Consumers are finding ways to protect their wealth from long-term care expenses without buying long-term care insurance (LTCI). Consumers seeking these alternatives, however, need to know some details to ensure they buy the best coverage for them.
LTCI sales should be booming. The big Baby Boomer generation is in the prime years for buying LTCI. Yet, sales of LTCI are at the lowest level in nearly 20 years, according to industry sources. As we’ve covered in the past, many people believe the policies cost too much and doubt they will ever receive benefits under them. Other concerns are the complicated terms, the fear insurers will deny legitimate claims, and histories of substantial premium increases.
Filling the gap for more people are life insurance policies with riders that cover some long-term care expenses. We refer to these as combo policies, and their sales are rising.
The attraction of a life insurance combo policy is you know benefits eventually will be paid in one form or the other. You also receive two benefits for the premium dollar. The life insurance benefits are the primary benefit, but payments for long-term care during life are available if needed.
Many consumers don’t realize there are two main versions of combo policies, and they have important differences as well as some common features. The two versions are chronic illness accelerated benefit riders and long-term care riders.
As with traditional LTCI, neither rider pays lifetime benefits until the insured’s need is diagnosed and certified by a physician and often must be recertified each year by a physician or other licensed health care professional. Usually, as under LTCI, the insured must be unable to perform at least two of the activities of daily living without assistance or be cognitively impaired (Alzheimer’s disease or a form of dementia).
Under a chronic illness rider the condition must be expected to be permanent, while that is not usually the case under an LTC rider. Usually there is a 90-day waiting period, meaning benefits don’t begin until 90 days after the condition began.
Here’s an important difference. A chronic benefit rider is a life insurance benefit. All benefits paid under the rider reduce the policy’s death benefits. The LTC benefits are early payment of the policy benefits. An LTC rider is a health insurance benefit. The rider reimburses the expenses incurred related to the physical condition and does not reduce the death benefits.
LTC riders have many similarities to conventional stand-alone LTC policies. They are reimbursement arrangements. You incur expenses and submit receipts to the insurer for reimbursement up to the policy’s terms and limits, or you receive advance approval from the insurer. The policy also will reimburse only certain types of expenses listed in the rider. Payments under the rider might or might not reduce the life insurance benefit, depending on the policy’s terms.
A chronic illness rider pays a per-diem rate once the condition is certified. The payments are made regardless of actual expenses incurred by the insured and the type of expenses incurred. Receipts or advance approval are not required. This can give the insured some freedom, such as paying a relative to provide home care that would not be covered under traditional LTCI or an LTC rider.
The IRS limits the per diem payment to $290, or $8,820 monthly, and that amount changes. You choose the per diem amount when purchasing the rider, and the insurer prices the rider accordingly. The benefits are paid at the per diem amount until the death benefits are exhausted or other limits under the rider are hit. For example, a rider might limit lifetime payments a percentage of the death benefit.
Combo policies cost more than straight whole life insurance policies, but the riders usually are substantially less expensive than comparable LTCI policies. The riders, however, typically don’t allow coverage terms to be customized to the extent they can be under conventional LTCI. In addition, you are buying the life insurance. If you don’t need the life insurance, it may be cheaper to buy a traditional LTCI and customize the terms to your needs and budget. But if you need permanent life insurance, consider adding one of these riders to your policy to pay for any LTC you need.
You also don’t generally get your pick of life insurance policies. Most combo policies are universal life policies with a single premium, not annual premiums. You also can find variable universal life policies that offer the riders.