Does ABR = LTC?

Can the insured recover from the chronic illness or is it expected to last for the remainder of life?

This primer will help you better understand the differences between Accelerated Benefit Riders, Enhanced Accelerated Benefit Riders, Long Term Care Benefit Riders and Hybrid Life/LTC policies

One of the trends in life product development over the past ten years has been the emergence of “tiered” and “enhanced” Accelerated Benefit Riders (ABR). No longer is the ABR an after thought or just a promise to access some of the life policy death benefits in the last six months of life.  Some carriers such as Lincoln and LSW have been offering three tiers of benefits in their “free” ABRs – terminal illness, critical illness and chronic illness benefits although some limit chronic benefits to more restrictive nursing home definitions. And, now, some are also introducing “Enhanced” ABRs for an additional charge (monthly deduction from the UL account value) that many commentators see as “MoneyGuard on a budget”. As you will see below, that description is an overstatement. Other carriers have added Long Term Care riders to UL products though some have also taken them away, too. So, you may ask, why should I care? Is this hair-splitting, semantics, hype or something else?

This product trend mirrors a decade of sideways market returns, volatile markets, declining life policy dividend scales and UL crediting rates at policy minimums. Against this challenging backdrop, it represents carriers’ efforts at providing substance while slapping on a new and improved label to their life products. And, the thing is, it is working. National Life Group’s Life of the Southwest (LSW) is the number three indexed life seller in large part due to their strong emphasis on their living benefits rider. They have even added all three (terminal, critical and chronic) living benefits to their entire series of term products.

Standard Accelerated Benefits Riders (“no charge” to add) – Standard ABRs or “living benefit riders” pay a part of the life policy face amount of coverage in advance. The rider can be added at no charge, though there may be a charge to access the benefits, if needed. Standard ABRs are still the most common type. Most standard ABRs are still limited to accelerating the death benefit for a diagnosis of terminal illness (expectation of death within 6-24 months depending on the carrier) but some permanent policies can be expected to be more liberal in the benefit triggers e.g. some may include a critical illness benefit. Term policies usually don’t offer more than an accelerated death benefit for terminal illness.

For standard ABRs that go beyond terminal illness, the benefits may include some or all of the triggers for either “critical illness” or, in a few cases, a limited form of chronic illness. The benefits will trigger on the diagnosis of certain dread diseases i.e “critical illness” and in the event of a diagnosis that affects the insured’s longevity and quality of life, such as a major organ transplant. For those impacted by long term illness, whether or not one enters a nursing home, some carriers provide for limited “chronic illness” benefits.

The amount that companies may pay in advance varies by company and circumstance. The amount may be expressed as a percentage of the face amount of coverage and is often limited to a maximum dollar amount. Standard ABRs are less generous than the enhanced ABRs and cap the amounts accelerated by the lesser of a percentage of death benefit and a specified maximum amount. There is usually an administrative charge applied at time of rider claim.

Enhanced Accelerated Benefits Riders (“charge” to add) – Enhanced ABRs add chronic illness to the mix but not LTC. Hartford Life (now Prudential) has one of the oldest and better known riders of this type. Prudential calls it BenefitAccess. Again, where these riders are available, it is usually for certain permanent life products only.

All ABRs (standard and enhanced) which pay benefits for chronic illness do so via Section 101(g). This subsection allows the benefit to be paid as a tax free acceleration of death benefit.  Many enhanced ABR riders are classified as 101(g) only and are generally referred to as “Accelerated Death Benefit for Chronic Illness” riders. With these products, the term “long-term care” may not be used in marketing, sales literature, or in sales presentations to clients. The term “chronic illness” must be used instead. In addition, these riders generally require that the physician must certify the chronic illness “is likely to last the rest of the insured’s life”. In other words, the condition must be non-recoverable. Insureds with conditions such as mild to moderate strokes, orthopedic repairs, physical complications from cancer recovery, or other recoverable conditions, would not be eligible to go on claim. In fact, recent claims experience from Genworth, the leading traditional LTC insurance provider, suggests that about 1 in 4 LTC claimants recover from their LTC “benefit-eligible” condition in the first year. That’s great for those covered by an LTC benefit but for those with a Section 101(g)-only, enhanced ABR benefit, many would never meet the test for “is likely to last the rest of the insured’s life”.  For this reason, you need to know your product and use care when explaining these features to clients so they have an understanding of any limitations in coverage. Note that these riders all use the indemnity model since claims reimbursement is not possible due to not being a long-term care product.

Some chronic illness riders are paid for by an additional charge added to the policy, or an increased premium, or by making the rider a policy feature and then discounting the amount of death benefit accelerated to provide the chronic illness benefit, if necessary. In the latter, benefits cannot be determined until the time comes to go on claim. The carriers will reduce the death benefit amount by actuarial computation to reflect the earlier payout. Among the factors that can affect the actual amount available are the face amount of death coverage, the insured’s actual future mortality, outstanding policy loans, current interest rates, future scheduled premiums, and administrative charges.

The policy owner can receive benefits by lump sum or in a series of installments. The amount of money available by rider is likely more than they would realize by surrendering the policy for cash or by taking a policy loan. Insureds usually do not have to use amounts they receive under the option to pay medical or nursing home expenses. Rather, they generally may use these amounts in any manner they desire. 

