit for chronic illness. Most importantly, in order to collect, the physician must certify that the chronic illness is going to be a permanent condition for the insured’s lifetime. This limits drastically the use of the insurance since the condition of the insured must be non-recoverable thus disallowing any type of temporary conditions mentioned above when using a 7702(b) program.
One indication as to whether the rider is a chronic illness 101(g) or 7702(b) is whether the rider is being purchased with an additional charge added to the policy or is simply an included feature with no additional underwriting. If it is the later, then there is no way of knowing how much benefit will actually be paid out since there will be a discounting to the total death benefit purchased when the chronic illness rider is requested to be paid due to a permanent chronic illness.
Nothing is free today so even though you may believe you are not being charged for the chronic illness rider, think again. Insurance companies, instead of charging a fee, will discount the death benefit for which the chronic illness benefit will be taken when those benefits are actually needed. Thus making it indeterminable as to how much benefit will actually be paid out.
The insurance companies will discount the benefits based on age, sex of the insured, premium class, interest rates, and cash values at the time of a claim. Unfortunately, 101(g) is not explained as well as it should be and many insured are caught in a trap thinking they have coverage. In reality, when it comes time to collect due to a chronic illness, they quickly realize that their benefits are vastly less than what they had originally assumed.
For those riders that actually charge a premium the insured is in a better position to know exactly what his benefit will be at the time of claim.
In today’s world of ever-changing policy features, it is imperative that the insured understands the nuances between the various types of riders and plans offered. If and when a claim is made, knowing precisely what benefits one will receive relieves a tremendous amount of emotional, physical, and financial stresses on the family members due to the consequences of a long term need.