A critical illness rider on a life insurance policy typically allows you to accelerate some of the death benefits of the life insurance policy if you meet the definition of a “critical illness.” These riders go by a variety of names using terms such as “living benefits rider,” “accelerated access,” “accelerated benefits,” or similar.
A “critical illness” is often defined as having been diagnosed with one of several specific critical illnesses that are either terminal or chronic and expected to need continuous care over an extended period of time. Included illnesses often include cancer, heart attacks, stroke, kidney failure, Alzheimer’s disease, Parkinson’s disease, HIV, ALS, or similar. As always, you should read the fine print of the policy closely, as definitions vary between companies and policies
Key Differences Between a Critical Illness Rider and a Long-Term Care Rider
Many insurance agents discuss life insurance policies with a critical illness rider as though they are almost the same as a life insurance policy with a long-term care rider, but it’s important to understand some key differences:
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Long-Term Care Rider |
Chronic Illness Rider |
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What is the benefit? |
Death benefits may be accelerated to pay for long-term care expenses. Generally, additional long-term care coverage beyond the death benefit can be purchased via an additional rider. |
The death benefit may be accelerated in the event of a chronic illness. However, benefits are generally limited to a percentage of the death benefit, ranging from 50% to 100%. |
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Eligibility Requirements |
Assessment by a licensed health professional certifying that you are unable to perform 2 of 6 Activities of Daily Living, have a severe cognitive impairment, or both. Impairment can be temporary or permanent. |
Assessment by a licensed health professional certifying that you cannot perform 2 of 6 Activities of Daily Living for the last 90 days or you have severe cognitive impairment with no likely potential for recovery. Typically, impairment cannot be temporary. |
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How are benefits paid? |
Usually either by reimbursement or cash indemnity. Some policies may require proof of actual expenses paid. Other policies may allow the benefits to be used for any purpose. |
Cash indemnity. Usually, the benefits can be used for any purpose. |
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Are the benefits subject to taxes? |
Usually no. See Internal Revenue Code Section 7702B. |
Usually, no, unless they exceed the applicable per diem limit. See Internal Revenue Code Section 101g. |
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Elimination Period |
Varies, but 0 or 90 seem to be the most common, though some policies have longer elimination periods. |
Varies, but usually 0-90 days |
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Return of Premium |
Many policies include a 100% return of premium option |
Not usually included |
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Inflation Protection Rider |
Available at an additional cost |
Not available |
While there are many similarities, I’ve highlighted the most significant differences between a true long-term care rider vs. a chronic illness rider. While we do sometimes use life insurance with a chronic care rider as part of a long-term care plan, it's important to understand these key differences.
Many of our clients who engage in long-term care planning opt to purchase an additional rider that increases the long-term care benefit pool (often to 2 or 3 times the original death benefit)—this is an option that is generally not available with a chronic care rider.
Having coverage for a temporary event can also be beneficial. Consider the following:
- Only 25% of stroke victims die or need permanent care in a nursing home shortly after having the stroke.
- 10% of stroke victims have almost full recoveries.
- 25% of stroke victims recover with only minor impairments.
- 40% of stroke victims are left with moderate to severe impairments that require some care. (Source)
In many of the above cases, the impairment would not be expected to be permanent and, therefore, may not qualify as a “chronic illness” under a chronic illness rider.
Injuries sustained due to an accident or fall may not be deemed to be permanent. People aged 75 or older who fall are four times more likely to be admitted to a nursing facility (source). However, the fall and related injuries may not qualify as a “chronic illness” under a chronic illness rider if the condition is not considered to be permanent.
We’re not saying that a chronic illness rider isn’t worthwhile, but if you’re considering purchasing a life insurance policy with a chronic illness rider, be sure to read the fine print and that you understand some of the potential shortfalls of using a chronic illness rider rather than a long-term care rider.
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