The difference between a Chronic or Critical Care Rider (CCCR) and a true Long Term Care Rider (LTCR) is that the impairment, whatever it may be, must be expected to be permanent in order to qualify for benefits under a CCCR.
The result is some clients who need temporary care wouldn’t have benefits under their CCCR, while they may have been covered under a true LTCR.
When we take a closer look at both LTCRs and CCCRs in an effort to truly understand the nuances that exist, we discover there is much, much more to the story.
The reality is that there are five distinct types of riders that all claim to do basically the same thing. The fact that they’re lumped into only two groups is really just the tip of the iceberg.
How these riders work
Both types of riders have the same basic functionality.
If an insured is unable to perform two out of the six Activities of Daily Living (ADL) or have significant cognitive impairment, they may be eligible for benefits. The benefits are similar under both types of rider in that they are both acceleration of the death benefit from the policy.
(Death benefits and cash values associated with these contracts are reduced by the payment of benefits.)
That’s really where the similarities between these two types of riders end.
The differences are significant, and they all have to do with how the actual benefit payments are calculated at the time of claim and how the client “pays” for coverage.
LTC riders, which fall under section 7702B, provide the most robust benefits in this category. The trade-off is that these riders are also the most expensive and are usually fully underwritten.
There are two methods for the payment of benefits under an LTCR: Indemnity and reimbursement
Indemnity simply pays the benefit amount you request once you are on claim. Reimbursement requires the submission of expense documentation to the insurance company claims department on a monthly basis to receive benefits.
Both types are also subject to a contractual maximum based on the benefit maximum purchased at the time the policy was issued.
Once on claim under either benefit payment method, the client will receive benefits as illustrated, up to the benefit maximum purchased, until the benefit pool is exhausted and a small, residual death benefit is typically preserved.
A critical difference here is also the ability to purchase an “extension of benefits” that provides a pool of money above and beyond the initial acceleration of the death benefit.
Inclusion of this rider will typically double the size of the total benefit amount, effectively doubling the duration of the benefits elected, without having to purchase additional death benefit.
These are very cost effective and allow the client to purchase a smaller face amount, yet receive the same benefits as a contract without the extension of benefits rider.
Chronic and critical care riders
The availability of CCCRs, which falls under section 101(g), has expanded rapidly in recent years. Demographics, education around the probability of needing care and the high cost of traditional LTC coverage and LTC riders have all contributed to the rise of these riders.
The market has evolved to the point that there is almost an expectation that permanent contracts include this feature. There’s enough momentum, in fact, that this type of rider is now being added to term insurance contracts as well.
Benefits are paid on an indemnity basis under these riders, but there are three different methods being used by insurance carriers to determine the actual pay out. These methods are directly tied to how the client “pays” for benefits.
Additional cost CCCRs
A subset of these are actually elective riders that must be applied for and have a premium cost associated with them.
These “Additional Cost” riders have a distinct advantage over other cost structures: The benefit amount illustrated at the time of sale is exactly what the client will receive once on claim.
The incremental cost for adding the rider is typically very reasonable, particularly for younger clients who are statistically years away from a likely claim.
“No cost” CCCRs
No cost is in quotes for a reason.
The reality is that the cost is simply deferred until claim time, and it’s paid for via discounting the total benefits paid out under the contract. This discount is critical to understand.
Assuming a policy owner has qualified for benefits, the insurance company will use a formula based on expected mortality, policy cash values and interest rates to come to a discount percentage.
Here’s how it could work:
- $1MM face
- 25% acceleration maximum
- $250K potential benefit payout
- 25% “discounting” based on the factors above
- Client actually receives $187,500
- Remaining death benefit is $750K
- Total payout under the contract is $937,500
The rider just cost that client $62,500!
That’s not free, or no cost – that’s simply deferred.
No cost underwritten CCCRs
This variation on the no cost CCCR theme is not seen that often. Rather than rely on a formula and mortality assumptions based on age, this rider will require a review of the client’s medical file at claim time to determine if they’re eligible for benefits.
In some instances, simply qualifying under the two-of-six ADL’s rule will not be enough. The cause of the impairment has to be a “qualifying condition” as well.
This type may turn out to be the most expensive rider of all if it doesn’t actually pay a claim.
The good news is that this underwriting process avoids the discounting, so if you qualify, the acceleration plus remaining death benefit, if any, can equal the initial face amount purchased.
Here’s the most important question in this discussion: Which type of rider are you selling?