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Limitation of Chronic Illness Rider for Long Term Care: Recovery

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January 23, 2015

1:05 PM

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Accelerated Death Benefits, Chronic Illness Accelerated Death Benefit, Chronic Illness Rider, living benefits

Life insurance can also cover long-term care (LTC) expenses.  Most permanent life insurance plans above $25,000 in coverage offer a benefit option to cover LTC expenses. However coverage forks down two separate roads, so choose careful which one one to take.

These accelerated benefit riders come in two types: one is called a long-term care (LTC) rider, and the other is called a chronic illness rider. The LTC rider costs extra premium; most chronic care riders have no upfront charge. Charges will only occur if the rider is elected. So why pay extra for the LTC rider over at chronic illness rider?  What exactly are the differences between a chronic illness rider and a long-term care rider?

Long-term care riders:  unable to perform two out of six activities of daily living or cognitive impairment pays temporary and permanent claims.  “Qualified Long Term Care Insurance Contracts.” IRC 7702B; and also IRC101(g).

Chronic Illness riders: unable to perform two out of six activities of daily living or cognitive impairment; trigger: the condition must be expected to be permanent in order to qualify.  IRC 101(g)

With temporary conditions requiring LTC, and a conditions in a gray area as to its outcome being temporary or permanent, the chronic illness rider would not meet the qualification threshold.

The $64 question then becomes: how often are conditions requiring long-term care temporary? How often would a chronic illness rider leave the insured unqualified to draw a benefit?   From the research I’ve seen, about one third of the time.

The need for long-term care breaks down into a few health conditions: dementia and cognitive impairment, stroke, arthritis, cancer and accident or injury

Dementia and Cognitive Impairment:     both riders suitable

At some stage dementia would be identifiable via a cognitive test and a doctor would certify as permanent.  Not in any way a temporary or recoverable condition.

Stroke      Advantage: long-term care rider

The leading reason to pay extra for a LTC rider.   So many moderate to severe strokes would not be judged expected to be permanent, so a chronic illness rider could not be activated.

“Current statistics for stroke survival rates are:
10 percent of stroke victims recover almost completely.
25 percent of stroke victims recover with minor impairments.
40 percent of stroke victims experience moderate to severe impairments requiring special care.
10 percent of stroke victims require care in a nursing home or other long-term care facility.
15 percent die shortly after the stroke”

Arthritis     both riders suitable

temporary vs. permanent hard to discern statistically  statistics   If the arthritis was that severe to cause someone to be unable to perform 2 out the 6 activities of daily living, I doubt it would be deemed a recoverable condition.

Cancer    Both riders limited suitability, some advantage to the LTC rider, though 90 day elimination period would limit the LTC rider’s usefulness.

For end stage cancer patient, a life insurance terminal illness accelerated benefit rider which is included with nearly all life plans would be available regardless.


Injury/Accident     Advantage: long-term care rider, but a 90 elimination period limited its effectiveness

Mostly LTC situations are temporary.   note: falls among older adults

Another major factor in the decision should be that long term care riders are a reimbursement benefit. Chronic illness riders are indemnity benefits, i.e. cash benefits.  The reimbursement method, for qualfied LTC expenses, is inherently more restrictive.

Research:   CBO study   (pdf.)

A Chronic Illness Rider Gets Approved in California

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January 7, 2015

4:13 PM

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Chronic Illness Accelerated Death Benefit, living benefits

I thought I’d never see the day that a life insurance company would manage to get a chronic illness accelerated benefit rider approved California, but one major carrier announced it had yesterday.  This carrier does not like any mention of product details without prior approval, but it’s a carrier I highly recommend. Please contact me for full details.

Prior to this a few carriers like Nationwide offered Long Term Care Riders in California, but none had managed to get a Chronic Illness Rider approved.  See here for a full listing of carriers and pros and cons to each.  LTC riders are more comprehensive.  The main difference is that with Chronic Care Riders the condition must be considered as permanent, which wouldn’t be much help for a mild or moderate stroke or a broken hip.

However, most chronic illness riders have no upfront charge and could serve well if the situation warranted, a way of releasing a living benefit rather than having it locked away solely as a death benefit.

This opens up a very viable option for California life insurance consumers.  It’s very good new it finally happened.

