Living Benefit Riders

Harry is diagnosed with a mental disorder. To become eligible for payments under his policy's long-term care rider, he must prove which of the following? that the mental condition appeared within the past ten months that he has been mentally handicapped for the past 12 months that his health or safety had been at risk within the last six months that his health or safety would be at risk without supervision

that his health or safety would be at risk without supervision

Qualifying for Accelerated Benefits

To qualify for this benefit, the insured must prove that he or she either has a terminal illness or catastrophic accident that results in permanent disability requiring long-term care. To be classified as terminally ill, the person must be certified by a doctor as having a condition that can be expected to result in death within 24 months. Once certified as terminally ill or critically injured, the insured may be permitted to choose whether he or she wants to receive the payout as a lump sum or monthly payments over a set time period.

No Special Exclusions and Restrictions

Most states prohibit life insurance policies from imposing any restrictions or exclusions on accelerated benefits that are not also excluded or restricted in the base life insurance policy as well. Likewise, most policies stipulate that the accelerated death benefit must be incontestable on the same (if not more favorable) basis as the base policy.

All of the following statements about long-term care riders and long-term care policies under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 are correct, EXCEPT: The insured's diagnosis can be the result of either a medical or cognitive (mental health) reason. If for a medical reason, then the insured must be certified as unable to perform at least two activities of daily living (ADLs) for at least 90 days. The insured must spend time in a hospital before payment. An insured who bought an long-term care rider becomes eligible for its benefit when he or she is diagnosed as chronically ill. There may be an elimination or waiting period of 10 to 100 days before benefits are payable.

The insured must spend time in a hospital before payment.

Conditions for LTC Payment

LTC rider benefits become payable when the insured is diagnosed as chronically ill, for either a medical or cognitive (mental health) reason. If for a medical reason, then the insured must be certified as unable to perform at least two activities of daily living (ADLs) for at least 90 days. If for a mental health reason, then the insured must prove that his or her health or safety would be at risk without supervision. The insured must be certified within the previous 12 months. Prior hospitalization is not required to qualify for LTC rider benefits. With passage of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, neither LTC riders nor LTC policies may require that the insured be hospitalized before qualifying for LTC insurance benefits. However, they may require an elimination or waiting period of 10 to 100 days before benefits are payable.

Effect of Accelerated Benefit on Policy's Death Benefit

Accelerated life insurance benefits are typically limited to something less than the full death benefit. While 50 percent of the death benefit is a common limit, some policies provide up to 70 percent. There is no prohibition against insurers providing access to the full death benefit, though this is uncommon. Upon the insured's death, the insurer pays the net death benefit to the beneficiary. Some companies also deduct an interest charge from the death proceeds to compensate for interest lost due to the accelerated payment.

If Ken becomes eligible (by a medical reason) for payments under his life insurance long-term care rider, he must be certified as unable to perform which of the following? any activity of daily living for at least 30 days at least five activities of daily living for at least 60 days At least two activities of daily living for at least 90 days any activities of daily living for at least 30 days

At least two activities of daily living for at least 90 days

Long-Term Care Rider

Another popular living benefit rider is the long-term care (LTC) rider. This rider provides financial support for the costs of medical care, nursing home care, and assisted living care for extended durations. Like the accelerated benefits provision, the LTC rider allows a portion of the life policy's face amount to be paid out should the insured require long-term care. The key difference between the two is that, unlike the accelerated benefits provision, the LTC benefit does not require the insured to suffer a catastrophic injury to qualify for long-term care benefits. With the LTC rider, benefits become payable if the insured requires long-term care and meets the conditions for payment. Another difference between an accelerated benefits provision and a long-term care rider: LTC riders typically come at a modest cost, whereas the accelerated benefits provision is commonly included at no charge in life policies today. The benefits provided under a LTC rider are similar to those of a long-term care insurance policy. Both provide money to pay for a range of medical and social service expenses and can be used for various levels of medical services, from nursing home care to home health care. Some insurers offer additional options that provide funds for adult day care, hospice care, and more.

Effect of the LTC Rider on the Policy's Death Benefit

The impact of the LTC rider on a policy's death benefit depends on which rider option the policyowner selects. Insurers offer two options: generalized (or independent) option—Under this option, the LTC rider benefits are separate from the life policy death benefit. Benefits paid to the insured do not affect the life policy's face amount. The beneficiary receives the full death benefit when the insured dies. This rider comes at a higher cost than the integrated option since it provides benefits in addition to the policy's death benefit. integrated option—Under this option, the LTC benefits are linked to the life insurance policy's face amount. The LTC benefits paid out are drawn from the life insurance policy's face amount. Up to 70 to 75 percent, or so, of the face amount can be used for long-term care expenses. The beneficiary receives the remainder as the death benefit. (In this way, the LTC integrated option is similar to the accelerated death benefit rider.) This rider comes at a modest cost and may even be included at no charge as part of the accelerated benefit provision.

If an insured qualifies for and takes an accelerated benefit from her life insurance policy, which of the following most accurately describes the impact this will have on her policy's death benefit? The death benefit is reduced by the amount of the accelerated benefit payment, and no more. The death benefit is reduced by an amount that is less than the accelerated benefit payment. The death benefit is unreduced, though the cash value is reduced by the accelerated benefit payment. The death benefit is reduced by the amount of the accelerated benefit payment, and in some cases an additional amount may be deducted.

The death benefit is reduced by the amount of the accelerated benefit payment, and in some cases an additional amount may be deducted.

Disclosure Required

If a life policy includes an accelerated benefit, most states require that insurers provide a disclosure statement to the applicant at the time of application. If the accelerated benefit is requested after policy issue, the disclosure statement must be provided to the policyowner at the time of the request. The disclosure must provide a brief description of accelerated benefits and definitions of conditions triggering payment of benefits, and it must include an explanation of the effect payment of the accelerated benefit would have on the policy's cash value, accumulation account, death benefit, premium, and policy loans. Some states require that the disclosure note that receipt of accelerated benefit payments may adversely affect the recipient's eligibility for Medicaid or other government benefits. Further, some states require that the disclosure note that receipt of accelerated benefits may be taxable. In practice, most insurers include these notes as a standard part of their disclosure in all states where they sell the product.

Accelerated Benefits Riders

Until relatively recently, an insured with a terminal illness could only access the value in his or her life insurance policy through a cash value loan, withdrawal, or policy surrender. This was hardly ideal because some of these options involved potential charges and taxes that diminished the net amount. Plus, when the need for money is great (as it often is when serious illness strikes), these options may be insufficient. Insurers today offer a way to meet this critical need through accelerated benefits riders. Accelerated benefits are made available either through a rider or as a provision of the policy itself. Accelerated benefits were initially available only in the form of riders. They have reached the point where many life insurance policies today provide this benefit automatically, without additional charge, as a standard policy provision. An accelerated benefits provision (or rider) allows a payout of some portion of the policy's death benefit while the insured is still living. Most of these riders pay less than the full face value as an accelerated benefit. In other words, some portion of the death benefit payment is accelerated and paid while the insured is still alive. The typical provision allows up to 50 percent of the death benefit to be available, though some policies allow up to 100 percent. The insured can then use these funds for a range of needs, from standard living expenses to medical care—or for anything else he or she wants. Any amount of the death benefit not distributed through an accelerated benefits provision remains payable to the policy's named beneficiary at the insured's death.