Accelerated Benefit Riders

Life insurance policies that include accelerated benefit riders provide several types of protection to policyholders in one vehicle. These policies can now offer protection against chronic illness, critical illness and nursing home care on top of the traditional death benefit and/or cash value.

Accelerated benefit riders have effectively provided consumers with a greater level of control over their insurance protection, according to Jason Kestler, president and CEO of Kestler Financial Group headquartered in Leesburg, VA. "Clients are now able to start or stop a stream of income from their policies when they have a qualifying need, and many riders now also provide a cost-of-living adjustment to keep up with inflation." 

Market demographics, improved financial education and the rising cost and need of healthcare have made multiline protection in a single vehicle more attractive to consumers. But those who need specific types of protection from these unique vehicles need to read the fine print and do their homework to understand whether they will receive what they are truly seeking and how much they will pay for it.

Accelerated benefit riders are essentially the modern equivalent of the viatical settlements that terminally ill policyholders used in previous decades to raise cash to pay their medical bills. Under these arrangements, policyholders would sell their policies to a third-party settlement company for a percentage of the face amount of the policy. The policyholder would then name the settlement company as the beneficiary of the policy, and the company would collect the death benefit after the policyholder passed away. But this process was cumbersome and fraught with obstacles, including non-guaranteed rates of return for the viators, difficulties in accurately predicting their life expectancies and a substantial amount of fraud. These factors often prevented the exchange from working as planned, and these onerous transactions generated negative publicity, as viators alerted regulators and the media about the damaging financial consequences of the settlements. But the life insurance industry saw a great opportunity in this arena and subsequently began to design more sophisticated products that allowed policyholders to access some or all of the death benefit (typically 25 to 100% of the policy when certain events occur).

In some cases, policyholders have a choice as to how the benefits are paid; they may receive either a lump-sum or periodic payments, depending upon the type of claim and benefit, but they are still entitled to any remaining cash value and death benefit in the policy. As with many other forms of insurance, accelerated benefits can be paid either as reimbursements or on an indemnity basis, with the benefit going directly to the care providers or other parties requiring payment. There may also be an absolute dollar limit on the total amount of benefits paid, as well as a minimum dollar payout.

Some riders can only be purchased at an additional cost, while others are built directly into the policy. Although the former type of rider will assess the policyholder an extra charge up front in the form of a period fee, this type of benefit will pay out the full amount that is stated in the policy. “No-cost” riders are simply riders that are paid at the time of claim, where the insurance carrier will discount the amount of benefits that are paid to the policy owner according to a formula that takes interest and mortality rates into account, as well as the amount of cash value in the policy.

Some policies also offer an extension-of-benefits-rider that usually doubles the amount of accelerated coverage at an additional cost, but without the purchase of additional death benefit. This rider effectively allows cost-conscious consumers to purchase a smaller amount of death benefit and still maintain adequate living benefit protection. Riders known as “linked benefits” can also provide coverage for long-term care (LTC) expenses that equal at least two to three times the face amount of the policy.

Critical Illness riders pay out a large portion of the death benefit to policyholders (typically 50-80%) upon the diagnosis of a major condition or injuries. This benefit is usually received as a lump-sum payment. A sample listing of conditions that can trigger a payout from one carrier includes:

• Heart attack
• Stroke
• Invasive cancer
• End-stage renal failure
• Major organ transplant
• ALS
• Blindness
• Paralysis
• Arterial aneurysms
• Central nervous system tumors
• Major multi-system trauma (to 3 or more organs or systems
• AIDS
• Severe disease of any organ that shortens life expectancy
• Severe central nervous system diseases (Parkinson’s, Huntington’s, Multiple Sclerosis, Encephalitis)
• Major burns
• Loss of limbs

These riders pay out a periodic benefit if the policyholder becomes incapacitated or disabled for an extended period of time. This type of rider typically triggers when the insured becomes unable to perform at least two out of the six activities of daily living, including eating, bathing, toileting, dressing, transferring and continence.

This type of benefit typically requires separate full underwriting for the insured but provides more comprehensive coverage for long-term or nursing home expenses than chronic illness benefits, albeit at a higher cost.

Consumers can be understandably confused by the separation of chronic illness benefits from long-term care, as both seem to fall essentially into the same category. The life insurance industry, however, requires that these two types of benefits remain distinct. Chronic illness riders are more restrictive by nature than long-term care riders, and one of the key differences between the two is that to qualify for the former, the insured must be permanently incapacitated. Chronic illness riders may also pay out in a lump sum or on an annual basis, whereas long-term care riders usually have a monthly payout. The cost of processing and managing claims for chronic illness benefits is also typically cheaper than for long-term care riders; therefore, the cost of chronic illness benefits is lower for consumers.

Although living benefits can be a valuable addition to any life insurance policy, consumers must consider several key factors before purchasing a product that contains living benefits or before adding them to their current policies. Some of the issues that policy owners must contend with include:

• The financial impact of the reduction of the death benefit on the policy beneficiaries if accelerated benefits are paid out: If this happens, will the insured’s and/or policy owner’s estate plan remain intact?
• The inability of accelerated benefit riders to completely substitute for separate policies that are specifically designed to cover certain risks, such as disability or health insurance.
• The impact of receipt of accelerated benefits on the possible receipt of Medicaid: The income paid out from accelerated riders is often counted as income for this purpose, although applicants are not required by law to exhaust these benefits before they can be considered eligible.
• The possible taxation of accelerated benefits: The IRS is still working through the details on this matter; in most cases, benefits are not taxable, but this can vary by state, carrier, type of claim and type of benefits that are paid. Policy owners should seek counsel with a tax attorney on this matter.

Accelerated benefit riders can provide you with substantial protection against several types of claims in one convenient package. For more information on accelerated benefit riders, consult your life insurance agent, broker or financial advisor.