Hodler - Valentine Godé-Darel im Krankenbett - 1914

Reforming Indexed Universal Life (IUL) Illustrations

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December 12, 2014

10:43 AM

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0% Floor, 1 year point-to-point, 2014, Floor, Index Selections, indexed life insurance, interest crediting, Non-guaranteed current assumptions, S&P 500

Life insurance agents market Indexed Universal Life (IUL) in large part by illustrations showing cash value returns based on interest rate crediting assumptions. The default rate for running an IUL quote is set by the carrier, and that’s based on historical index averages. Long historical look backs, often 30 years, generate the highest interest rate assumptions. To give a quote, agents can assume a lower credit rate by plugging in a lower percentage on the software, but the carrier default rate shows highest cash value accumulation, so the assumed rate, likely between 7% and 8.25%, has the strongest incentive to be presented. Some major life insurance carriers want this practice reformed, concerned that their eventual inaccuracy of the cash value accumulation will give everyone in the life industry a bad name.

Is there cause for concern?  Yes.  Some carriers who object primarily market whole life products, so the criticism is self serving, but their concern is legitimate.

Index UL products credit rate assumptions are up there. The most common index used for IULs is the S & P 500, and the historical average hovers around an 8.00% rate of return.  The illustration runs a steady 8% crediting rate every year until age 120. For a 35 year old, that’s 85 years straight.  Projections have great cash value figures at age 65, and loans for retirement income age 65 to age 100.  Impressive, but unrealistic.

One carrier doing business in New York has modified their illustration to show alternate values more prominently.  It look something like this:

Guaranteed Values Non-Guaranteed Values
(alternate)		 Non-Guaranteed Values
.
 2.00%             4.00%          8.00%

Nothing really new.  Illustration signature pages already have a midpoint assumption. This just runs the values all the way out on the subsequent charts. Still the IUL illustration shows S & P 500 Index annual point interest crediting each and every year even if an alternate cuts the assumed return in half. Interest crediting is subject to cap, now hovering around 13%, but may be reset lower the guaranteed cap is around 4% for many plans.  Indexed ULs have a the zero percent floor guarantee.  How often will the index hit the floor to effect the average?  Showing the same crediting rate every year is harder to justify in the distribution phase for retirement income loans. Compare a 30 year history, to a 15 year history and add up the zeros, by counting 0, 1, 2, 8, 11, as in 2000, 2001, 2002, 2008, 2011.

Here’s a better proposal from Fred Anderson, a life actuary from the Minnesota Department of Insurance.  (emphasis mine)

“Principles that should be included, Andersen said, are a national index of credit rates no more than 1¼ to 2¼ percent higher than traditional universal credit rates; prominent side-by-side mid-point comparisons; the relationship between policy loan rates and credit rates “that addresses a problem there.”

Doing a survey of ten large life company UL credit rates on December 8, 2014, they showed most current assumption UL now credit in the 3% to 4% range. A few were 4% to 5%.  Adding 1¼ to 2¼ percent would mean Index UL illustrations should assume credit rates of 4.25% to at the most 7.00%.  As it stands now, a consumer is more likely to be shown 8% each and every year. It wouldn’t be difficult for life companies to have illustrations with interest rate variations to match actual historical returns, so the client could review cash values that reflect the typical historical ups and downs of index returns. It’s already done on indexed annuities proposals.  John Hancock‘s Indexed UL illustrations already have this option.

Recommendation: Consumers should request Index UL illustrations with non guaranteed credit rates no higher than 5.00% to 5.50%.  A constant crediting rate is unrealistic; consider cash value projections for comparison purposes only.

Posted 12/12/2014.  Interest rates subject to change.

Mountain scene mist rising unknown artist

Spouse as owner of a life insurance policy

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November 10, 2014

2:23 PM

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2014

Who should be the owner of a life insurance policy?  The person insured is generally the owner with the policy established to protect the beneficiary from financial loss.  However, the policy can be set up where the spouse is both the owner and beneficiary of the policy. Why would the spouse want to the owner?  Mainly it’s to prevent the beneficiary being changed or the policy cancelled without the spouse’s consent.

