#255 | Chronic Illness Riders: Don’t Get Tangled Up in a Lawsuit

Bobby’s Note:
Over the years, I’ve been asked multiple times to cover so-called hybrid or linked-benefit life insurance products. These products are becoming incredibly popular in the market but, unfortunately, they’re not my area of core expertise and therefore I have chosen to not write about them for The Life Product Review. However, the need is still there and I’m happy to report that my friend Ramona Neal, formerly of Nationwide, is now independently publishing data and articles about these products at her website, Living Benefit Review.

Ramona has graciously offered to publish one of her articles every quarter exclusively on The Life Product Review. Ramona has also provided a discounted rate for TLPR subscribers who also want to subscribe to Living Benefit Review. Simply go to the Individual Subscriptions page (here), fill in your information, click “Have a coupon?” and enter Q8UIIGE9M to receive $200 off of an annual subscription. Enjoy the article and check out her site!

Living Benefit Trends:  As you wrap up your year-end life insurance sales you will undoubtedly be choosing between Chronic Illness Rider variations and Long-Term Care Riders.  These living benefit rider solutions have profoundly changed the insurance industry and have become the #1 life insurance trend in the last 15 years.  Today, they can be found on all product chassis including Term.  Per LIMRA, as of 2019, 30% of total life insurance premiums included some form of a long-term care insurance solution (Hybrid products, LTC riders and Chronic Illness riders).  Think about that for a moment, 30%!  These living benefit riders have transformed our industry and some advisors even lead with promoting them.  The focus is no longer exclusively on the death benefit and cash value.  Now, one can look to spend down (accelerate) the death benefit while living if they meet the eligibility criteria of being chronically ill or severely cognitively impaired. 

Trap Door with Certain Chronic Illness Riders:  With many Chronic Illness rider variations there is a wrinkle, but that wrinkle can grow into a crater if client expectations are not responsibly managed.  The issue is, How Much of the Death Benefit is ELIGIBLE to be Accelerated?  Well, it depends and by how much it depends can be jaw dropping.  Consider this hypothetical scenario where you have two seemingly identical $300k life insurance policies where the only difference is the Chronic Illness rider variation:  

  • With the 1st policy, the owner is eligible to accelerate the entire $300k. (Exactly as you’d expect.)
  • With the 2nd policy, the owner is eligible to accelerate $30k. (Wait… What you ask?)

What I’m saying is, when you are limited to accelerating a fraction such as $30k, then this means it cost the policy owner $270k to accelerate.  Did your heart just skip a beat?  Suddenly these “free” chronic Illness riders can cost a great deal, and quite possibly cost you your relationship with your client (if misrepresented).

Lawsuits:  Predictably some policy owners have been outraged to find they are only eligible to accelerate a fraction of the death benefit. (Especially when you consider the discovery is made at the vulnerable time of claim).  As a result, we are seeing class action lawsuits filed against insurers (with the selling agent’s detailed representations referenced).  In response, law firms are gearing up on both sides.  Some are prepping insurers in anticipation of more litigation and some are promoting their services on their websites directly to consumers.

Which type of Chronic Illness Rider Variation are You selling? 

  •  Ongoing Charges:  Are you selling the type of Chronic Illness rider that has ongoing charges where there is a predictable chronic illness benefit? (Charges are deducted each month from the cash value, or off every premium for WL).  If you are, then you can breathe easier since the entire death benefit can be accelerated such as $300k from the above example.  These riders require separate underwriting based on morbidity just as LTC riders do. 
  • Charge at Acceleration:  Are you selling the type of Chronic Illness rider with no charge until acceleration?  

The Discounted method is most popular where the charge is determined at the time of claim.  Logically, since the charge is unknown until the time of claim, it stands to reason that the actual chronic illness benefit amount is also unknown until the time of claim.  So, if you are selling this variation, then a fraction of the death benefit can be accelerated such as (a) $30k out of $300k, or (b) more, or (c) less.  The amount eligible to be accelerated depends on various factors such as age, life expectancy, (severity of condition), gender, future premiums, cash value, permanent or Term product, and interest rate.  Typically, these riders do not require underwriting and are often automatically issued with the policy up to a certain age/rating. 

