Life Insurance with a Critical Illness Rider

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning

A critical illness rider on a life insurance policy typically allows you to accelerate some of the death benefit 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 define 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 long-term care rider, but it’s important to understand some key differences:

 

Long-Term Care Rider

Chronic Illness Rider

What is the benefit?

Death benefit 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.

Death benefit may be accelerated in the event of a chronic illness. Benefits are generally limited to a percentage of the death benefit, ranging from 50%-100%.

Eligibility Requirements

Assessment by 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 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.

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.

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.

Elimination Period

Varies, but 0 or 90 seem to the most common, though some policies have longer elimination periods.

Varies, but usually 0-90 days

Return of Premium

Many policies include a 100% return of premium option

Not usually included

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 age 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.

We Can Help You Develop a Long-Term Care Plan

Having assisted many Wake County clients with long-term care planning, our team at Carolina Family Estate Planning understands that developing a long-term care plan is about not just protecting your own independence and dignity, but also protecting those you love from the physical, emotional, and financial toll that caring for a loved one can take.

We’ve helped many clients take an interdisciplinary approach to their long-term care planning by exploring both legal and financial options. Usually, a well-rounded long-term care plan will involve a combination of legal, health care, and financial tools to meet your goals and maximize your protection. To get started, register an upcoming seminar to learn more or call our office at 919-443-3035.

 

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