Keep in mind the owner of a life insurance policy completely controls that policy.  Here are some of the ownership rights:

Change the beneficiary(s) or the death benefit shares received by the beneficiaries
Cancel or surrender the policy for its cash value
Discontinue Premium payments
Transfer ownership of the policy
Borrowing from the policy’s cash value
Cash value withdrawals from the policy
Determine how the beneficiary will receive death proceeds

So looking into opaque crystal ball of the future, why should the spouse be owner?  What could possibly go wrong?

Divorce

I’ve been working on a cocktail called “Grounds For Divorce”
Polishing a compass that I hold in my sleeve

Elbow “Grounds for Divorce” lyrics

White Nights, 1922, Mstislav Dobuzhinsky

The most obvious reason the spouse to be owner is self interest protect in case of divorce. A woman financially dependent on her husband, those with young children would be better off owning the life insurance policy to protect her interest.  In a life insurance and divorce article’s comment section I recently read, there are several examples of spouses left with nothing due to beneficiary or cancelled policies, some despite a divorce ordered court agreement.  Won’t happen to me?  Older couples in long-term marriages aren’t immune, since gray divorce has increased significantly for those over 65.   Cross ownership of life insurance policies, each owning the policy of the other spouse, is a common option to consider.

Certainly when a ex-spouse is financially dependent on The ownership of a life insurance policy by an ex-spouse is not clear cut as to its validity. It would depend on the financial interest, how much the former spouse depends on their ex financially.  Certain states have laws to address this issue. In community property states: Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin different rules apply, and the spouse has more secure beneficiary rights.

Medicaid Eligibility

Life insurance with cash value counts towards an elder’s assets for medicaid edibility.  To avoid this the spouse or children would be better off owning the policy.

Capacity

What if the person insured as owner exhibits signs of dementia or Alzheimer’s and makes a beneficiary change and cancels a life insurance policy?  If the insured has a family history of dementia or there is a large age difference, it may be advisable for the spouse to own the policy.

Estate Taxes
Federal estate tax changes in 2013 has rendered life insurance ownership as part of taxable estate a non factor for all those expect millionaires north of 5.25 million and for couples $10.5 million indexed for inflation. For state estate taxes, in several states ownership may be a consideration.

Please contact me for a free and confidential life insurance quote

Licensed Agent:  Sean Drummey
phone:  (910) 328-0447
email:    spdrummey@gmail.com


Disclaimer:  This website has been prepared for general information purposes only. The information on this website should not be construed as legal or tax advice on any subject matter.  No recipients of content from this site, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal, tax or other professional advice on the particular facts and circumstances to their own specific situation and state of residence before making any decisions.  In any event I will not be liable in respect to actions taken or not taken based on the contents of this Website.

IUL for retirement income

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August 29, 2014

9:51 AM

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Cash accumulation, Cash Value, current interest, Increasing death benefit for cash accumulation, indexed life insurance, IUL, maximizing cash value, Maximum cash accumulation Indexed UL, MEC, MEC limit, Modified Endowment Contract, Modified Endowment Contract

What is the best way to compare Index UL (IUL) companies for cash value accumulation and loans for retirement income?  Request illustrations be emailed to you. All life permanent life insurance, whole life, UL, or IUL with non guaranteed assumptions require illustrations for the insured’s review and signature.  A competent life broker has the ability to email multiple carrier illustrations for comparison purposes.  Make specific requests for the illustration’s structure, especially index interest rates assumptions. Insist each and every carrier use the same assumptions . Then compare cash value accumulation and loans for retirement income. Relative performance of the carriers, identifying the top performer, matters more than the figures themselves, which lack validity since they are projections over too long a period of time. To overfund an IUL request:

1.  Identical  assumptions: rate classification, premium amount, index rate, number of years paying premium, loan years

2. S & P 500 Index annual point-to-point; interest assumption of 5% or at most 5.50%

Commonly presented index interest rate returns of 7% to 8%+ each and every year over 20, 30, 40 years and longer are unrealistic and highly speculative

3. Minimum face amount. Guideline annual premium: Guideline premium test  (maximum non-MEC)

Work backwards from the amount of money intended for premiums to solve for the minimum face amount that’s still within the limits as a non modified endowment contract (MEC).  Come to the agent with a figure, as in, for example, wanting to put in $15,000 a year for the next 20 years.  The initial face amount will be solved from there; it will be made as low as possible to meet IRS guidelines.  

