The more common type of benefit on existing life insurance policies is the accelerated death-benefit rider. These riders often have no additional up-front charge and are just included as part of the policy; however, this is not always the case, as some policies do charge extra for the rider up front. The rider cannot be marketed as long-term care coverage and the policy cannot pay out anything in excess of the life insurance death-benefit face amount.
Typically, the amount of money that can be accelerated and paid out before death is determined by a number of factors including age, gender, class of policy, interest rate, and policy death-benefit amount. All accelerated benefits for chronic illness require indemnity payment. (Indemnity pays a monthly or daily cash benefit and reimbursement pays benefits based on actual incurred expenses). For instance, the higher the interest rate and the younger you are when you file a claim for accelerated death benefits, the more the death benefit will be discounted.
Chronic illness riders work a little bit differently than the other options mentioned. Under a chronic illness rider, the individual must be certified as “chronically ill” by a licensed health care practitioner as being unable to perform at least two activities of daily living, be disabled at a similar level, or have severe cognitive impairment. Activities of daily living are defined as 1) eating, 2) toileting, 3) transferring, 4) bathing, 5) dressing, and 6) continence. The receipt of benefits is generally treated as income tax free as long as they do not exceed certain HIPAA daily limits.
With life-linked benefits, policies can be marketed and sold as providing long-term care coverage. These policies are a combination of a life insurance policy and a 7702(b) long-term care rider. Most of these policies come with a six-year benefit period, with the death benefit paid out over the first two years, and the 7702(b) rider continuing to pay the monthly benefit for up to four more years.
Benefits are typically paid out as a percentage of the death-benefit amount each month, but do not exceed the IRS per diem amount. Although most policies with these riders provide for reimbursement of qualified long-term care, there are at least two riders available that pay as indemnity-style policies. Linked-benefit policies with 7702(b) riders are typically sold with a single premium, but some may permit premiums to be paid over a specified number of years. Premiums are guaranteed and most provide for a nominal death benefit, even if all of the long-term care benefits are paid out.
A linked-benefit life insurance policy will be a cheaper way to provide long-term care financing benefits, but a more expensive way to provide life insurance benefits when compared to an accelerated death-benefit policy… However, there are benefits to both linked benefit and accelerated death-benefit life insurance policies compared to a stand-alone long-term care insurance policy. Both require typically level premiums or a single lump-sum premium, meaning that they will not see the premium increases or lifelong premium payments that most long-term care insurance policies require.