Actuarial Notes

Life Insurance Acceleration Riders

By Jim Filmore · Society of Actuaries · 2013

Study guide: Exam ILA-101

An article by Jim Filmore in the July 2013 issue (Issue 76) of Reinsurance News, the newsletter of the Society of Actuaries' Reinsurance Section, appearing on pages 35-38. It discusses the more common form of chronic illness riders found in the U.S. marketplace, as life insurers have begun offering acceleration of part of the face amount to the chronically or critically ill, together with considerations to control the risks under that rider.

On the syllabus

  • Exam ILA-101 — Life Insurance Acceleration Riders, SOA Reinsurance News, Jul 2013, pp. 35-38 (the whole article); outcomes 1a, 1b.

Introduction

  • Historically, U.S. life insurers gave the policyholder the option to accelerate part of the death benefit on terminal illness, typically a physician-certified life expectancy of less than 12 months (24 months in some states).
  • In recent years insurers have started offering acceleration to those who are chronically or critically ill.

Definitions

  • A terminal illness rider allows acceleration of a portion of the face amount when life expectancy is less than X months, typically 12 (24 in some states).
  • A chronic illness rider allows acceleration when the policyholder cannot perform two or more activities of daily living (bathing, continence, dressing, eating, toileting and transferring) without assistance.
  • A critical illness rider allows acceleration when the policyholder meets the criteria for one or more listed critical illnesses, such as a heart attack or a stroke.
  • Life/long-term care (LTC) combination products and LTC acceleration riders are beyond the scope of the article.

Chronic Illness Benefit Designs

  • Chronic illness riders are typically designed so that the benefit qualifies for favorable tax treatment under section 101(g) of the Internal Revenue Code.
  • Actuarial discounting of the face amount being accelerated.
  • A lien held against the death benefit for the cumulative accelerated amount plus interest, primarily used when the base policy is a whole life policy.
  • An explicit additional premium charged when the rider is attached to the policy.

Risk Control Measures on Chronic Illness Acceleration Riders

  • A supplemental underwriting application for any acceleration rider.
  • Limits on the issue ages at which the rider can be added, and cognitive testing at particular issue ages.
  • A lien with interest charged, or payment of a discounted amount based on the life expectancy assumed for a chronically ill individual of that gender and attained age.
  • Limits on the annual and maximum acceleration amounts.
  • Certification by an approved licensed health care practitioner of the loss of activities of daily living, with the loss defined as expected to be permanent.
  • Exclusions that mirror the base policy language, contestability that follows the base policy, availability only up to a maximum rating, and a maximum benefit below 100 percent of the death benefit.

Reinsurance Participation in Chronic Illness Acceleration Riders

  • Terminal illness acceleration riders are often considered standard, and most reinsurers participate in proportion to their participation in the base policy.
  • Reinsurance participation in chronic illness acceleration riders is more varied, and depends on the product to which the rider is attached (permanent or term).
  • A reinsurer may approve participation subject to a one-time payment upon death or upon lapse of the policy.
  • Questions to consider include how the reinsurer is compensated if the writing company charges for the rider, whether a yearly renewable term reinsurer should wait until death to pay its portion of the net amount at risk, and whether to offer the rider to existing policyholders, with what underwriting to control anti-selection.

Conclusion

  • A shift to include living benefits requires additional analysis and risk control measures, as otherwise the expected profitability of the product may not be realized.

Sources