4. Increasing death benefit for premium payment years.

5.  Set the premium payment years from 20 to 30 years.  If older, allow at least 15 years, but usually a relatively short period of time, like 15 years, isn’t enough time to build sufficient cash value to allow for retirement income loans.

This is the accumulation period.  Compare cash accumulation after the accumulation period ends.  

6. Level death benefit all years in distribution period and thereafter to age 100 or age 120

7. Loans at fixed rate or maximum variable capped rate

Ask if variable loan rate is capped. Variable loan rates are frequently based on Moody’s Corporate Bond Yield index and those rates have been much higher in the past than currently.

8. Distributions starting at age 65 or after set number of years of accumulation

9. Limited distribution period to 5, 10 or 15 years

Compare which carrier has the higher values, but do not place weight in the amount which is not a reliable value when the index interest rate return assumption is a constant

10. Solve for cash value of at least $1,000 at age 100 or $1 at age 120

Example:  male, age 35, preferred plus, $12,000 premiums 30 years at increasing death benefit; zero premiums thereafter at level death benefit; 5.50% S & P 500 annual point-to-point, minimum Non-MEC, guideline premium test, solve for maximum distributions 15 years, variable loan option at cap 5.5%, monthly loans, solve for $1,000 cash surrender value age 100

key figures to review in the illustration’s yearly summary charts:

  • year 30 – most cash value accumulation
  • years 31-46 – highest annual loans

Mt. Hood, Illustration by R.S. Gifford

Hybrid life insurance with LTC benefits: tap into or pass on

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June 6, 2014

10:07 AM

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101(g) chronic illness rider, 7702B Long-Term Care rider, Accelerated Death Benefits, In your 50's, In your 60's, Increasing Face Amount for cash accumulation, Indexed Universal Life

Watering-troughs_in_the_Wadi_Ghuzze_-_early_morning_Art.IWMART1518
Baby boomers postponing purchasing long term care insurance, despite what may be going on in their parents advanced age, have plenty of reasons to balk at conventional LTC plans.

One of the six primary reasons people do not buy long term care insurance.  pdf

Sixth, the structure of policies themselves (benefits
denominated in dollars per day, inflation risk of purchasing insurance for an event that is probabilistically far away, increases in premiums for everyone when insurance companies face insolvency, denial of applications) reduces purchase rates.

Potential premium rate increases, big ones, are are the glaring weakness of stand alone LTC plan. The track record of existing policies has not been good with the double digit premium increases over the past few years.

To the rescue for viable avenue of coverage, Hybrid life/LTC insurance offers rate stability. Guaranteed Universal Life (GUL) products lock in a fixed premium guaranteed for life.  The majority of these GUL products come with some sort of accelerated benefit targeted for long term care.

Hybrid Life plans provide a benefit one way or another. If you never need LTC coverage, your beneficiaries get the life insurance. Then if long-term care becomes a necessity, accelerate out a portion of the benefit. It may be only a small portion of the benefit ends up being needed; the rest can remain as a life insurance benefit.

Life hybrids are not perfect. Look for plans that specifically titled “long-term care” for more comprehensive benefit. Life policies with “chronic care” accelerated benefits are not as inclusive as their long term care benefit counterparts. With chronic care, the condition must likely be permanent. That benefit threshold would be a problem with for example a stroke, however debilitating a stroke might be, it may be considered to be recoverable. Many more conditions like a broken hip are not going to qualify for a chronic care benefit where they would if the plan’s benefits are full fledged long-term care.

There are other limitations that pull from the edges of rock solid LTC coverage. For example, the structure of benefit is generally limited by a monthly amount or daily maximum tied to the HIPAA per diem limit currently allowed by IRS rules, but just review carefully what’s optimal given the choices for plans and your situation.

Look for plans that have indemnity benefit, paid in cash, rather than reimbursement: better to receive a check than submit bills to be repaid.

How much coverage is enough?

Fifth, a sizable portion of the population has neither sufficient wealth to protect nor income to pay long-term care insurance premiums.

Most people have a desire to leave something to their children, or if nothing else, not be a financial burden on their children. It’s hard to judge how much money would be needed to cover LTC.  It really runs the gambit but coverage for $100,000 provides at least something. One life plan with chronic care starts at a $25,000 face amount.

