Our featured monthly article, Life Insurance Products with Long Term Care Riders, is a timely piece as November is Long Term Care Awareness Month. A concerted effort has been made by both the insurance industry and most state legislatures to bring attention to the growing concern over the cost of care for our aging population.
The article discusses alternative strategies on addressing the risk of a long term care event considering the struggles within the long term care (LTC) insurance industry. Insurance companies have attempted to provide alternatives to the traditional form of the LTC policy in order to help individuals overcome the multiple objections to purchasing coverage and to maintain profitability in a difficult market. While these hybrid forms of policies can help individuals overcome the emotional hurdle of purchasing long term care insurance coverage, hybrids need to be carefully considered in order to appreciate whether overcoming those hurdles justify the added cost.
In my experience, the internal conflict individuals struggle with include, purchasing a policy many years in advance, coverage that may not be used, and the protection can carry a significant cost of premiums. Typically though, the resistance to implementing coverage is rooted in the unequal comparison between other purchased insurance coverages.
Insurance companies price insurance coverage based on many factors, but a primary factor is probability of use. Many individuals have very little hesitation purchasing life insurance due to its inevitability. However, purchasing term life insurance and actually passing away during the term has a very low probability of use. Which is why insurance companies charge low premiums for the coverage.
In contrast, there is a high probability of using long term care insurance coverage during your lifetime. This helps explain why long term care insurance is priced so much higher than other types of commonly held insurance coverages. For more details on the statistics and more, click the LTC workbook image below.
Interestingly, insurance companies providing LTC insurance have been struggling for years to profitably offer the coverage. Due to an initial mispricing of the coverage early on, high retention rates by policyholders, and high usage rates many companies closed their doors to new customers. Insurance companies didn’t charge enough from the get go because they used life insurance statistics to price coverage instead of LTC insurance statistics. Additionally, they underestimated how many people would drop their coverage and how many people would actually use their coverage. Fortunately, companies have corrected their past mistakes and have designed current offerings to be more sustainable.
Life Insurance Products with Long Term Care Riders
Are they worthwhile alternatives to traditional LTC policies?
The price of long-term care insurance has really gone up. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed this. Last year, the American Association for Long-Term Care Insurance (AALTCI) noted that married 60-year-olds would pay between $2,000-$3,500 annually in premiums for a standalone LTC policy. 1
Changing demographics and low interest rates have prompted major insurers to stop offering LTC coverage. As the AALTCI notes, the number of LTC policies sold in this country fell from 750,000 in 2000 to 105,000 in 2015. Not all insurers offer these policies. The demand for the coverage remains, however – and in response, insurance providers have introduced new options. 1,2
Hybrid LTC products have emerged. Some insurers offer “cash rich” permanent life insurance policies that let you tap part of the death benefit to pay for long-term care. Other insurance products feature similar potential benefits. 1,2
As these insurance products are doing “double duty” (i.e., one policy or product offering the potential for two kinds of coverage), their premiums are costlier than that of a standalone LTC policy. On the other hand, you can get what you want from one insurance product rather than having to pay for two. 3
Another nice perk offered by these hybrid LTC products: sometimes, insurers guarantee that the premiums you pay will never rise. (Many retirees wish that were the case with their traditional LTC policies.) Whether the premiums are locked in at the initial level or not, the death benefit, coverage amount, and cash value are all, commonly, guaranteed. 3
Hybrid LTC policies provide a death benefit, a percentage of which will go to your heirs. Do traditional LTC policies offer a death benefit? No. If you buy a discrete LTC policy, but die without needing long-term care, all those LTC policy premiums you paid will not return to you. 3
The basics of securing LTC coverage applies to these policies. The earlier in life you arrange the coverage, the lower the premiums will likely be. If you are not healthy enough to qualify for a standalone LTC insurance policy, you might qualify for a hybrid policy – sometimes no medical exam is required. The LTC insurance benefit may be used when a doctor certifies that the policyholder is unable to perform two or more of the six activities of daily living (eating, dressing, bathing, transferring in and out of bed, toileting, and maintaining continence). 4,5
Lump sums are no longer needed to fund many of these hybrid LTC policies. In the past, insurers would commonly require a single premium payment of $75,000-$100,000. No more. Most insurance companies let you fund these policies with monthly, quarterly, or annual premiums. When a lump sum is necessary, it may not be a major hurdle for a high net worth individual or couple, especially since appreciated assets from other life insurance products can be transferred into a hybrid product through a 1035 exchange. 2,3,6
Are these hybrid policies just mediocre compromises? They have critics as well as fans. Detractors cite their two sets of fees, per their two forms of insurance coverage. They also point out that hybrid LTC policies are not inflation protected, so the insurance benefit is worth less with the passage of time. Also, while the premiums paid on conventional LTC policies are tax deductible, premiums paid on these hybrid policies are not. 3
Funding the whole policy up front with a single premium payment has both an upside and a downside. You will not contend with potential premium increases over time, as owners of stock LTC policies often do; on the other hand, the return on the insurance product may be locked into today’s low interest rates.
Another reality is that many middle-class seniors have little or no need to buy a life insurance policy. Their heirs will not face inheritance taxes because their estates will not exceed the federal estate tax exemption. Moreover, their children may be adults and financially stable, themselves. A large death benefit for these heirs is nice, but the opportunity cost of paying the life insurance premiums may be significant.
Cash value life insurance can be a crucial element in estate planning for those with large or complex estates, however – and if some of its death benefit can be directed toward long-term care for the policyholder, it may prove even more useful than commonly assumed.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – investmentnews.com/article/20160721/FREE/160729979/long-term-care-insurance-market-sees-rapid-decline [7/21/16]
2 – nytimes.com/2016/03/06/business/retirementspecial/hybrid-long-term-care-policies-provide-cash-and-leave-some-behind.html [3/6/16]
3 – today.com/series/starttoday/have-healthy-retirement-jean-chatzky-how-pay-long-term-care-t106862 [1/10/17]
4 – elderlawanswers.com/hybrid-policies-allow-you-to-have-your-long-term-care-insurance-cake-and-eat-it-too-15541# [4/5/16]
5 – elderlawanswers.com/activities-of-daily-living-measure-the-need-for-long-term-care-assistance-15395 [11/24/15]
6 – kiplinger.com/article/insurance/T036-C001-S003-tax-friendly-ways-to-pay-for-long-term-care-insura.html [8/16/16]