What is a Chronic Illness Rider?

A chronic illness rider is an add-on for your life insurance that pays you a benefit should you be diagnosed with a qualifying chronic illness. While most people think of life insurance as only an insurance that can pay a benefit when you pass away, there are several options to customize your life insurance policy to help you out if you need financial help while you’re still alive. A chronic illness rider, or a rider for long-term care, can do just that.

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What is a chronic illness rider option?

A chronic illness rider is a life insurance option that gives you a way to tap into life insurance benefits while still alive if you are diagnosed with a qualifying chronic illness. This is considered an accelerated death benefit rider and is sometimes added to policies at no extra cost.

To qualify for a chronic illness rider, a policy owner must be diagnosed with a qualifying condition and may need to meet certain long-term care requirements, specifically an insurance company may require certain daily living needs demand additional assistance.

If you have a life insurance policy without a rider, you may be able to sell your life insurance policy for a cash settlement.

The purpose of chronic illness riders

Chronic illness riders are designed to help the insured afford the costs of living with a chronic illness. For example, if someone is diagnosed with a chronic, terminal illness, they may be able to live more comfortably, afford better medical care, and get access to long-term care to offset the care costs of a severe cognitive impairment.

This turns the death benefit of a life insurance policy into living benefits. If you have $1 million in life insurance coming and expect to pass away within a year, for example, you may be able to access hundreds of thousands of dollars now. That could help offset the financial stressors of an illness for both the chronically ill individual and their family.

Examples of chronic illnesses that may trigger a payout from a rider include stroke, heart attack, diabetes, multiple sclerosis, HIV/AIDS, and organ failure. Even Alzheimer’s disease may satisfy the eligibility requirements for a chronic condition for a chronic illness rider. Talk to your insurance agent to learn more if you’re buying a new policy, or consult your insurance agent or insurance company for more details if you already have a policy and chronic illness.

Who may benefit from chronic illness riders

Anyone with a terminal, chronic illness that has a life insurance policy with a chronic illness rider may benefit. Chronic diseases affect 40% of the American population. Those with a terminal component to their illness may enjoy a benefit payment from the accelerated benefit from their rider.

In some cases, a chronic illness requires more extensive long-term care, possibly even a nursing home. Long-term care needs are expensive even for some healthy seniors. When you need help with multiple activities of daily living, such as bathing or cooking, a chronic illness rider can make up for a lack of long-term care insurance.

The extra money from a chronic illness rider could allow you to hire help for some home care needs, helping you avoid a nursing home. It can also free up the time of a spouse to continue working. The possibilities of how you use the accelerated benefit are endless and up to you. Once the life insurance company makes your benefit payment, the funds are yours to use however you wish.

Items to Consider

Before cashing in on a chronic illness rider, it is important to consider other aspects of your finances, health and long-term care insurance, and even Medicare benefits. Also, it is imperative to keep in mind that exercising your accelerated benefit rider may lower the life policy payment to loved ones after passing away.

The first major consideration is the impact on your life insurance. If you’ve reached a savings rate where you don’t need the cash from your life insurance early or have enough income from other sources to cover health care and other needs, you don’t have to take from the funds already earmarked for your loved ones.

Next, consider other alternatives to help pay for healthcare costs. For example, many people don’t realize Medicare includes some level of long-term care support. Medicare Part A and Part B cover most hospital and medical costs, not custodial care needs. However, when that care comes from a long-term care hospital, skilled nursing facility, home health service provider, or hospice care provider, Medicare may offer some help with long-term care costs. If you have a qualifying income, Medicaid may also offer benefits.

If you have it, long-term care insurance is another option to avoid using a chronic illness rider. Long-term care insurance policies are not as easy to come across as they once were, and they can be quite expensive. However, in some cases you can get some type of insurance through an employer or your state. All employees of a California company, for example, have long-term disability insurance from the state. While that won’t pay directly for care, it does help with the costs of a long-term absence from work.

Even if you don’t have a chronic care rider, you may have a long-term care rider (sometimes called an LTC rider). This is a very similar addition to your life insurance policy that gives you an accelerated death benefit specifically for long-term care costs while still alive. More on this down below.

Financial Implications

Getting a payout from a life insurance company generally won’t count as income, so you shouldn’t have to worry too much about paying taxes. All life insurance rider benefits are tax-free. Long-term care insurance, on the other hand, may be taxable depending on how the insurance policy is structured.

The biggest financial implications may be for the family, not the insured individual, when a chronic illness rider is used. This is because the rider may drain all benefits from the policy, leaving nothing behind for loved ones who may have been counting on some or all of that life insurance money.