With the exception of certain plans like Lincoln National’s MoneyGuard, hybrid life benefits do not provide inflation protection. LTC benefits are no higher than the death benefit. Chronic Care plans have no upfront charge, but reduce the benefit with a discount charge. How big a policy is enough if determined by the face amount: $100k, $250k, $1m?  The solution to choose a plan that builds cash value with an increasing face amount death benefit, either an Indexed Universal Life or a Current Assumption UL, to access cash value through policy loans or partial surrenders.

Hybrid life premiums with accelerated living benefits for LTC are affordable, not for or some worst case scenario like Alzheimer’s, but still something is better for nothing. There are hybrid life plans with $100,000 to $250,000 face amounts for people in their 50’s or 60’s with reasonable premiums. Chronic Care riders have no up front charge for the benefit. Check them out by reviewing the sample quotes by age on this website.

Indexed Universal Life (IUL): adding a dose of realism to quotes

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February 28, 2014

4:56 PM

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Cap Rate, Indexed Universal Life, Maximum cash accumulation Indexed UL, overfunding, Prevent MEC

Franklin Booth, illustration for “The Flying Islands of the Night” , 1913

When shopping for Indexed Universal Life (IUL) agents ought to provide quotes with full illustrations. Indexed UL illustration are easy for an experienced agent to quickly run. They’re about 10 pages long, can be generated in a pdf file format and emailed. Insist on a full illustration, not a summary. Insist on the illustration being emailed for review. That’s what you’ll get if you contact me. Agents have the latitude to present these illustrations with maximum index interest rate assumptions, which for the S & P 500 Index interest rates ranging from 7.50% to over 8.25%. Not unlikely to see the highest allowed rate assumption, since it’s the default rate on the quote software, and especially because the results look better. Those maximum rates are justified by the index’s historical average over the last 25, 30 or 40 years.

The most common index used is the S & P 500. Here is S & P 500 yearly returns since 1975. Since we’re dealing here with Indexed ULs, translate those numbers to a cap, current caps generally run 11% to 16% percent, and a floor usually 0% or with a few carriers 1%. Now after seeing how the S & P has moved historically, factor in unguaranteed double digit caps, how can an illustration showing 8% interest rate returns in all years be justified?  All years for a 35 year old means 65 years in a row, out to age 100, or even longer.

0, 1, 2, 8, 11
The S & P 500 had zero or negative returns in 2000, 2001, 2002, 2008 and 2011.  How would that 15 year historical performance translate in IUL performance? For someone for example 40 years old having an accumulation phase of 25 years, some down years over that time span has a chance to be absorbed by positive years, but what about the distribution phase when some are targeting IULs for maximum loans? That could be a real problem, and that sort of scenario is masked by maximum interest rate assumptions in all years.

Penn Mutual has an excellent quote illustration system that allows the agent to put in either the maximum interest rate or an assumed interest rate and two alternate assumed interest rate scenarios, so illustrations can show a total of three interest rate assumptions. Also interest rates can be input year by year. Penn Mutual also can generate a IUL historical report which shows 20, 30, 40, 50 or 60 years historical index returns and how that translated to their current 13% cap and guaranteed 1% floor.

Request lower interest rates for added realism
Illustrations should be run in the 5% to 5.5% range to take into account years where the floor is met, if caps rates come down, or if cost of insurance is increased.  Even better, run an illustration, as possible with Penn Mutual, with multiple interest rate assumptions plugged in year by year.  Regardless, of how they are run, all IUL illustrations should be view as very hypothetical, at best a general projection.

Tentative Offers for Lowest Life insurance Rates with a Health Condition

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January 31, 2014

5:37 PM

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2014, credits, impaired risk, standard, standard non tobacco rates, Standard Plus, substandard rates, Table 2, Table 3, Table 4, Table 8, Table B, Table C, Table C to Standard, Table D, Table H, table shave, Up to 2 Tables, Up to 3 Tables

Urnersee
The best way for someone with a moderate to major medical condition, like epilepsy, elevated liver functions, Crohn’s Disease, colitis or many others, to get the lowest life insurance rates is to first get a tentative offer. Here’s the way it works. Give an independent agent and broker the basics of your health history. Then a short summary is provided to carrier underwriters of the health condition: onset, degree of severity, medications taken, degree of control, age, height and weight. Then underwriters review and reply, usually within 24 to 48 hours, with an offer of a tentative rate classification. That classification is a non-binding offer, fair enough because it’s based on limited information, but it does provide a good indication as to which carrier to apply for and a likely rate.

