Life Insurance with Chronic Illness Riders

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While the principal function of a life insurance policy is to pay the death benefits to the policyholder’s beneficiaries or loved ones – your life insurance policy can also help you if you have been diagnosed with a chronic illness. Usually, life insurance policies have an add-on, also known as a chronic illness rider. This rider will provide you with a portion of the death benefit payment if you have been diagnosed with a chronic illness that has impacted the way you live.

What is a Chronic Illness Rider?

A chronic illness rider is an add-on to your life insurance policy that will allow you to receive your policy’s death benefits while you are still alive, as long as you have been diagnosed with a qualifying chronic illness. 

It is a rider that most life insurance provides at no additional cost, in case you end up with an illness that requires constant care. A chronic illness rider, an accelerated death benefit rider, or a long-term care (LTC) rider – they are the insurance product add-ons to your policy that can help you through a critical illness or a chronic illness. 

The primary purpose of a chronic illness rider is to help the policy owner if they are struggling with a chronic illness. With a chronic illness or severe cognitive impairment, the activities of daily living can become a struggle for the individual. They may need help with day-to-day tasks such as eating, bathing, getting dressed, toileting, continence, or moving from one place to another. 

Someone with a chronic illness may also need round-the-clock care or even long-term care services. The expenses associated with a chronic illness are high, and a chronic illness rider, or living benefits rider, can provide the policy owner with their death benefits while they are still alive. 

How does a Chronic Illness Rider Work?

Most life insurance companies that provide life insurance policies usually offer the option of a chronic illness rider. It is a provision with the life insurance provided by the insurer that offers a payout if the policyholder has a chronic illness and they require a death benefit amount to help with their medical expenses.

The purpose of the chronic illness rider is to help the policyholder with a terminal illness or a chronic illness to provide for their care. The living benefits that the rider provides can help with the considerable expenses that are associated with chronic illness – including medical bills, nursing homes, long-term care costs, private caretaker, etc. 

Usually, when the policyholder files a claim, they will receive a lump sum that constitutes a portion of the face value of their life insurance policy. This is known as an indemnity payment, and can be used for things other than medical expenses. If you need the payout to cover other bills or loans, you can do that with an indemnity payment.

If you have a long-term care rider, then you will receive reimbursement instead of a lump sum payment. With this rider, you will have to pay out of pocket for care, and then your insurance company will reimburse you for the expenses that your illness has brought about. If your life insurance policy has this rider, then the face value of your policy will be lowered over time. 

If your life insurance policy has a chronic illness rider, then you will not receive your death benefit payout all at once. With a chronic illness, the benefits are paid out incrementally over a period of time.

Eligibility for Chronic Illness Rider

If you have a life insurance policy with a chronic illness rider, then you can be eligible for a payout as long as a medical professional has diagnosed you with a chronic illness and verified that you need help with managing your chronic condition. There are several critical illnesses and chronic illnesses that may make you eligible to receive the payout, including multiple sclerosis, heart attack, heart stroke, organ failure, Alzheimer’s disease, HIV/AIDS, and even diabetes. 

Tax and Financial Implications

If you receive a payout from your life insurance company because of a chronic illness rider, then the amount you receive will not count as income, and will likely not be taxed. The benefits received from life insurance riders are exempted from taxes,  and the payout you receive can be put towards your expenses.

While you may not lose any money to taxes, it is unlikely that the payout you receive will reflect the value of your life insurance policy’s death benefit. A rider is like a trade-off where you trade the value of your policy for immediate cash value. Using the rider can also have an impact on your beneficiaries and loved ones. If your primary motivation for a life insurance policy is to have your loved ones covered financially – using the rider could mean that they do not receive your full death benefits in case you pass away.

What Insurers Offer a Chronic Illness Rider?

Almost every life insurance company offers a chronic illness rider/accelerated death benefits rider/ long-term care rider with their life insurance policy. Depending on the insurer, choosing the rider could come at no additional cost, or for a fee. Riders are a common option and are opted for by many policyholders who may want to use their death benefit amount for an emergency. While many individuals may still choose permanent life insurance policy programs or long-term care insurance, a rider with their life insurance policy makes more sense for several policyholders.

Choosing Chronic Illness Rider- The Key Considerations

Before you choose a chronic illness rider for your life insurance policy, you should consider the following points:

  • Your beneficiaries could end up receiving less or no death benefits after you pass away.

  • If you have long-term care insurance, it will cover expenses related to your chronic condition. You do not need to cash out your rider if you have other medical or health insurance. 

Medicaid can provide benefits if you have an eligible income. Medicare can also help with long-term care.

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Can I add a chronic illness rider to my existing life insurance policy?

Yes, most insurance companies do allow you the option of adding a rider to your life insurance policy.

Will there be any underwriting requirements?

Yes, to choose a chronic illness rider, the underwriting will consist of answering questions related to your health.

Is the rider valid forever?

No, the rider usually stays valid till the policyholder reaches the age of 80. But different insurance companies may have different policies.

How are the benefits of the rider distributed?

It depends on your circumstances, as well as your insurance company. You may receive a lump sum, payment in increments, or reimbursements for care costs.

Don’t lose your lifelong investment. Discover your policy’s value today.