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Ep 26: What’s Better, A Chronic Illness Rider or a LTC Rider? with David McKnight

May 1, 2019
The question often comes up, which is better? A chronic illness rider or a long term care rider? For 50 to 65 years, the primary benefit of the Life Insurance Retirement Plan is the ability to receive your death benefit in advance of your death in order to pay for long term care. The long term care...

Episode Transcript - What’s Better, A Chronic Illness Rider or a LTC Rider? with David McKnight

0:00:05
A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
0:00:19
Hi there. David McKnight. Welcome to The Power of Zero show. Grateful that you're able to take some time out of your day to join us. I've got some great news, The Volatility Shield, which came out about three weeks ago, is now available in bulk discount, just go to thevolatilityshield.com and you can get those quantities on bulk discounts. Also, we're getting very close within a day or two of getting The Volatility Shield on Audible, which is very exciting. Hopefully, you all had a chance to watch The Power of Zero: The Tax Train Is Coming, the world wide release happened last week, we're very excited for that. You can now purchase the DVD + Blu-ray Combo Pack on Amazon as well as stream it on Amazon, iTunes, reelhouse.org, and if you have clients or friends who want to watch it, you can actually purchase codes that you can send to them and that they can redeem to be able to watch the movie for free. That's very exciting. You can actually get those at thetaxtrain.com.
0:01:32
As for today's show, I’m excited to talk about this, I don't think it's going to take us too long so this is going to be one of our shorter shows, but the question often arises: What's better, a long-term care rider or a chronic-illness rider? Remember, for 50 to 65-year-olds, one of the primary allures of the LIRP is the ability to receive your death benefit in advance of your death for the purpose of paying for long-term care. Remember, the traditional long-term care approaches sort of provoke heartburn among most people, which is why traditional long-term care policies are starting to go-the-way-of-the-dodo bird because nobody wants to pay for something that they hope they never have to use. Of course, when you use an LIRP, if you died peacefully in your sleep 30 years from now never having used it, someone's still getting a death benefit, so there isn't that sensation of having paid for something that you hope you never have to use.
0:02:34
Let's start off with the long-term care rider. The long-term care rider basically says that for an extra charge, you can receive your death benefit in advance for your death, you will get 2%, 3%, or 4%. If you have a death benefit of $500,000, they are going to send you 2% of that $500,000 or $10,000 per month every month for 4 years for the purpose of paying for long-term care. Two of six activities of daily living is what is the trigger for that, so if you can't feed yourself, bathe yourself, transfer yourself, what have you, then you can find one doctor to write one letter to that effect they will start sending that to you. Now, one critical thing to note here is that because it's a long-term care rider, they will underwrite you for long-term care so that if you have back issues, knee issues, or what have you, then that can potentially—even though you might live to be 120—that could potentially be cause for rejection of your application.
0:03:38
The thing that you have to recognize though is that there is an extra cost for this because what's happening actually, they are giving you your death benefit earlier on average earlier than they would have otherwise given you your death benefit, therefore they have to compensate them for the years where they wouldn't have been able to draw expenses off of your bucket. They have to compensate them for that. You're basically paying for that on the front end with the anticipation that you will get it on the back end should you die peacefully in your sleep 30 years from now never having needed the long-term care, you don't recoup that money.
0:04:14
Now let's talk about the chronic-illness rider, and then when we're done describing these two, I will talk about which one I prefer the best. The chronic illness rider basically says that they are not going to charge you any extra money for this benefit should you, at some point in your life, no longer be able to perform two of six activities of daily living—and you can find one doctor to write one letter to that effect—they will give you 2%, some companies, per month, or other companies will do 25% per year, 2% per month for 4 years or 25% per year for 4 years, they will advance that to you prior to your death for the purpose of paying for long-term care. The difference is because they didn't charge you on the front end, they are going to charge you on the back end, meaning, they will discount that, let's just call it 2%—2% of that same $500,000 is $10,000—instead of giving you $10,000 every month for 4 years, they will discount that $10,000 and that's going to be a function of your cash value at the time, it's going to be primarily a function of your age. If they anticipated you’re going to live to age 85, but you need long-term care at age 80, they're basically giving you that money prior to when they had anticipated giving it to you, therefore, they need to compensate themselves for that so they will give you a discount. Instead of getting $10,000 per month, you might only get $9,000. The big difference between these two approaches comes down to you, do you pay it on the front end or do you pay it on the back end?
