Adding Long-Term Care (LTC) or Chronic Illness (CI) Riders to permanent life insurance policies is all the rage. Insurance companies are whole heartedly promoting these features and arguing why their version is the best on the street. However, rather than decide which rider is best, my contrarian personality made me question whether these riders are advantageous at all.
Generally speaking, a LTC or CI rider will prepay a portion of the death benefit if a client needs assistance with activities of daily living or is cognitively impaired. Most riders will pay a percentage of the death benefit every month, reducing the remaining death benefit accordingly. The most common monthly benefit offered is 2%. Since this is a prepayment of the death benefit, the LTC amount and the death benefit are the same and a 2% monthly benefit yields 50 months of payments.
So, by paying the extra rider premium, the policyholder has the right to access their money early, before death but the pool of money is exactly the same. The client is paying more for the same pool of money and gaining to possibility that they may access the funds early. Is this worth it?
The answer, as with many things, is it depends. Clearly if the client were to need assistance with daily living activities a few years after the policy were issued and then live to life expectancy they would be much better off with a LTC or CI rider. But what about a more common situation? To test these waters we ran a test scenario using a 50 year old female client, Sara Sample, who is considering the purchase of a $500,000 life insurance policy with a 2% long term care rider ($10,000 per month LTC benefit). To make the analysis company neutral, we ran a comparison spreadsheet of ten fully guaranteed products from multiple carriers and used only 2% monthly riders. The average premium for the policies with the LTC / CI benefit attached is $6,104. The average premium for the policies without the LTC / Benefit is $5,184. Sara Sample will pay an additional $920 for the right to possibly receive the $500,000 early. Either way the benefit is $500,000, it is simply a matter of when it is paid.
Sara Sample has a statistical life expectancy of 88 years, according to the 2015 Valuation Basic Table published by the Society of Actuaries. We examined 4 scenarios where Ms. Sample purchased a $500,000 policy and passed away at age 88. In the first scenario she purchased a policy without a LTC/CI rider. In the second she purchased a policy with a LTC/CI rider but did not have a LTC claim. In the third she purchased a policy with a LTC/CI rider and used maximum benefits starting at age 84. Finally, the last scenario she bought the rider but used half the benefit beginning at age 84. Then we compared the internal rates of return (IRR) at her death.
Scenario 1 (No LTC/CI benefit death at 88) – 4.11% IRR
Scenario 2 (LTC/CI no claim death at 88) – 3.42% IRR
Scenario 3 (LTC/CI Max benefit starting 84, death at 88) – 4.27% IRR
Scenario 4 (LTC/CI Half benefit starting 84, death 88) – 3.99% IRR
What conclusions can we draw? In 3 out of 4 scenarios the client realized a higher rate-of return without the rider. Assuming the client has the assets to self-fund any LTC expenses until the death benefit is paid to her loved ones perhaps she is better off purchasing a life insurance policy without the rider.
This is merely one example using one set of facts. If the client did not have liquid assets to cover the risk or was concerned about the possibility of an early claim then certainly the rider may be the better choice. We also relied on average prices and certainly the less the client pays for the LTC /CI rider option the better off they will be. It certainly is food for thought.
If you are interested in receiving the illustrations and spreadsheets used in this analysis, or if you would like to stress test a different scenario, please contact the marketing team at Comprehensive Planning.
