by Brenda Salyer
It is no longer true that having traditional long-term care insurance is the only way to pay for long-term care expenses. The long-standing deterrent to buying traditional long-term care has been the “use it or lose it” concern among most consumers. As agents, we know that our clients have a high likelihood of needing long-term care at some point. We can recite the statistics to them, but we cannot predict the future. Fortunately, we now have numerous alternative solutions to address this concern for our clients.
Most people are confused about how to start a long-term care plan. Because planning can be overwhelming, many put it off. But as our clients age, one clear priority becomes wealth preservation: the desire to provide for their spouses, children, and future generations. Nearly all of our clients want to leave a legacy to their surviving families and are willing, to discuss how to plan to do so.
So many linked-benefit products are available to our clients, including life insurance/long-term care linked-benefit products. We now have an opportunity to discuss long-term care planning through a life insurance purchase. Many are not aware that these products offer 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 have life insurance to provide for loved ones. The full death benefit passes tax free to their named beneficiaries if your client has a long-term care benefit rider and does not use the benefits.
Over one-half of Americans are concerned that they will not be able to fund long-term care expenses. Also, one-third of Americans have considered whether, if they were to die prematurely, their family would face financial difficulties, according to a recent LIMRA study. Given those concerns and the fact that 30% of Americans have no life insurance, many of your clients are very likely to need life insurance or additional life insurance. Your uninsured or underinsured clients are not likely to have money set aside for long-term care expenses or have purchased a stand-alone long-term care policy.
If your clients have enough life insurance, they may benefit from exchanging it for a hybrid life insurance product. Under Pension Protection Act of 2006, people can exchange a traditional life insurance policy for a hybrid policy through a 1035 exchange without paying taxes on the interest earned within the initial policy. Payouts for qualified long-term care expenses are tax free, which could 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 money (usually a fixed amount on a monthly basis) while others reimburse long-term care expenses as they are incurred. Either way, this money is an acceleration of the initial death benefit. Some policies have extended benefit riders that can provide double or triple the initial death benefit amount when the initial death benefit is exhausted.
Is a Hybrid Policy Right for Your Client?
There are many considerations when determining whether a life insurance/long-term care hybrid policy is right for your client including the following:
• How will your client pay for the policy?
• Will it provide enough funds to meet their future long-term care needs?
• What 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 insurable?
• What benefits and limitations are under the long-term care rider?
Policies can be funded through a single lump-sum payment, which is most common, or paid over any number of years. To illustrate these payment options, imagine that a 65-year-old male client has $50,000 of readily available assets in bank CDs or other accounts. That $50,000 lump-sum payment would be used to purchase a single-premium life insurance policy of $64,864. Your client purchases a long-term care acceleration-of-benefits rider for two years and an extension-of-benefits rider for four more years. With the two riders (assuming long-term care benefits are needed), your client would get $32,432 annually for a maximum of six years, or $2,703 monthly. If your client used all six years of his potential benefits, the initial $50,000 investment would provide $194,592 in long-term care benefits.
The cost of the riders is also a factor. In the example above, a monthly fee is associated with each of the two riders for the first 10 years of the policy. The initial acceleration-of-benefits rider fee is $19.78 per month. The extension-of-benefits rider is $35.87 per month. For $55.65 per month, your client could secure nearly four times more than the initial investment in potential long-term care benefits. If your client doesn’t need long-term care, the death benefit of $64,864 would pass to the beneficiary upon your client’s death.
The cost of long-term care is another consideration is. Will the long-term care benefits cover the cost of the services your client needs? The average annual cost of long-term care in California ranges from $20,020 for adult day-care services to $83,950 for a semi-private room in a nursing home, according to the Dept. of Health and Human Services. In our example above, the $32,432 annual benefit may not be enough 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 may limit the amount of self-funded and family-provided care your client would need. 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, it is not an option with some hybrid policies, or it is offered as another rider for which your client would have to pay additional fees. Inflation protection riders offer increasing long-term care benefits — typically 3% to 5% annually. If the cost of electing an inflation protection rider is not prohibitive for your client, adding it could increase their benefits considerably. Referring again to our previous example, if this client needed benefits at age 79 and had elected a 3% inflation rider, the monthly payout on the policy would be $3,331 and would continue to increase annually by 3%.
It is important to make sure that your client understands the benefits and limitations of their 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 that your clients have a clear understanding of how and when they can access the benefits under their policy.
Before recommending a life insurance/long-term care hybrid policy to your clients, consider their need for enough life insurance and the 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 want to leave a legacy. They could 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. A linked-benefit policy could be an excellent option for a client who has no life insurance or insufficient life insurance and no long-term care in place. q
Brenda Salyer is a Life and Annuity Specialist and licensed insurance broker with Ritter Insurance Marketing (Ritter). She received her B.A. from Shippensburg University of PA and has been working in insurance and commercial real estate marketing for 14 years. Ritter is a national Field Marketing Organization that solves the distribution needs of more than 70 insurance companies in the senior health and life markets. Ritter’s proprietary services, including a customized CRM system and quoting tools, have earned the company its reputation as a technology leader in the insurance industry. For more information, visit www.ritterim.com.