Are Multibenefit Policies Worth the Cost?

Insurers have had trouble selling long-term health care insurance policies. To boost sales, they created multiple benefit policies. Let’s take a look at them.

Insurers face a dilemma. During most of the average person’s life, he is more likely to become disabled or in need of long-term care than to die prematurely. Yet, fewer people purchase disability and long-term care insurance than buy life insurance. Insurance industry sources estimate that only 1%-3% of the target market purchases long-term care insurance.

Long-term care insurance is expensive. But what seems to bother many people is that, unlike life insurance, there is a probability one will pay premiums for years and never receive a cash benefit from the policy. A homeowner’s policy also has a low probability of paying cash benefits, but people are much more likely to buy homeowner’s insurance than disability or long-term care insurance. By combining life insurance with long-term care and disability insurance, insurers hope the policies might be more appealing to consumers.

Here’s how a multiple benefit, or multiple risk, insurance policy might work.

The insured buys a permanent life insurance policy with a death benefit. Let’s say the benefit is $200,000. The policy also carries a long-term care benefit with a monthly payout of $8,000. If the insured needs long-term care, the insurer advances the death benefit at a rate of $8,000 monthly up to $200,000. The payments are made on a tax-free basis. If long-term care still is needed after the death benefit is exhausted, the policy will pay an additional $200,000 of long-term care expenses at $8,000 per month.

The expenses covered are the same as those covered by traditional long-term care policies: nursing homes, assisted living facilities, and home care.

With a traditional permanent life insurance policy, the insured also can tap the benefits early. A loan might be available. Or the insured could cancel the policy and get the cash value. The policy also might be sold in a transaction known as a Viatical Settlement. But in each of these cases, the insured would not get access to the full death benefit. In all but the loan, the insured has to give up ownership of the policy. So the multi-benefit policy provides more coverage without giving up ownership of the policy.

A multiple benefit policy also might cover disability or be an all-risk policy. Under these policies, when a covered chronic or critical illness or injury is diagnosed, the policy begins paying a monthly benefit. The amount of the benefit depends on the diagnosis. There usually is a maximum disability payment, up to a percentage of the death benefit. The death benefit and cash value are reduced by the amount of the benefits paid. The payments can be used for any purpose. The insured does not have to be terminally ill, confined to a nursing home, or even hospitalized.

There are obvious attractions to the multiple benefit policies. If you do not use the lifetime benefits, the death benefits will be paid. The insured is less likely to think premiums are wasted. Yet, there are some potential disadvantages to be considered:

• Any benefits paid during life reduce the death benefit. If the amount of death benefit definitely will be needed to pay estate taxes or for some other purpose, you don’t want that benefit reduced by lifetime benefits.
• In at least some of the policies, the death benefits are reduced first. Suppose a policy has a $200,000 death benefit and a $200,000 maximum long-term care benefit. If you need long-term care, the payments for that will first reduce the death benefit. If you die after having receiving $150,000 for long-term care, the beneficiaries will receive $50,000 of life insurance and the long-term care benefit technically won’t have been used. Be sure you know how any lifetime benefits will affect the death benefits and the cash value.
• Multiple benefit policies are relatively expensive. You will pay more to have several benefits covered in one policy than by buying separate policies. The insurer is taking more risk under these policies, plus there probably is some markup for the convenience and additional administrative costs of the policies. You definitely will overpay for some of the benefits and might be paying for benefits you don’t need.
• The benefits might not be high enough. The non-life insurance benefits available are based on the amount of the life insurance you select. If you want to insure for unlimited lifetime long-term care benefits, for example, you might have to purchase a lot of life insurance.

With a multiple benefit policy you have more flexibility, pay only one premium, and have a greater probability of getting some cash benefit for the premiums. You also might pay more than for separate policies, might buy coverage you don’t want, and could have the eventual life insurance benefits reduced.