One of David Colflesh's clients is a widow, age 70, who had most of her liquid assets in CDs. "She inquired about long-term-care (LTC) coverage," recalls Colflesh, who offers investment advisory services through Eagle Strategies in Tarkio, Miss., and is a New York Life agent. "Her tax advisor recommended that she use her savings to pay for long-term care if she needed it. After I reviewed her financial situation with her, she decided to move $100,000 from her CDs to a life insurance policy that also offered LTC benefits of over $230,000." The policy will pay a modest death benefit even if all the LTC benefits already have been paid.

Essentially, this client wound up with a product that's a combination of life and LTC insurance. Such products have been around for a while and have enjoyed some success. Starting in 2010, these so-called combo LTC products, including annuity/LTC as well as life insurance/LTC blends, are likely to become even more popular as some deferred tax breaks take effect and pricing benefits become clearer.

"We certainly need rejuvenation in this market," says Phyllis Shelton, president of LTC Consultants in Hendersonville, Tenn. "Combo products, along with work site sales, are the two bright spots I see for LTC insurance."

LONG-TERM DECLINE

As Shelton's comments indicate, standalone LTC insurance sales have been in a funk lately. According to LIMRA International, "Significant declines in individual LTCI sales continued through the third quarter of 2009, with 28% fewer buyers when compared with the first nine months of 2008 and a 29% decline in new premium." Indeed, 2005, 2006 and 2008 were also down years, while 2007 was flat.

Why have sales of individual LTC insurance been slowing? Many observers cite the "use it or lose it" aspect of LTC policies; consumers might pay premiums for years-even decades-and never file a claim. Some potential buyers may be put off by the idea of "wasting" the money spent on LTC insurance premiums, says Carl Friedrich, a consulting actuary and principal in the Lake Forest, Ill., office of Milliman.

LIMRA puts the average annual premium at about $2,160. Even with some discounts, a married couple might be looking at an outlay of around $4,000 per year to buy coverage. Many individuals and couples probably tell themselves that they have other alternatives (sell a house, tap a portfolio, rely on a relative) to spending so much money to protect against a financial drain that might never occur.

Hence the appeal of combo products. If clients need coverage for long-term care, they have it. If their need for custodial care is modest or nonexistent, the money they spent on life insurance or annuity premiums will provide a payoff for them or their beneficiaries.

This appeal has resulted in significant business already. For 2008, first-year premium on combination plans was estimated at $650 million (primarily single premium), Friedrich says. That exceeded first-year standalone LTC insurance premiums (primarily annual premium) of roughly $600 million. Shelton adds that the $600 million number does not include group sales, which are considerable.

"We have offered a life insurance policy with an LTC rider for a few years," says Steve Roche, vice president of product strategy at the individual life division of Hartford Life. "Recently, 20% to 25% of the people buying that policy are choosing the LTC rider, which exceeded our expectations. That indicates the appeal of a product where you will not lose it if you don't use it."

LONG TIME COMING

The totals for combo products can be expected to climb this year because of some provisions of the Pension Protection Act of 2006. That act included some changes in tax law that went into effect in January. Those relating to LTC insurance included:

* Approval of LTC riders on annuity contracts. Formerly, these riders were specifically allowed for life insurance policies but not annuities. Now it's clear that LTC riders can be added to annuities without losing the tax deferral of annuities or some tax-free insurance benefits of most LTC insurance policies.

* Tax-free access to cash values for LTC coverage. Previously, when insurance or annuity cash values were tapped to pay for LTC coverage, the consumer owed tax on the money moved from one side of the combo product to the other, as if a distribution from the insurance policy or the annuity had occurred. Now such internal transactions won't generate income tax.

* LTC insurance eligibility for tax-deferred exchanges. Life insurance policies, annuities and LTC insurance policies can be exchanged for LTC policies under the like-kind exchange rules of Section 1035 of the tax code. Life insurance policies and annuities with LTC coverage are included. Until 2010, Section 1035 didn't extend to LTC insurance.