Note:  A second less common variation of no charge until acceleration rider utilizes the Lien method.  Here the chronic illness benefit amount is known at policy issue such as 50% of the death benefit subject to a maximum.  But, once again, what’s not known is how much it will cost you.  Here the cost (compounding lien) is deducted from the remainder death benefit paid to the beneficiary.  So, the longer the insured lives after acceleration, the larger the lien amount grows to – resulting in a potential death benefit of $0.

  • If you don’t know which Chronic Illness rider variation you are selling, then Houston you have a problem.  And, more importantly, your clients have a problem.  To further complicate matters some carriers offer several rider solutions on the same product chassis (Chronic Illness Rider with ongoing charges, Chronic Illness rider charge at acceleration, and LTC Rider with ongoing charges).  They do so to maximize planning opportunities tailored to the consumer.  So, my question is, which button did you click for the illustration?  What did you tell them? Did you place a priority focus on the living benefits at the point of sale?  If you did, then that’s likely what they walked away remembering.    

Now what?  Review and Accurately Represent 

Selling Today:  Take a close look at what you are currently selling so you can adequately represent the chronic illness benefit.  Can they accelerate the entire death benefit? Does the company hold back a percentage such as 5-10% to help cover final expenses at death?  Is the charge determined at acceleration where either the chronic illness benefit is unknown (discounting method), or the remaining death benefit is unknown (lien method)?  Many carriers now have an optional report where you can illustrate the rider benefit by inputting various ages at acceleration (sometimes you must search for this report on another tab).  It’s probably a good idea to use these reports along with client rider guides and FAQ’s to help better describe the benefit, especially if focusing on living benefits is a key component of your sales process.

Previously Sold:  For Chronic Illness Riders (aka:  Accelerated Death Benefit riders) that you’ve previously sold, take an inventory of those that have the charge determined at acceleration (discount/lien).  You can check the policy or final illustration to help you decipher.  Note:  I would Not use the insurers current rider guides since their rider benefits have likely changed.  For example, those Chronic Illness riders issued prior to Dec 2014, required the condition to be permanent and expected to last the rest of the insured’s lifetime.  Furthermore, even in instances where a carrier makes an enhancement to an existing rider, usually it only applies to new issues.  If you don’t have information on the riders you’ve sold, contact the carrier to ask?  Maybe you can get an in-force illustration reflecting their current age for acceleration?  Then you can refer to it with your client at their annual review and/or send it to them.  If it were me, I would document my files that it was disclosed, discussed, and mailed.  

How did we Get Here and Why so Much Confusion?  Simply put, over time riders morphed to win on illustrations where no drag of ongoing charges equated to a better price.  So, in competitive situations advisors selling the “no charge” riders – appeared to have the best price and therefore had the best chance at rising to the finals to win the case.  (Not to mention the added advantage of No underwriting making them quicker to get issued and get paid on). This pricing advantage did not go unnoticed by insurers.  (Think about it from their perspective.)  Today, Chronic Illness riders with no charge until acceleration are by far the most prevalent.  Yes, I know. The irony is not lost.  Those riders winning on price (on the illustration) often cost the most (at the time of claim) and are the very ones entangled in litigation.  To add further insult to the irony is recognition of LTC riders. They are the only riders allowed to be described and marketed as long-term care.  LTC riders offer some of the most robust benefits especially related to consumer protections.  Regrettably, they are sometimes judged as inconvenient because they can require an additional Health license and ongoing Continuing Education (combined with ongoing charges).  Sigh.

Disturbed to be in this Predicament? 

