What to Know Before Purchasing a Long-Term Care Rider

Do you know the difference between a long-term care rider and chronic illness rider? Section 7702B and Section 101(g)? If you’re contemplating a life insurance policy or annuity with a long-term care rider, make sure to understand the key terms.

The insurance industry has changed since I began my career. Long-term care insurance policies were the recommended option, and the company I started with even had their own stand-alone home health care policy.

A New York Times article “Aged, Frail, and Denied Care by Their Insurers” left me stunned on how insurance companies that sell traditional long-term care insurance policies deny claims when needed most and I had witnessed this on multiple occasions. It was difficult endorsing this product after all the backlash. According to AARP, 52% of people who turn 65 today will develop a severe disability that will require long-term care at some point in retirement. The U.S. Department of Health and Human Services reports that 70% of people over 65 will need long-term care at some point in their lives.

So, how do you approach such a delicate subject? Of course, you can always self-pay or apply for government benefits — such as Veterans Aid and Attendance or Medicaid — but the qualification rules are strict and continually changing. For instance, the Department of Veterans Affairs implemented new guidelines on net worth and asset transfers in September 2018.

Long-term care insurance is still an option, but even large companies, such as GE, intend to impose a $1.7 billion premium increase through 2029 on its roughly 274,000 long-term care insurance policyholders. The average policyholder age is 77. Can you visualize getting hit with a substantial premium increase on your long-term care insurance policy after paying on it for over 12 years? (Learn more by reading 6 Options to Fund Long-Term Care in Retirement.)

While there are other options to traditional long-term care insurance — including life insurance and annuity long-term care riders — not all are structured the same. In fact, there are two styles of riders that are often confused: 1.) long-term care riders; and 2.) chronic illness riders.

What is a long-term care rider?

A long-term care rider is an add-on or feature to a life insurance policy or an annuity under IRC §7702B (the Internal Revenue Code concerning the treatment of long-term care) designed to help pay for the costs of long-term care services. Claims paid on these can be either temporary or permanent (as opposed to chronic illness riders, which are only for permanent conditions). In order to qualify for services, they must be recommended by a licensed health practitioner — such as your doctor.

Long-term care benefits from a life insurance or annuity rider are paid in two ways:

Indemnity policy

With an indemnity policy, once the insured person qualifies for benefits, monthly payments are paid out according to the contract. The policy automatically pays the specified dollar amount directly to the policyholder each month, regardless of what the care actually costs.

Benefits paid in excess of the HIPAA “per diem” (or per day) limitation are subject to taxation. The HIPAA per diem rate for 2019 is $370 per day (up from $360 per day for both 2017 and 2018).

For example, say a 65-year-old woman purchases an annuity with a long-term care rider for $100,000 that provides an immediate benefit of about $300,000 (or $137 per day for up to six years). If she were to qualify for long-term care benefits in the following year (age 66), she’d receive about $141 per day, as the benefit grows over time based on the contractual guarantees. (It’s important to note that not all insurance companies operate the same way.) Since this amount is below the HIPAA per diem rate of $370 per day, all benefits paid would be tax-free!

Reimbursement policy

With a reimbursement policy, you’d only be “reimbursed” for your actual long-term care costs, instead of receiving a steady amount, like an indemnity policy.

Source: https://www.kiplinger.com/article/insurance/t036-c032-s014-purchasing-a-long-term-care-rider-what-to-know.html