Traditional long-term care insurance is no longer the only way to pay for future long-term care expenses.
The longstanding deterrent to traditional long-term care purchases is the “use it or lose it” concern that most insureds have regarding this type of insurance. While we as agents know the likelihood of our clients needing long-term care is high and can recite the statistics to them, we cannot predict the future. Fortunately, we now have numerous alternative solutions to assuage this concern for our clients.
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Most people are confused about how to begin a long-term care plan. Because planning can be overwhelming, many put it off so they don’t have to think about it or make those difficult decisions now. But as our clients age, one clear priority becomes wealth preservation: the desire to provide financially for their spouses, children, and future generations. Nearly all of our clients want to leave a legacy for their surviving families and are willing to discuss how to plan to do so.
With the myriad of linked-benefit products that are now available to our clients, including life insurance/long-term care linked-benefit products, we now have an opportunity to begin a discussion about long-term care planning through a life insurance purchase. Many are unaware that these products present alternative ways of preserving wealth and funding long-term care expenses.
The Benefits of a Hybrid Product
The obvious benefit of a life insurance/long-term care hybrid product is that it allows your clients to put life insurance in place to provide for their loved ones in the event of their death. If your client has a long-term care benefit rider and does not use its benefits, the full death benefit passes tax free to their named beneficiaries.
LIMRA’s 2014 Insurance Barometer Study indicates that over one-half of Americans are concerned that they will be unable to fund long-term care expenses, and one-third of Americans have considered the financial difficulties that would be placed on their surviving families if they passed away prematurely. Given those concerns and the fact that 30 percent of Americans have no life insurance in place at all, it is very likely that many of your clients have a need for life insurance or additional life insurance. For your clients who are uninsured or underinsured, it is also unlikely that they have funds set aside for long-term care expenses or have purchased a stand-alone long-term care policy.
If your clients do indeed have adequate life insurance in place, they may benefit from exchanging it for a hybrid life insurance product. The Pension Protection Act of 2006 allows owners of traditional life insurance policies to exchange their policies through a 1035 exchange for a hybrid policy without having to pay taxes on the interest earned within the initial policy. Payouts for qualified long-term care expenses are tax free, which could potentially translate into a significant taxable gain inside the new policy.
Your client’s initial life insurance purchase could provide double, triple, or more in long-term care benefits. When long-term care benefits are needed, some policies pay out a percentage of the funds (usually a fixed amount on a monthly basis), while others reimburse long-term care expenses as they are incurred. Either way, these funds are an acceleration of the initial death benefit. When the initial death benefit is fully exhausted, some policies have extended benefit riders that can provide double or triple the initial death benefit amount.
Is a Hybrid Policy Right for Your Client?
There are many considerations to take into account when determining if a life insurance/long-term care hybrid policy is right for your client. How will your client pay for the policy? Will it provide adequate funds for his or her future long-term care needs? What type of inflation protection is available with the policy and what is the associated cost? What remains of the death benefit if the long-term care benefits are exhausted? Is your client currently insurable? What are the specific benefits and limitations under the long-term care rider?
Policies can be funded through one single lump-sum payment, which is most common, or paid over any number of years. To illustrate these payment options, imagine you have a 65-year-old male client who has $60,000 of readily available assets in the form of bank CDs or other accounts. That $60,000 lump-sum payment would purchase a single-premium life insurance policy of $82,556. Your client chose to purchase a long-term care acceleration of benefits rider for two years and an additional extension of benefits rider for four additional years. With the two riders added to the policy (and assuming long-term care benefits are needed), your client would receive $41,278 annually for a maximum of six years, or $3,440 monthly. If your client utilized all six years of his potential benefits, his initial $60,000 investment would provide him with a total of $247,668 in long-term care benefits.
The cost of the riders is also a factor. In the example above, there is a monthly fee associated with each of the two riders for the first 10 years of the policy. The initial acceleration of benefits rider fee is $22.04 per month. The extension of benefits rider would cost your client an additional $100.80 per month. For a total of $122.84 per month, your client would be securing more than four times his initial investment in potential long-term care benefits. If your client doesn’t require long-term care, the death benefit of $82,556 would pass to his beneficiary upon his death.
Another consideration is the cost of long-term care. Will the long-term care benefits provided by the policy cover the cost of the services your client needs? According to the U.S. Department of Health and Human Services, the current average annual cost of long-term care in California ranges from $20,020 for adult day-care services to $97,367 for a semiprivate room in a nursing home. In our example above, the $41,278 annual benefit may not be sufficient to fund care for this client. Compared to a traditional long-term care policy, an acceleration of benefits rider probably wouldn’t cover all necessary care considering the rising costs of home health care and nursing home care. On the other hand, the benefits provided may limit the amount of self-funded and family-provided care your client would require. With the alternative being no long-term care coverage at all, even some assistance provided by such a rider would be beneficial to your client.
Many traditional long-term care policies offer built-in inflation protection. However, with some hybrid policies, it is not an option or it is offered as another rider that your client would have to elect and pay additional fees for. Inflation protection riders offer increasing long-term care benefits that are typically between 3 and 5 percent annually. If the cost of electing an inflation protection rider is not prohibitive for your client, adding it could considerably increase his or her benefits. Referring again to our previous example, if this client needed benefits at age 79 and had elected a 3 percent inflation rider, the monthly payout on his policy would be $3,762 and would continue to increase annually by 3 percent.
Additionally, it is important to make certain that your client understands the benefits and limitations of his or her policy. If a woman leaves her job to care for her husband in their home, is income replacement a qualified expense under a long-term care rider? In most cases, it is not. Covered expenses under a long-term care rider vary by carrier. There may be a deductible or elimination period. Pre-existing conditions may not be covered for a specific timeframe. Benefits are usually triggered by a certification from a licensed health-care practitioner stating that the policyholder is unable to perform at least two of the six activities of daily living (ADLs) or is experiencing severe cognitive impairment or loss of mental capacity. A prescribed plan of care from the physician is usually required. Be sure your clients have a clear understanding of how and when they are able to access the benefits under their policy.
Before recommending a life insurance/long-term care hybrid policy to your clients, consider their need for adequate life insurance and desire to provide for their loved ones. A linked-benefit life insurance/long-term care policy with no additional life insurance may not be a viable option for clients who wish to leave behind a legacy. They could ultimately exhaust the death benefit to pay for long-term care expenses, leaving little to no benefits for the surviving family. Be prepared to discuss alternatives. If your client has no or insufficient life insurance and no long-term care in place, a linked-benefit policy could be an excellent option.
A modified version of this article was previously published in the January 2015 issue of California Broker Magazine.