Dealing with chronic illnesses is a major concern for many older adults, significantly affecting their long-term care costs. A chronic illness rider on a life insurance policy can be a vital tool in managing these expenses. This guide explores what chronic illness riders are, how they work, and considers both their advantages and alternatives.
What is a Chronic Illness Rider?
A chronic illness rider is an add-on to a life insurance policy that provides financial benefits if the policyholder becomes seriously or chronically ill. These riders allow the policyholder to access some of their death benefit early to cover expenses related to their illness, particularly long-term care costs that Medicare might not cover.
Eligibility and Activation
To activate a chronic illness rider, a policyholder must be unable to perform at least two of the six activities of daily living (ADLs) as certified by a physician. The ADLs include eating, bathing, dressing, toileting, transferring (moving into or out of a bed or chair), and continence. The condition must also be expected to be chronic or permanent, typically requiring a waiting period (often 90 days) before benefits can start.
Cost of Chronic Illness Riders
Some insurers include a basic chronic illness rider in their life insurance policies at no additional cost, offering limited benefits. More comprehensive riders are usually available for an extra fee, which varies based on the policyholder’s age, health, and the specifics of the insurance policy.
How They Work
Chronic illness riders are considered a living benefit because they provide financial payouts while the policyholder is still alive. These benefits are deducted from the death benefit of the policy, reducing the amount available to beneficiaries upon the policyholder’s death. Payouts can be structured in various ways, depending on the policy terms—some allow for monthly payments, while others may permit lump-sum withdrawals.
Chronic Illness Rider vs. Long-Term Care Rider
While both riders address similar needs, there are key differences:
- Chronic Illness Rider: Typically activates based on the inability to perform a certain number of ADLs, with flexible use of funds.
- Long-Term Care (LTC) Rider: Provides broader coverage for long-term care needs and may offer both indemnity and reimbursement models, often requiring a formal plan of care.
Pros and Cons of Chronic Illness Riders
Pros:
- Provides funds that can be used for a variety of needs, not strictly medical expenses.
- Retains a portion of the death benefit if not all rider benefits are used.
- Generally costs less than standalone long-term care insurance.
Cons:
- Not all chronic conditions may qualify for rider activation.
- Benefits used reduce the available death benefit.
- May not provide sufficient funds for extensive long-term care needs.
Alternatives to Chronic Illness Riders
For those without a chronic illness rider or those seeking additional options, alternatives include:
- Life Settlements: Selling your life insurance policy for a lump sum of cash. This is an option for policyholders aged 65 or older with a policy value of $50,000 or more. It provides a way to access funds that may exceed the surrender value of the policy.
- Viatical Settlements: Similar to life settlements but specifically for policyholders with a terminal illness and a life expectancy of less than two years.
These settlements provide immediate cash but require relinquishing the death benefit and future premiums.
Implementing a Chronic Illness Rider
If considering a chronic illness rider, it’s wise to discuss options with a financial advisor or an insurance professional who can provide detailed information tailored to individual health and financial situations. They can help navigate the complexities of different policies and ensure that any chosen solution aligns with long-term financial and health care goals.
In sum, chronic illness riders and their alternatives offer crucial financial support for managing long-term care expenses, allowing individuals to use their life insurance benefits in ways that best suit their needs during challenging times.