Long Term Care Riders (“true” LTC benefits paid from base life policy with no extension) – Building on ABRs offering chronic illness benefits, riders with the additional classification of Section 7702B offer more comprehensive coverage which moves us into “true” long term care benefits. To qualify for claim, the client needs to meet a definition of chronic illness which requires a physician to certify the insured, for a period of at least 90 days, is unable to perform at least two Activities of Daily Living (ADLs) or suffers from severe cognitive impairment. Unlike most enhanced ABR riders, this definition allows for the LTC condition of the insured to eventually be fully recoverable, so conditions such as mild strokes, orthopedic repairs, side effects of certain cancers, etc. would qualify for a long-term care claim on this type of policy. In addition, all riders in this category charge an additional premium or monthly deduction for the rider, which will add to the policy premium cost. LTC monthly benefits and cumulative total benefits are determined at issue (assuming no withdrawals or loans from the policy) so the policy holder knows from day one what the benefits will be should they need to go on claim.

The following chart from Nationwide summarizes the differences between enhanced ABRs and LTC riders. Click on the chart below to enlarge. For an updated white paper, please see Understanding Variations in LTC and Chronic Illness Riders.

Hybrid Long Term Care (LTC from base life policy plus extension of benefits rider) – For more comprehensive LTC needs, traditional LTC policies are often selected. A major disadvantage is that for those who die before ever needing LTC, there is no benefit ever paid, no death benefit and the premiums paid are usually not recoverable. That’s why hybrid LTC aka “linked benefits” products like Lincoln MoneyGuard and Genworth Total Living Coverage are ideal as benefits are paid in such scenarios. These products are true tax-qualified LTC insurance policies that provide comparable protection to traditional LTC insurance products. Hybrids are not new either –MoneyGuard was first introduced nearly 25 years ago.

Most LTC riders, mentioned in the prior section, serve to accelerate the life policy death benefit. Hybrid life/LTC policies do that and then extend the LTC benefits. Depending on the carrier, the extension of benefits rider either increases the total benefit amount available for long-term care expenses (while the death benefit remains the same) or lengthens the number of months over which the insurer will pay benefits. In either case, benefit payments will reduce the available death benefit of the policy. However, some companies still pay a minimum “residual” death benefit even if the total of all accelerated benefit payments exceeds the policy’s death benefit amount. These policies also have significant advantages including return of premium and benefit guarantees.

What to Use When

“In reality, most chronic illness riders…have more restrictive terms than the standard LTCI trigger definitions, so the prohibition of marketing those plans as LTCI is appropriate.”

Milliman Research Report “Chronic Illness Accelerated Benefit Riders” April 2012

As noted, there are different triggers for benefits between each of the riders—that’s really the main difference with regards to LTC versus chronic illness.  The standard ABRs are really not designed in a similar fashion, but carriers and distributors like to compare them so we include them in this chart for comparisons (click on image to enlarge).

For an outline of the difference between “enhanced ABRs”, most LTC riders, and Lincoln’s MoneyGuard product (nearly 80% of the hybrid marketshare), click on this Enhanced ABR versus LTC versus MoneyGuard chart from Lincoln to see how their enhanced ABR compares to most LTC riders and to their own hybrid, MoneyGuard. The key takeaways for suitability are the difference in client objectives between the three design alternatives. Some of the major differences are:

Difference between LTC and Chronic Illness Benefit Triggers—The actual triggers for a client that goes on claim are exactly the same for chronic illness and long-term care with one major difference.  Both are defined as an inability to perform 2 of 6 “activities of daily living” or “severe cognitive impairment”.  These activities include Bating, Eating, Continence, Transferring, Dressing, and Toileting (or some variation on these).  The difference lies in the duration of the illness.   As mentioned in enhanced ABR section above, in order for a client to qualify to receive benefits under a chronic illness rider, their condition has to be a permanent condition certified by their healthcare professional and the client is not expected to recover from the illness.  With Long-Term Care Acceleration riders like Lincoln MoneyGuard, the policy will provide for “intermittent” care so long as the illness is expected to last for at least the minimum specified period which is usually 90 days.  A client with a minor stroke that is expected to be receiving care for 6 months would qualify for benefits from an LTC policy, but would not with a chronic illness.  This is a big difference.

Difference in Payout— Lincoln MoneyGuard follows a reimbursement payout design, while many of the “enhanced ABR” riders are designed as an “indemnity” payout.  With a reimbursement plan, the client is only reimbursed for actual qualified expenses incurred as a result of their illness.  With an indemnity benefit, the client receives a specified amount of benefit each month as a cash payment that they can use on whatever they see fit.  There are no restrictions on how they spend these funds because the maximum payout is capped at the IRS per diem limit ($320/day in 2013).  This allows the client to spend the funds on things like home remodeling, transportation, help with chores, etc.

Difference in Funding—Lincoln MoneyGuard may be funded with either 1, 3, 5, 7, or 10 payments whereas a Life+Rider combination allows for more flexibility regarding the premium payments (Lifetime pay, pay to certain age, etc.)

Difference in Client Goals—for a similar premium, a client would likely receive a higher death benefit from a policy with a chronic illness rider, but will receive far more funds for LTC with a Lincoln MoneyGuard policy because of the Extension of Benefits rider and the leverage that it provides.  In other words, a client with a Death Benefit need would be better suited to a product with a rider attached, but a client with LTC coverage in mind would benefit from a MoneyGuard type of policy.