According to the Centers for Disease Control (CDC), some 80% of older adults have one chronic disease, and 50% have two or more. The CDC also reports that 95% of healthcare costs for older Americans are related to chronic conditions.
Those stats demonstrate a clear need for solutions that help seniors pay for long-term care — costs that often arise with chronic disease but are not covered by Medicare. One solution is an optional life insurance benefit called a chronic illness rider.
What is a chronic illness rider?
If you’re looking for an understandable chronic illness rider definition, you’re in luck: A chronic illness rider is a feature available on life insurance that funds long-term care costs when you have a permanent or terminal illness. Some chronic illness riders specify the conditions or diseases that are eligible for benefits, but many do not.
Normally, you don’t become eligible for benefits under the rider until your condition incapacitates you. This is not as subjective as it sounds. A physician must certify that you cannot perform at least two of six “activities of daily living” (ADLs), often for a minimum length of time. The six ADLs are: eating, bathing, dressing, standing/sitting/walking, continence, and using the bathroom independently.
Based on the impairment requirement, a fully functional diabetic wouldn’t qualify for benefits under a chronic illness rider. But a diabetic who cannot walk to the bathroom might.
Who can benefit from chronic illness riders?
You can benefit from a chronic illness rider if you have a high risk of chronic disease, either because of your lifestyle or your family medical history. If you aren’t sure of your risk level, ask your physician. He or she can identify risk factors and share strategies for reducing that risk.
How much does a chronic illness rider cost?
Some life insurance policies include a basic chronic illness rider at no extra cost. As you can imagine, these free riders provide limited payouts.
Many insurers give you the option to upgrade to a paid rider with larger payouts. You might pay a few hundred dollars a year for the upgrade, but the cost will vary based on terms and limits. Your age and health are also factors.
How do chronic illness riders work?
A chronic illness rider is what’s called a living benefit or accelerated death benefit rider. Typically, you buy life insurance so that your loved ones will receive a payment after you pass. Accelerated death benefits give you access to that payment while you are still living.
It’s important to understand that your chronic illness benefits come out of your death benefit. In other words, if you use your chronic illness benefits, your death benefit is reduced accordingly. The mechanics of that reduction vary greatly from one policy to the next. Here are three examples of how it might work:
- Rider allows for monthly payments of up to 2% of the policy’s death benefit. Every $1 in benefit used reduces the death benefit by $2. You can use up to 100% of your death benefit.
- Rider allows for monthly payments of up to 5% of the policy’s death benefit. Every $1 in benefits used reduces the death benefit by $1. You can use up to 75% of your death benefit.
- Rider allows for annual payments of up to 24% of the policy’s death benefit. Every $1 in benefits used reduces the death benefit by $1. You can use up to 90% of your death benefit.
As you can see, key features in a chronic illness rider are the maximum monthly benefit, how benefits consume your death benefit, and how much of your death benefit you can accelerate.
How do chronic illness rider benefit payouts work?
The first step to collecting benefits is to file a claim. As part of the claim, you’ll ask your physician to certify your condition meets the eligibility requirements. If your insurer agrees, you’ll begin collecting benefits (after a waiting period, if there is one).
The amount of your benefit payments under your chronic illness rider should be specified in your policy documentation. It’s typically 2% to 4% of your death benefit per month. Some policies also provide for annual, lump sum payments. All chronic illness riders will cap your benefit payments at some percentage of your death benefit, ranging from 75% to 100%.
Since most chronic illness riders are “indemnity” rather than “reimbursement” policies, you shouldn’t have to submit receipts or proof of your medical expenses. There should be no restrictions on how you use funds, either.
Chronic illness rider vs long-term care (LTC) rider
The differences between a chronic illness rider and an LTC rider can be nuanced. The table below summarizes some of the main differences you might see. Keep in mind that riders vary from one insurer to the next. Your insurer may structure them differently.
|Rider Type||Eligibility||Waiting Period||Payment Structure|
|Chronic Illness Rider||0-90 days||Indemnity|
|Long-term Care Rider||Can’t perform 2 of 6 ADLs||90+ days||Indemnity or Reimbursement|
Is a chronic illness rider right for me?
A low-cost or free chronic illness rider can be a smart planning move, especially if you have a history disease in your family. Whether you should upgrade to a more expensive rider with richer benefits is a tougher question to answer. Review the pros and cons below to help you decide.
- There are often no restrictions on how you use your chronic illness payments.
- You still get your death benefit if you don’t use the chronic illness benefits.
- Chronic illness riders are less expensive than standalone chronic illness insurance or long-term care insurance.
- Not all conditions requiring long-term care will meet the eligibility requirements for your chronic illness benefits.
- Your chronic illness rider benefits may not be sufficient for a long-term condition.
- If you use your chronic illness benefits, your death benefit is reduced.
What if I already have a life insurance policy but no rider?
Some insurers allow you to add riders to an existing life insurance policy. A chronic illness rider, though, can be harder to get and more expensive if you are older. And if you’ve already been diagnosed with a chronic condition, adding the rider will be even more challenging.
Life or viatical settlement as an option
One alternative is to sell your life insurance for cash to raise the funds you need. There are two types of life insurance sales transactions: the life settlement and the viatical settlement. You may be eligible for a life settlement if you are 65 or older and your policy’s face value is $50,000 or more. Viatical settlements are reserved for policyowners who are chronically or terminally ill with an expected lifespan of less than two years.
A marketable life insurance policy can command a sales price of up to 60% of the policy’s death benefit — far more cash than you’d generate by surrendering your insurance. You would give up your death benefit, but you’d also relieve yourself from future premiums on that policy.
Knowing the value of your life insurance can confirm if a life or viatical settlement is worth pursuing. Harbor Life Settlements can help you here. Our team offers free policy reviews and valuations. Reach out to us today to learn more.