Riders to the rescue? LTC needs can be met if agents know the facts, expert says

Consumers are flocking to riders in an effort to address critical illness and long-term care concerns. Regulators are scrambling to keep up with new rules and regulations of those products.

Now it's up to producers to do their part and know what they are selling, said Ramona Neal, president of Living Benefit Review, which provides competitive intelligence solutions for life insurers with long-term care components.

Neal spoke during a webinar Monday sponsored by the National Association of Insurance and Financial Advisors. November is National Long-Term Care Awareness Month and NAIFA kicked it off with a day of programming on the issue.

"Find out what you're selling to your clients moving forward and take a look at what you have sold," Neal said, "so that you can adequately represent them. Because I think as an industry, we all have room for improvement."

Critical illness vs critical illness

One issue is that riders are not all the same, Neal explained. There is one major difference in particular, one that can leave clients exposed if they are not aware.

Long-term-care riders, which date to the early 2000s, allow the entire death benefit to be accelerated to cover long-term-care expenses. With chronic Illness riders, however, the amount eligible to be accelerated depends on crucial details. And by how much Neal said, can be staggering.

Some chronic illness riders have charges like LTC riders with predictable benefits. Others do not. Instead, they calculate the charge and benefit amount eligible to be accelerated at the time of claim, usually via a discount method, Neal said. The eligible amount can vary depending on factors such as age, gender, life expectancy/severity of condition, cash values and future premiums.

Neal shared two different outcomes for fictional sisters she named Mary and Martha. Both had $500,000 policies issued at 30 years old. Then 15 years later they went on claim. The results were very different based on a slight change in rider design:

• Mary bought life insurance with an up-front charge chronic illness rider (where she paid a premium for the rider each year for 15 years): The entire $500,000 was eligible to be accelerated over four years to cover Mary’s long-term-care expenses. Then her policy was extinguished. Her cumulative rider charges were $1,200.
• Martha bought life insurance with a chronic illness rider design where both the charge and benefit are determined at acceleration (she paid no rider premium during the 15 years). The amount Martha was eligible to accelerate was $195,000 over four years. Then her policy was extinguished. This resulted in a rider charge of $305,000.

The difference is Martha did not have a chronic illness rider variation with upfront charges where the benefits are known and predictable, Neal explained. The insurance company offered her a $195,000 acceleration. If she accepts the policy is extinguished. However, if she is not happy with the offer, she does not have to accept it and can continue making her premium payments and retain her policy.

"If Martha thought she could accelerate $500,000 you can see how she would be upset and why she might be contacting an attorney," she said. "Nobody wants to be named in a lawsuit right? They don't just go after the insurance company. They tend to name the agent as well, based on what I've seen."

Neither rider design is bad, Neal stressed. In fact, the charge at acceleration for chronic illness riders have ideal sales applications, too.

"What’s important is that clients know what they have," she said. "The problem isn’t any of the riders. All of the riders are good. The problem is, are agents adequately managing expectations on how they work. Because if we don’t know what we are selling, then how can our clients know what they are buying."

All riders good

All of the rider options help address the risk clients face from a late-life illness or crippling disability, Neal noted. They are good for insurers and agents, too.

"Riders with no monthly charge don’t have the drag of charges on the illustration," Neal wrote in a 2020 column. "In competitive situations those companies and agents selling them appear to have the best price. Furthermore, the riders with no monthly charge typically require no underwriting, making them quicker to issue (which means agents get paid quicker too)."

Long-term care and critical illness riders continue to sell very well. As of year-end 2021, total new premium for individual life combination products increased 22% to $4.3 billion, according to LIMRA’s 2021 U.S. Individual Life Combination Products Annual Review. There were nearly 559,000 policies sold in 2021, up 37% compared with 2020 results.

Standalone individual long-term care products held only 14% of the broader long-term care insurance policy market in 2021, LIMRA said, a 4-percentage-point increase from 2020. There were 90,752 new LTCi policies in 2021.

That last figure comes with an asterisk, however. Sales received a bump from a Washington state program – the first of its kind – that required residents to get LTC insurance or face a tax to pay for a state-provided benefit.

Other states are considering legislation as well, Neal pointed out, although the details are scant. With new laws and regulations, the rules will further change. Producers should listen to clients always, Neal told the NAIFA audience.

"If you are selling a life insurance policy to a client and you mention a chronic illness rider, a long-term care rider and you're in a 45-minute or an hour meeting and the majority of the time they're sitting there talking about the chronic illness or a long-term care rider," Neal said. "To me, that would be a clue that it's an important benefit for them and I would do whatever I can to get them the most robust benefit."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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