You have to weight the pros and cons of your needs for the funds today versus your family’s needs in the future. This is not a simple decision and there is no right or wrong answer, just what’s right for your family.

Chronic care riders versus long-term care riders

We’ve mentioned long-term care riders a few times in this article so far, so in this section we are going to talk about similarities and differences between chronic care riders and long-term care riders.

Long-term care riders are intended to help with the costs of long-term care. No surprise there, it’s in the name. This care requirement is typically broken down into six activities of daily living – eating, bathing, dressing, toileting, transferring (walking to another room or chair), and continence. To qualify for a payout from a long-term care rider, the insured typically needs to satisfy that they can’t do at least two items from this list.

Care can happen in the home, in a nursing facility, in a hospital, or even an adult day care. Care workers generally cost at least $20 per hour for in-home assistance. Costs vary for outside care depending on the level required and type of facility. For home care, workers typically help with things like housework, taking medication, preparing and cleaning from meals, laundry, shopping, pet care, and other tasks around the house.

Just like a long-term care rider, you’ll need a doctor to sign off that you qualify for a payout when cashing in with a chronic care rider. However, the payments for long-term care may work differently, as do taxes in some cases for long-term care.

Payouts from chronic care riders

When you do decide it’s right to take the accelerated benefit from a chronic care rider, you have a few steps to get paid. First, like most insurance products, you’ll need to file a claim to get paid. For a chronic care policy, your payment will come as an indemnity payment.

With an LTC rider, payments may come through reimbursements for care services you pay for out of pocket. This may incrementally lower the cash value of a policy over time rather than taking a lump payment at once.

With a lump payment, also called an indemnity payment, you can use the money for anything you’d like and the insurance company won’t be checking to make sure you use it for care. With a chronic illness, you may have other priorities you want the funds to cover instead of care.

If you have a permanent life insurance policy, such as universal life or whole life, you may have to put your insurance policy through a form of conversion before you can access benefits from a rider. With term life insurance, the payout process for a rider is a bit simpler than with permanent life insurance.

Determining the benefit amount from a chronic care rider

A chronic care rider may not pay out the entire death benefit, or the whole thing at once. In many cases, it will pay a portion ahead of time or rely on one of a few different CI rider payout methods.

The discounted death benefit method tends to accelerate all or a portion of the death benefit, sometimes up to 100 percent of the benefit amount. With this method, there are no up-front costs. The amount you get accelerated tends to follow the severity of the condition and life expectancy. Every dollar you take today discounts your death benefit in the future. Ideally, it discounts it at a dollar-for-dollar rate.

Depending on the terms of the policy and rider, this may not be the case. For example, you may get $50,000 in cash for a $100,000 reduction in the future death benefit. While that does give up some value compared to the original death benefit amount, it may be worth it.

The lien method offers an opportunity to accelerate benefits by taking a lien on the future value of the policy. The downside is that you have to pay an interest rate on the lien. With this method, you are in effect taking a loan against a future death benefit payout and have to pay interest on that loan.

The dollar-for-dollar acceleration method works a lot like the discounted death benefit method. However, there is no discounting on what you get in the future. If you have a $500,000 death benefit and take $100,000, it will reduce the future death benefit to $400,000. This is better than the discounted death benefit method and the lien method if available.

Make the right chronic illness rider decision

Life insurance can be complicated, so don’t be ashamed if you are not sure what to do with your current situation. If you have a chronic illness and life insurance with a chronic illness rider, you may be able to alleviate your financial strain at no additional cost.

Check into what other options you have to cover your costs, including long-term care insurance and government assistance programs, before tapping into your life insurance. If you do have a rider, hopefully, it gives you an option to take out funds from your death benefit using the dollar-for-dollar method so you don’t end up paying more to access your funds.

At the end of the day, it is up to you and your family to decide if and how to take advantage of a chronic illness rider. While it may take funds from your family later on, the benefits to your life while you are still alive may make that decision worthwhile. After all, if you’ve been paying for life insurance for decades, you should get a slice of the benefits without any guilt.

When in doubt, you can consult with a trusted financial advisor or attorney for more guidance and personal assistance when deciding how to handle your chronic illness rider and life insurance. If you don’t have a chronic illness rider, a life settlement may be a good alternative. With the right focus on your long-term finances, your health, and your family, you can make the right insurance decision for your unique needs.

Eric Rosenberg
Eric Rosenberg
Eric Rosenberg is a personal finance expert residing in Southern California. He holds a BSBA in finance from the University of Colorado and an MBA in finance from the University of Denver. He has over a decade of experience writing about financial topics online. His work has been featured on Business Insider, Investopedia, The Balance, Investor Junkie, and a wide range of quality financial publications.
 

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