Life Insurance with Living Benefits

That title really is industry speak but tries very hard to explain what this product offers. This plan is being aggressively marketed, now that other plans are getting some press and favorable sales numbers. The plans I am referring to are critical illness and chronic illness. What they have done with this plan is offer you a life insurance policy WITH critical illness, chronic illness and terminal illness coverage, hence the term “LIVING BENEFIT.” You now have the opportunity to cover the major illnesses with the life plan, so in essence you do not have to die to collect. You choose your benefit amount, in terms of death benefit, and the benefit for the living benefits is based on that amount. They refer to it as “accelerating” the death benefit. We will cover this in more detail later in the article. One item to not be overlooked is the state availability of these plans and the waiting or qualification periods for each condition.

Before we get in to these plans, I want to put a major caveat out there. When discussing these types of plans I am speaking in general terms. Each company will have their own state variations and specific wording for qualifications for benefit payouts. When reviewing these plans, as always, read thoroughly and ask questions!

Let’s take each facet of this coverage and break it down, then we can understand each benefit within the plan.

The Obvious, Life Insurance

We have two plan options, built either on a Term or Universal base.  Now before you go sticking your nose up at universal plans, one should understand the needs of the client. I so clearly recall the mantra of most life agents, “buy term because it is much less expensive than a universal plan and invest the difference!” I wish each agent would go back to the clients they sold the term to and ask them how their investment has grown by investing that difference.  I am willing to bet that they did not invest the difference.

The terms to choose from are based on age but can go as high as 40 years. There are also 10-, 15-, 20-, 30- and 40-year terms available. I know this sounds like I am harping on this point, but it is imperative to really try and determine the client’s needs BEFORE suggesting a plan for them. I am not speaking of the superficial asking of a few questions to make it look like you are concerned for their well-being, but actually taking time to hear what they think their needs are. Engage in “what if” conversations and bring up scenarios they might not have considered. Okay, I’ll get off my soapbox, but I had to make that point.

Some companies offer coverage beginning at age 0 with a minimum face value of $25,000. There is no maximum benefit amount, but the Accelerated benefit portion has a cap of $500,000. Underwriting for this coverage is the normal process, as it would be for any standard life application. There is not much more to say about the life insurance side of this coverage–it pays your chosen benefit amount upon the passing of the insured!

Critical Illness Coverage

Now we get to the meat of this plan. The critical illness coverage will pay you a benefit if you are diagnosed with a critical condition, such as but not limited to cancer, heart attack, stroke or renal failure. Please read your policy carefully to see exactly what constitutes a covered condition. This is not meant to be a negative of the plan, but you need to be aware of the terminology used and how it applies to paying a claim. For instance, the heart coverage may not cover angina or heart conditions, but may require the death of heart muscle. Cancer may not cover skin types other than melanoma. I hope you see the point–read and ask questions!

Chronic Illness

This coverage is being touted as a long term care alternative and has most of the features a long term plan (LTC plan) offers, but it is not as comprehensive as a standalone plan. We will discuss costs later in the article and this will be very telling as to the value. You will find in most of these plans that the qualification rules are very similar. Again, read the policy for details, but most will have you qualify by being unable to perform two of the six activities of daily living. Depending on the company you choose, they will have a waiting period before benefits are paid. This waiting period could come in the form of a period of time the policy must be in force and/or a specific waiting period once diagnosed! We will discuss the benefit payout in another paragraph as it is going to take some detail.

Terminal Illness Rider

I feel this is one of the most overstated riders in the industry! The terminal illness rider in most policies has a caveat that says you must be diagnosed with a condition that leaves you with a life expectancy of less than 12 months! This should not be confused with a critical illness rider, at all! The difference here being that the terminal illness rider could pay your benefit based on an accident or an illness, whereas the critical illness will pay only for a covered illness, i.e., a critical condition.

Acceleration of Benefits – The Payout

Acceleration of Benefits is the term used to pay you a benefit for one of the riders in these plans, the critical, chronic and terminal illness. Simply put, when you are diagnosed with one of these conditions, the insurance company will offer a benefit amount based on the DEATH benefit of the life plan. The critical illness and terminal illness benefit would be paid in a lump sum benefit while the chronic benefit is paid in a monthly payment.

This is how the benefit is determined and how it is paid. When you file a claim, the insurance company takes into account the severity of your condition, how long you have had the policy and how long you are expected to survive. They use these factors to calculate a maximum benefit they will offer. You may take a portion of that amount or all of it.  If you take an amount equal to the death benefit, your policy terminates. If you choose to take just a portion of the offer then it is deducted from your total death benefit and your policy stays in effect but at a lower premium!

Example:

Death Benefit                                                                    $200,000

Accelerated Benefit Offered                                       $180,000

Amount You Choose to Accelerate                        $100,000

Remaining Death Benefit                                             $100,000

This could be accelerated as many times as conditions dictate and the balance is left as the death benefit. This type of plan is very good if someone is in need of a very large accelerated benefit amount, typically over $100,000.

Who does this plan fit?

This is too easy and I will save my answer for the end. In the meantime, we can start with business owners. Most of these folks carry a pretty high level of death coverage and quite possibly some disability. We also know that disability coverage has waiting periods and does not cover all lost wages. But what happens if a key person does not die, but is unable to perform their duties for 6 months due to a heart attack, cancer or a stroke? This type of coverage will offer the option to take a high benefit amount with no waiting periods! You may choose an amount for a death benefit but the maximum accelerated amount will be $500,000 to $1,000,000, based on the company.

This plan would be appropriate to show seniors! They are still going to need financial help to cover the out-of-pocket expenses they will have with any type of health coverage that they carry into retirement. If a critical illness strikes, which statistics show are much more likely to happen after age 65, the lump sum benefit may help cover prescription costs and travel for treatment and protect the savings account.

Present this plan to younger clients that are in their wage-earning years. Show it to anyone that has a family history of critical illness. Show it to everyone and compare it to a plain term or universal product and let the client decide for themselves.