By Cyril Tuohy
Financial advisors who keep track of the proliferation of living benefits riders tacked onto life insurance policies may have asked themselves why so many insurance carriers recently are trumpeting the benefit of a lump sum payment.
Insurance carriers have announced lump sum options with terminal and critical illness riders, and even with chronic illness riders used to pay for long-term care as the industry looks for ways to “accelerate” the policy benefits.
The lump sum is a lot easier and the claims experience more stable and predictable, as carriers don’t have to pay out in small installments over longer periods.
Partly as a result, carriers favor the lump sum payment over monthly, quarterly or annual installments to pay for care associated with terminal illness, chronic illness or critical illness.
Stephen Rowley, vice president of Gen Re, said that from the standpoint of insurer pricing “there’s a lot more safety and predictability in the lump sum.”
“There’s no claim other than the lump sum payment and as a result I don’t need to price for any continuation assumptions of that in the policy,” he said.
A lump sum allows carriers to get away from the complexities of claim reserving and reimbursement claims adjudication.
From the consumer’s perspective, the money is theirs to spend as they see fit: building an addition to a home to accommodate an ailing in-law, or paying for in-home care, for example.
“It’s a simple ‘if-then’ approach,” Rowley told InsuranceNewsNet. “If you meet the benefit eligibility requirements — then you are paid.”
In the last two years, major insurance carriers including New York Life, Prudential, Sun Life and Aflac have introduced living benefit riders to buttress their whole life and universal life policies.
Many, but not all, of those riders pay a lump sum.
AIG’s Critical Care Plus rider, for example, pays a single lump-sum benefit of up to $500,000 to cover the costs of out-of-network treatment for critical illness like cancer and stroke, as well as indirect costs such as lost income.
By contrast, New York Life’s new chronic care rider for its whole life product line pays out monthly, but without the need to submit receipts for claim reimbursement.
When triggered, some chronic illness riders pay on an indemnity basis, while other chronic illness riders pay on a reimbursement basis and don’t require medical receipts.
Rowley uses the analogy of the Montana cancer patient in need of specialty treatment or treatment at a “center of excellence” in New York or Los Angeles. Because treatment is more expensive in the big cities, the patients are better off with the cash.
Gene Pastula, president of Westland Financial Services in San Diego, said that because carriers price the living benefit into the policy, whether carriers pay out in a lump sum or through installments doesn’t make much difference to the underwriter.
For carriers, the lump sum amounts to a bonus sales feature, he said.
But to the insured lying in a hospital bed or suffering from a terminal illness at home, receiving a lump sum of $200,000 or $50,000 before death instead of $2,000 or $3,000 a month, makes a big difference.
Pastula said people suffering from a critical illness — cancer, stroke or heart attack, for example — face heavy medical bills, so the lump sum is an added benefit on the life insurance policy.
The biggest changes, Pastula also said, isn’t so much with carriers paying a lump sum benefit payment on the way out, it’s with collecting a lump sum premium on the way in from policyholders looking to fund their policies.
The struggling fortunes of long-term care insurance carriers have opened the door to more accelerated benefit riders on life insurance policies, and “more and more carriers are shifting to the lump sum payment model as riders have taken off,” Rowley said.
Long-term care benefits are aren’t as generous as they used to be, but the illness riders on life insurance policies are relatively generous by comparison, Rowley also said.
Rowley said that back-office claims processing for long-term care is fairly complex, more than what many life carriers are prepared to handle, so it’s easier for life insurers to move to a lump sum or a “limited lump sum” model, he said.
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