A Deeper Dive Into Chronic Illness Riders

By Cyril Tuohy

InsuranceNewsNet

Item: This month, Voya Financial offered a chronic care rider with three of the company’s universal life insurance policies.

Item: Last February, American International Group (AIG) launched a chronic illness rider under the AG Asset Protector suit of riders for life insurance products.

Item: Last January, New York Life introduced a chronic care rider to newly issued standard and custom whole life insurance policies.

Chronic illness riders by themselves are a relatively new concept, although the benefit they offer has existed for many years in the form of long-term care which addresses the policyholder’s inability to perform activities of daily living.

The past few years have seen two unrelated trends conspire to slow the growth of life insurance policies and of long-term care policies.

Life insurance sales have been slowed by low interest rates that have remained low for longer than anyone cared to guess.

The supply of standalone long-term care insurance (LTCi) policies shrank as LTC carriers underwrote relatively generous policies at prices that were too low. Profits evaporated as claims came due and many carriers with poor claims experience fled. The remaining long-term care underwriters simply raised prices.

But now the industry is betting that a hybrid life/long-term care policy is the way forward: a life insurance policy — not a health insurance policy — that offers reimbursement for expenses tied to serious illness.

Todd Kneebone, vice president and head of protection products for Voya Financial’s Insurance Solutions business, said in an interview that attaching a chronic illness rider to the company’s three biggest selling universal life products “makes them even more attractive.”

Policyholders unable to perform two or more of the six activities of daily living - bathing, continence, dressing, eating, toileting and transferring - along with the doctor’s expectation that the conditions are permanent, trigger the chronic care rider, he said.

Chronic illness riders can be tacked on to one of Voya’s cash accumulation life insurance products, which include Voya Indexed Universal Life (IUL) — Global Choice, Voya IUL Global or Voya IUL Protector (except Orange Pass), the company said.

Chronic illness riders, which frequently pay out on a monthly basis, are often lumped with critical illness and terminal illness riders, into a class of riders knowns as living benefit or accelerated death benefit riders.

Injecting living benefits — benefits policyholders can take advantage of while alive — into life insurance policies has intensified recently, according to Joe Atamaniuk, vice president of marketing and account management at GenRe in Stamford, Conn.

“These riders are commonly added to the base life policy at no additional charge, and this ‘no-charge’ rider design has been particularly successfully in promoting life cover to the middle market,” Atamaniuk writes in a blog post.

The agreement between the policyholder and the insurer is that triggering the rider reduces the future death benefit amount as stipulated in the individual contract, but policyholders appear reluctant to claim the benefit.

Applicants see the riders as a way to receive more benefits for no additional cost, yet the benefits are rarely claimed because the insured doesn’t to want reduce the death benefit.

He cites statistics showing that less than half of the policyholders eligible for chronic, critical or terminal illness benefits actually claim them.

“The reasons behind the low claim figures could be the insured’s reluctance to reduce the death benefit of the policy, or he or she feels the discounted amount offered is unacceptable,” he writes.

Chronic illnesses include heart disease, Alzheimer’s or dementia, stroke, arthritis, cancer, diabetes or kidney disease.

In 2006, 84 percent of all health care spending in the U.S. supported the 50 percent of the population with one or more chronic medical conditions, according to the Centers for Disease Control and Prevention.

The SCAN Foundation estimates that the nation spends about $725 billion a year on chronic illness.

Carriers levy a charge for critical and chronic illness riders in one of three ways: through a discounted or “no-charge” method, a lien approach or an additional premium.

According to Atamaniuk, discounting involves lowering the face amount of the benefit in exchange for advancing the funds to the policyholder. This “no-charge” approach is popular with the middle market since buyers see this “as a way to receive added benefits for not additional cost,” he writes.

A lien approach holds the amount accelerated plus interest as a lien against the death benefit and the policyholder continues to pay the full premium.

In the third method, the policyholder pays an additional premium as that time the rider is issued, and the death benefit is reduced by the amount of the requested acceleration on a dollar-for-dollar basis, Atamaniuk writes.

Cyril Tuohy is senior writer for InsuranceNewsNet. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].