Rate classifications are Preferred Best, Preferred, Standard Plus, Standard, and the substandard Table 2 to Table 8. Substandard table ratings are alternately given letters: Table B though Table H.

For a major health condition with a history of control, the goal is often to get a standard rate or a low table rating. Final offers of coverage are based on medical records and full underwriting review. There are broad outlines as to what rate to expect, but since medical conditions vary by individual, the tentative quote process is a very valuable tool. One thing that trips up tentative quotes is that people often don’t know or fully understand the scope of their medical condition, or what’s in their medical records. During the application process medical information remains confidential in accordance HIPAA privacy rules.

Tentative offers will vary, sometimes considerably. It’s a very instructive. The same condition will be a Standard rate with one carrier, while others judge it to be more likely at Table 2 or Table 4. Once the rates classifications are received, compare quotes at those rates classes, see rates with a dose of realism and apply to the life insurance company likely to give the best offer.

Term Conversion to Indexed Universal Life (IUL)

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January 10, 2014

2:42 PM

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2014, Age 100, age 100 guarantee, Age 120 guarantee, American General Life Insurance Company, Cash accumulation, Cash Value, Conversion, current assumption UL or CAUL, current illustration, exchange, guaranteed universal life, GUL, in force illustration, level term, no exam life insurance, no medical exam, no physical exam, term, term conversion, term life, Universal Life, universal life policies with secondary guarantees

Buick_Convertible_1949

This week I was drawn by a client inquiry into analyzing the merits of converting a term policy into permanent.  A term policy’s ace in the hole is its conversion privileges.  Health conditions may arise as the decades go by. No matter how much one’s health may have changed for the worse, if still within the conversion period, a policy owner can convert all or part of the term policy to permanent without evidence of insurability at the original rate classification.  Be sure to ask about conversion when shopping for term.  It’s the second most important consideration after lowest premium.

For the American General term policy I was reviewing, they currently offered term conversion to either an Indexed Universal Life and a whole life product.  The indexed universal life product “AG Extend IUL” offers a no lapse guarantee rider to age 100.  That’s really great news for American General term policy holders: fixed premium and coverage guarantee to age 100. It would be better to have one to age 120 and beyond, but a lengthy guarantee is much better than not one of all.  It’s one step above the 5 to 25 year no lapse for other Indexed UL or current assumption UL products.

One of the problems with Indexed Universal Life is uncertainty on how it will perform over time.  Illustration shows non guaranteed projections, and they are very speculative in both the interest rate given, and how it’s shown at that rate for all years. An agent would be tempted to show the maximum interest rate allowed by the software. Carriers based those rates based on historical averages, as in the S & P 500 over the last 30 years. So an illustration may shows the S & P 500 annual point-to-point at 7.75% or 8.00% in all years.  Yes, each and every year.   The S & P certainly doesn’t perform like that in real life.  In all years for a 45 year old that projects a positive return, each and every year, for 75 years.   I run my IUL illustration a 5%. It’s more conservative projection but still a very uncertain projection because actual performance of the indexed may vary considerably and the carrier can change cap rates, participation rates and policy charges.

That’s why a lengthy guarantee on an Indexed UL like is “AG Extend IUL” is valuable.  Set the premium to the age 100 guarantee and then down the road the policy holder can evaluate actual performance and make changes accordingly to save on premiums if that age 100 guarantee is no longer necessary. So for example, start an Indexed UL at age 54 with premiums that guarantee coverage to age 100. Then when 75 year old  and in declining health, request an inforce illustration, and project how much premium the policy will need to have coverage to age 85.

If a Guaranteed Universal Life product is offered for conversion, generally that’s a better option to take, especially for those in their 60’s or 70’s.  If only a current assumption UL or Indexed UL is offered, funding it adequately, setting the premium high for plenty of cushion for cash value accumulation is well advised.  Have the agent show illustrations with coverage cash value to endow, or worth the face amount, at age 100.  Those run at target or $1 at age 100 might have more appealing premiums but might end up being underfunded for the long haul.