Riders on the Chronic Illness Storm

If you were a US-based insurance sales agent, you would most likely have received an email from the US insurer Prudential Financial that asked: ‘Can your clients afford a chronic illness?’

This is the $64,000 question for today’s ageing population. For nearly two decades, long-term care has been the living benefit product available for the income needs of people in the US with health problems linked with ageing.

Standalone product sales, however, have contracted because of pricing challenges, low lapse rates, and high claims experience. Although the need for this sort of living benefit has not abated, many life insurers have opted to either introduce long-term care (LTC) riders, a cut-down version sold as a rider to other plans, or to exit the LTC market altogether.

Over the past few years, a new type of living benefit product has been emerging in the US: chronic illness insurance riders for life insurance policies. This is a life acceleration product: that is, a type of coverage that accelerates a life insurance policy’s death benefit for specific chronic illness needs.

So what is chronic illness insurance cover, and how does it differ from the cover in critical illness policies and riders commonly found in Europe and Asia, and from the LTC insurance riders commonly found in the US?

Critical illness insurance cover is intended for a working-age population, and triggers in response to conditions such as cancer, heart attacks or strokes. Policies can be structured to cover for dozens of impairments, several levels of severity, and even to permit multiple claims should a policyholder be subject to more than one critical illness during the course of their life.

LTC insurance cover in the US is for older buyers. It is fully underwritten, and used in response to the need for home healthcare or nursing home care if the insured is, for any reason, unable to perform a specific number (depending on the policy) of the six main Activities of Daily Living (ADLs): eating, toileting, transferring, bathing, dressing, and continence, or if there is a cognitive impairment.

Chronic illness has some similarities to LTC insurance in that it is also intended for an older market – the target ages are 60 to 80 – but it is considered to be a separate class of cover from LTC.

Sellers of the product in the US are specifically prevented by regulation from terming it ‘long-term care’ in marketing materials. The cover contains triggers to enable claims payments should a claimant experience loss of ability to perform a specific number of ADLs (usually two), and if there is a cognitive impairment.

Triggering conditions can include AIDS, end-stage renal failure, permanent neurological deficit resulting from cerebral vascular accident, and others. In addition, chronic illness riders have a unique trigger requirement: a physician must certify that the illness is likely to last for the rest of the insured’s life, which is something the other types of coverage do not require. 

Chronic illness riders can be offered with all types of base insurance plans, from whole life and universal life to indexed universal life and variable universal life.

These riders have several price-benefit structures, each of which accelerates the death benefit in a different manner: discounting the death benefit; treating the acceleration as a lien (or offset); or assigning a specific cost of insurance charge.

The cover is also clearly stirring interest among US insurers. According to a 2011 survey by Milliman of the US chronic illness insurance market, 12 of the 43 life insurance company respondents either had issued, or were planning to issue, a chronic illness rider. A further 12 were intending to offer one, and a further six were considering the possibility.

So could a chronic illness product be viable and successful in the UK market? That, right now, is not easy to predict. Clearly, paying for care in old age is and will be an increasingly important issue in the foreseeable future.

People are living longer, the Baby Boomers are moving into their retirement years, and at least 30% of us are likely to need a way to supplement assets should a chronic, incurable illness strike in retirement.

Despite this growing need, asset protection options for older-age individuals are currently limited. Immediate needs annuities require a one-off lump-sum payment, and equity release schemes still suffer from poor press associated with earlier versions of the product.

Chronic illness coverage, if adjusted for UK market needs, could be an interesting niche product, especially for an insurer with an older-age target market such as a specialist annuity provider or a company serving high-net-worth individuals.