0:06:01
The other thing that's a little bit different about the chronic-illness rider versus a long-term care rider is that they will not underwrite you for long-term care, they will underwrite you not for morbidity, which is the likelihood you'll need long-term care, but for longevity, which is the likelihood that you will die or mortality. Even if you have a bad knee, bad back, bad hip, and you couldn't otherwise qualify for long-term care—or rheumatoid arthritis for that matter—they might deem you as someone who could live as long as 100 or 120, in which case, they will accept you. This is a great option for people who can't otherwise qualify for long-term care.
0:06:41
Now that we've defined the two options, I am going to tell you which one I prefer best. One of the things that gives me heartburn about the traditional long-term care approach is that you are paying for something you hope you never have to use, and if you die peacefully in your sleep 30 years from now never having used it, you don't get the money back at the end. That is not a whole lot different than the long-term care rider. The long-term care rider, you're paying extra upfront, in other words, that expense coming out of your bucket is a drag on your cash value. You're paying extra, and that's money that could have otherwise been used to grow and invest in your growth account or in some other investment, you're paying extra for that long-term care rider. If you die peacefully in your sleep 30 years from now never having used the long-term care rider, there's still that same sense of heartburn for having paid for something you hope you never have to use. Remember, you also have to qualify through the morbidity test, not the mortality test, which means you have to qualify in the same way you might qualify for long-term care insurance.
0:07:49
Now, why do I prefer the chronic-illness rider? I prefer the chronic-illness rider over long-term care rider simply because if you die peacefully in your sleep 30 years from now never having used the chronic-illness rider, you never lost any money along the way. There was never any drag on your cash value, there was never any opportunity costs for paying for something that you hope you didn't have to use, and these companies, most companies will traditionally underwrite these chronic-illness riders based on mortality, not on morbidity, in other words, you could have a bad back, a bad knee, a bad hip, or rheumatoid arthritis, and you could still qualify for the chronic-illness rider. This is a great alternative for people who can't otherwise qualify for traditional long-term care insurance and it neutralizes the single greatest source of heartburn that most people have when it comes to traditional long-term care approaches, which is this use-it-or-lose-it proposition. I would say that of the clients that I've met and helped get to the 0% tax bracket over the course of the last 20 years, I would say that the primary motivation that they have for using an LIRP is for the long-term care aspect of it. Typically, what I'm recommending is the chronic-illness rider because if we're trying to give an answer to the typical foibles and shortcomings of traditional long-term care insurance, I think that the chronic-illness rider does a very good job of offering the benefits of a traditional long-term care insurance policy without a lot of the traditional downfalls of a traditional long-term care policy.
0:09:29
That's the show for today. In summary, you have two approaches when it comes to using life insurance for long-term care, I'm not talking about a traditional asset-based approach that we talked about two weeks ago, but a traditional life insurance approach to long-term care, you have the choice of either a long-term care rider or a chronic-illness rider for the main reasons I mentioned today, I really do prefer the chronic-illness rider.
0:09:59
Anyway, that's the show for today. Remember, you can find out more about me at davidmcknight.com. If you're an advisor and you want to find out more about our programs, of course, you can go to powerofzero.com. Again, The Volatility Shield at thevolatilityshield.com, you can now buy in bulk discounts. By the time this podcast comes out, you may even be able to get an Audible of The Volatility Shield, if not, it's just a day or two away. Thanks for your patience with all that. Of course, if you want a single copy of The Power of Zero, just go to Amazon. If you want bulk copies, you can certainly go to thepowerofzerobook.com. If you want copies of my other book, go to lookbeforeyoulirp.com, there's a whole section in there that defines the differences between the chronic-illness rider and the long-term care rider and why I prefer the former and not the latter.
0:10:49
Thanks for being on the show today. Of course, if you want to listen to me on your favorite listening device, whether it's YouTube, iTunes, or wherever you listen to the podcast, you can always subscribe to me and you will get every new episode delivered right to your email box and you never have to worry about tracking it down. You can evaluate whether it's a subject that you're interested in listening to or not right there from your email. Thanks again for being part of the show today and we look forward to chatting with you next week.

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