The nation's first accelerated death benefit policies provided benefits to people who had just six months to live -- a timeframe that has since doubled, and in some cases, is even a bit longer. The time has come to take this benefit one step further by making it available for those with permanent chronic illnesses, not simply terminally ill patients.
We've clearly reached a point where the risks associated with these conditions are more manageable than ever before. There's also a moral imperative to consider helping people enjoy a better quality of life. And why shouldn't insurance agents be able to reap the advantages of innovative product development, not to mention give customers what they want?
Beyond vanilla
The days of selling vanilla life insurance are fast giving way to a more satisfying blend of whole life coverage with some built-in protection for both chronic illness and long term care. This is the direction in which we expect to see more permanent life insurance policies headed in the next five or 10 years, and there already are strong indications in the marketplace that prospective buyers have shown a willingness to convert their term life coverage into a more meaningful, beneficial, and long-lasting whole life policy.
Serious challenges associated with responding to demographic and regulatory trends, as well as supporting government-entitlement programs, will continue to ratchet up pressure on long term care insurance (LTCI) costs -- forcing the entire populace to pay more attention to funding these needs.
Members of the so-called "sandwich generation" don't want to saddle their children with the same kind of issues they have had to endure with their parents. Life insurance alone will not pay the bills while aging loved ones are confined to a nursing home. Although people generally fail to see the value of LTCI until their 50s and 60s, the benefits of accelerated death benefits will resonate with any age group when carefully explained.
Free rider
One possible solution is to include an enhanced accelerated benefit rider (EABR) in a whole life policy. Some companies offer the rider at no additional charge since there's a fixed premium and a relatively predefined net amount at risk.
Such an arrangement, which would burnish the value of permanent life insurance, is not appropriate for universal or variable life insurance whose policyholders have greater control of the net amount at risk. An enhanced accelerated benefit rider is not a substitute for LTCI, but it can supplement this coverage.
The idea at hand is simple: Benefits eligibility would hinge on activities of daily living, with assistance provided only to insureds who are permanently chronically ill and unable to perform at least two of six activities (defined by the IRS as eating, bathing, continence, dressing, toileting, and transferring) or have a permanent cognitive impairment that requires supervision.
There are several advantages to this approach, namely that there are no restrictions on how accelerated funds are used. Also, people would be able to draw from their life insurance policy on an income tax-free basis under the LTCI tax laws prior to when they became terminally ill.
Unlike life settlements, the policy would remain in force until the full value of the contract has been utilized.
Critical illness policies typically pay only for predefined illnesses, and the benefits are taxable, while LTCI coverage involves guesswork with regard to benefit levels, how long premiums should be paid, and the amount of inflation that should be attached to the policy. A wrong guess will leave policyholders short on cash. An EABR would serve as a valuable safety net that helps prevent erosion of other assets.
Changing needs
At a time when Americans are expected to take greater personal responsibility for funding their future, people need flexibility from their permanent life insurance products. The more tools clients have at their disposal, the better off everyone will be.
Indeed, the EABR exemplifies the ability of life insurance to evolve in response to the changing needs of consumers and provides an important additional reason for purchasing permanent life insurance policies.
Stephen M. Rice, CFP, CLU, ChFC is a senior sales consultant with the California-Pacific Agencies of The Guardian Life Insurance Company of America. Mr. Rice can be reached at srice@integratedplan.com.
