The crisis in long-term care insurance is causing people to look for alternatives to traditional LTCI. There are a few options, but you want to consider them care-fully before deciding on a plan. Each option has its own disadvantages.
In our January and March visits we documented how some insurers are raising premiums on LTCI while others are dropping out of the market, leaving fewer choices for new purchases. LTCI always is a tough policy to sell. People don’t like the idea that they could pay premiums for life and never receive benefits, and the policies are expensive. The recent problems make LTCI even less attractive to many people.
The first alternative to traditional LTCI is a combo or hybrid policy. There are several different types of combo policies, and the differences can be significant. A combo policy starts with a traditional annuity or life insurance policy and adds some form of LTC coverage to it. Sales of these policies are increasing, and many insurers are adding these offerings or expanding their coverage.
A combo life insurance policy starts with whole, or permanent, life insurance. This is life insurance that has a cash value or investment account along with the death benefits. Long-term care can be paid through the policy by adding an acceleration rider. This rider allows you to tap the cash value or the death benefits to pay for LTC. The events that could trigger the rider depend on the policy. Some require a medical diagnosis of terminal illness, while others have terms similar to LTCI, a diagnosis that help is required with at least two of the activities of daily living. Others require only a diagnosis of a chronic illness and determination of a need. These policies might be tapped to pay for a wheelchair ramp or to hire a relative to help around the house.
You need to know the trigger clause in a rider, so you’ll know the circumstances when the money would be available.
The withdrawals for LTC usually have an annual limit of 1% to 2% of the policy’s death benefit or have a daily limit.
When the life insurance policy is used to pay for LTC, the payments in effect convert some of the death benefits into living benefits and reduce the death benefits of the policy. The proceeds received from the policy to pay LTC are tax free.
Combo annuities policies are similar. You purchase an annuity and also purchase a rider that allows you to draw money out to pay for LTC under certain conditions.
The combo policies appeal to people for several reasons. The money put into the policy has several uses. It can provide life insurance or annuity payments. If needed before then, it can be used to pay for LTC. It also overcomes the objection to LTCI that premiums could be paid for decades with no benefits received.
The combo policies have several drawbacks.
You have to buy the policies with a lump sum, not monthly premiums. Many people can’t come up with a large enough lump sum to buy the life insurance or annuity.
Your LTC coverage is limited by the amount of life insurance you buy or the annuity deposit you make. That means you need to put a lot of money into the policy to have adequate coverage. You’ll receive more coverage with the life insurance than with an annuity. With life insurance, your single deposit premium will provide death and LTC benefits that are several times the premium. Shop around, but you’ll probably find that the LTC benefits under a combo life insurance policy are about double those under a combo annuity with the same deposit.
You no longer have the use of the lump sum for other purposes. It is out of your investment portfolio and is available for emergency expenses only under limited circumstances. The investment return on $100,000 might pay most of the premiums for both LTC and life insurance and still leave the $100,000 available for emergencies.
Also, the accelerated benefit rider increases the cost of the life insurance by about 20% or reduces the return of an annuity by about 1.25%.
In short, combo policies are an expensive way to buy the coverage, and they still produce low levels of coverage. You’d receive far more coverage with the premiums by purchasing a traditional LTCI policy.
There’s little point in buying a combo policy unless you already have a need for the life insurance or the annuity. When you have a need for LTC, the life insurance or annuity could be exhausted fairly quickly.
The combo policies can be good for someone whose health doesn’t qualify for traditional LTCI, because the combo policies tend to have less restrictive underwriting. He or she might qualify for life insurance or an annuity with an LTC rider.
A second option is to assume you’ll drawn down your assets for any long-term care you need and buy life insurance to ensure your loved ones received an inheritance. The life insurance likely will be less expensive than LTCI and isn’t as subject to steep premium increases. Also, your heirs receive the benefit whether you need LTC or not.
This strategy could be troublesome for married couples. If one spouse needs LTC while the other is alive, the couple’s assets could be spent down. That leaves the healthy spouse with no assets and also no means to keep paying the life insurance premiums.
A third option is to buy a low-cost LTCI policy when you are relatively young and be sure the policy guarantees that you can purchase additional coverage later. That way, you can buy the additional coverage without a fresh review of your health. You could purchase the initial coverage when in your early 50s, for example. Then, around age 65 evaluate whether you want to purchase the additional coverage, have accumulated enough assets to self-finance any coverage you need, or choose some other route.
A fourth option is to take the long view. The problems with LTCI the last couple of years are attributable largely to two factors: low interest rates and poor assumptions. Insurers aren’t earning the returns on their investment portfolios they expected. They also are paying more in claims than they expected, because they assumed shorter life expectancies and less of a need for LTC. Current policies are priced with different assumptions. As interest rates rise, the investment returns of the insurers should increase. Premiums could be more stable or subject to lower increases in the future.
Combo policies are worth considering as a way to plan for LTC. But they aren’t a panacea. They do have some drawbacks, including less coverage. Consider all the angles carefully before deciding how to plan for paying LTC expenses.