What are Catastrophic Illness Coverage and Long-Term Care Coverage?

Catastrophic illness coverage provides for accelerated death benefit payments on approximately the same terms and conditions as terminal illness coverage, except that the insured must have been diagnosed as having one of several listed catastrophic illnesses. Also referred to as dread disease coverage, the provision typically covers stroke, heart attack, cancer, coronary artery surgery, renal failure, and similar catastrophic diseases. Both terminal illness and catastrophic illness coverage’s provide that policy death benefits are reduced on a one-for-one payout basis. Cash values are reduced on either a one-for-one basis or in proportion to the death benefit reduction. According to the NAIC, Accelerated Benefits Guideline for Life Insurance, prospective buyers of these cover- ages must be given numerical illustrations that reflect the effects of an accelerated payout on the policy’s death benefit, cash values, premium, and policy loans. Additionally, consumers must receive a brief description of the accelerated benefits and definitions of the conditions or occurrences triggering payment. Any separate, identifiable premium charge must be disclosed. The NAIC and others have been concerned that such benefits, especially the catastrophic illness coverage, could be “oversold.” Certain dread disease policies with limited coverage fell into regulatory disfavor because of fear-based selling tactics and numerous claim disputes. Allegations of so-called post claim underwriting were widespread. Clearly, a weakness of these earlier policies and of this latest variation is that other illnesses can be equally devastating, yet no benefit is provided for them. The importance of an adequate health insurance program is underscored.
Long-Term Care Coverage
long term care insurance provides that monthly benefits can be paid if the insured is confined because of a medical condition. Of course, LTC insurance is most commonly purchased as a stand-alone policy, as discussed in the preceding chapter, but some is sold as riders to life insurance policies. To qualify for payments, the confinement must be covered, any preconfinement conditions and elimination periods met, and any minimum in-force requirements satisfied. To be covered, the confinement must be medically necessary and in a qualified facility. Although provisions vary, the rider may cover skilled nursing facilities, intermediate care facilities, and custodial care facilities. Some cover home convalescent care. Many riders are more restrictive than LTC policies and, for example, carry some type of prior confinement requirement in a hospital or other high-care facility to qualify for LTC benefits. Typically, the LTC confinement must have occurred within 30 days after discharge from the hospital (or other facility). Some riders have no prior confinement requirement. Riders routinely provide for an elimination period. This period may be from two to six months. Many insurers also require that the contract be in force for a minimum number of years a so-called in-force requirement before the insured is eligible to collect benefits. This period may range from three to ten years and may vary with issue age. Some contracts have no such requirement.
The monthly benefit typically equals 2 percent of the policy’s face amount, subject to some monthly maximum payout and to a total maximum payout (e.g., 50 percent of the policy face amount). Some companies provide a tiered payout of, say, 2.0 percent of the first $150,000 and 0.5 percent of the excess face amount up to $1 million. Thus, a $100,000 policy produces a monthly payment of $2,000. A $500,000 policy yields a $4,750 monthly benefit.
Amounts paid as benefits reduce the total death benefit on a one-for-one basis. Although contract wording varies, the reduction typically affects both the net amount at risk and the cash value proportionately. Accelerated death benefit coverage’s are fairly recent to the North American market and, therefore, it is difficult to discern trends. Clearly, however, with the increasing emphasis on insurance for its living benefits, the popularity of this class of coverage can be expected to grow.