If your troubled or maybe even panic stricken with the thought of researching which Chronic Illness rider variations you’ve sold, that’s understandable and I’m sorry.  But this whistle had to be blown.  After all, it’s better to hear it from me than from your clients and their legal counsel, right?  I’ve been in the insurance industry for 29 years.  I know about “vanishing premiums” from the 80’s (and the widespread subsequent lawsuits).  I know about the nurses in FL who thought they were buying an annuity instead of life insurance (and the subsequent lawsuit).   I know about the Death Master File debacle (and the subsequent lawsuits).  And we all know about recent IUL’s -arguably designed to circumvent the spirit of AG-49 (and the subsequent lawsuits). 

My Point is, You Can Get Ahead of This.  Don’t Wait for the Regulators to Catch Up (and Don’t Wait for the Insurers either).  I’ve read countless companies’ descriptions of their riders.  Granted the rider descriptions may be hard to find in a 20-40-page illustration or they may be disclosed in fine print.  But they are accurate.  The good news is, recently I’ve observed some insurers improving their sales literature.  In prior years some would cherry pick the claims scenarios selecting the oldest ages and most severe conditions maximizing the acceleration amount to better promote their rider.  Now I’m seeing more companies include fair and balanced examples which include younger ages and/or milder conditions. 

Speaking of Fine Print – Are you Surprised by How Different the Riders Are?

        Which Ones: 
Still require the condition to be Permanent?
Only pay for Nursing Home care?
Reserve the right to reduce the Chronic Illness Benefit to $500k?
Have a 2 year Waiting Period?
Require the policy owner to continue paying policy premiums while on claim?
Are Reimbursement?  Which are Indemnity Design?
Use Service Days for the Elimination Period?
Require at least 6 months of Nursing Home confinement?
    Which Ones:
Can simultaneously Illustrate various ages going on Claim?
Allow the Accelerated benefit to grow with Opt B Death Benefit or once Corridor is hit?
Can be added after issue subject to UW?
Include a Residual Death Benefit?
Have Rider Charges Guaranteed?
Offer a Referral Program?
Allow benefits paid outside the U.S.?
Are LTC riders and have built in Consumer Protections? (Lapse Protection, Reinstatement and Extension of Benefits)
If you Don’t Know, then Consider Subscribing to my Services for Impartial, Unbiased Comparisons:  LivingBenefitReview.com  Ramona Neal, CLU, ChFC, CLTC, REBC

Summary:  Are Chronic Illness riders with Charges Determined at Acceleration Bad?

All the Chronic Illness rider variations are good.  The problem isn’t any of the riders. The problem (trap door) is failure to manage expectations of how they work.  In fact, these riders can be especially appealing for certain sales applications such as LIRP, where the priority goal is to minimize costs and maximize cash value growth to help supplement retirement income.  Consider this:  your clients are paying $0 dollars in ongoing charges and can still have a benefit available if they choose to accelerate.  Therefore, so what, if it’s only a fraction of the death benefit?  They can choose to accelerate or Not depending on what’s best for them.  Furthermore, in instances where the insured never actually goes on claim, then clearly (with hindsight), these rider variations were the better choice. 

All the living benefit rider solutions and Hybrid products are good for our industry and have breathed new life into life insurance.  For consumers they find comfort and peace in knowing they can accelerate the death benefit while still alive, particularly smack dab in the middle of a pandemic.  But, if we don’t know what we are selling, then we can’t possibly know what the most suitable option is.  The time is now to become proficient in the rider variations:  Research, Review, and most importantly Accurately Represent them – especially for those of you who have made these riders the cornerstone of your life insurance sale by focusing on them.  

This article is intended for Financial Professional Use Only.  Living Benefit Review, LLC makes no warranties or representations as to its accuracy.  This article should not be construed as rendering tax, insurance, investment, or legal advice.  You acknowledge that any reliance on this material or any opinion, statement or information shall be at your sole risk. If you take any action based on the information in this article, you take full responsibility for the results of that action.  You should independently verify its content.  Nothing in this article constitutes an offer to sell or buy any insurance product or rider.  Products and riders, including benefits, exclusions, limitations, terms, and definitions vary by insurance company and vary by state.