Chronic illness rider

A chronic illness rider lets a policy owner draw part of the death benefit early when the insured becomes chronically ill. The usual definition mirrors federal tax law: a licensed health care practitioner certifies that the insured cannot perform at least two of six activities of daily living (bathing, continence, dressing, eating, toileting and transferring) for at least 90 days, or needs substantial supervision because of severe cognitive impairment such as dementia.

Riders differ in how they charge and pay. Some discount the payout to reflect paying early, so you receive less than the death benefit you give up; others charge a premium up front. Payments may be a lump sum or periodic, often capped at a percentage of the death benefit each year. Hypothetical example: on a $250,000 policy, a rider allowing 24% a year could pay up to $60,000 a year before any discount, reducing the eventual death benefit by at least as much.

A chronic illness rider is not long-term care insurance. Most do not require the money to be spent on care, many require the condition to be expected to be permanent, and claims can be declined if recovery is likely. Payments are generally tax-free within federal limits under Internal Revenue Code Section 101(g). Compare carefully: see chronic illness riders vs long-term care riders and accelerated death benefit riders: how they work and how they're taxed.