LTC combo policies: Assessing the pros and cons

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The long-term-care insurance landscape is ever-changing, with premiums going up and insurance carriers getting out of the business, but what isn’t changing is the need for clients to have a financial plan for custodial needs in their older years.

Statistics from indicate that someone turning 65 today has almost a 70% chance of needing this type of care.

This isn’t surprising, given that the national annual median cost of an assisted-living facility is $43,539, an in-home health aide is $46,332 and a private room in a nursing home is $92,000, according to the 2016 Genworth study on LTC costs.

The fact that it is becoming more and more difficult for the average family to purchase a LTC policy presents a challenge for advisers and their clients.

Coverage for a couple can run from about $2,000 to more than $5,000 annually, depending on the policy.

So that means either scrimping to pay now or risk being impoverished by costs later, not a choice many want to make. And like many mass-affluent consumers, some clients don’t have the assets to self-insure, yet they have too much to qualify for Medicaid.

Fortunately, the LTC industry has developed some new ways to pay that may work for some clients, most notably, combination policies.
These are universal-life insurance policies that allow policyholders to tap their death benefit if they need long-term care. Policyholders receive funds if they need long-term care, and if they don’t need care, their heirs receive the policy’s death benefit.

If they decide to drop their policy after a certain number of years, they typically get a return of their full premium.

These policies offer various options for premium payment. They can be purchased with a one-time lump sum payment, or a policyholder can opt instead to stretch premium payments over several years, with a reduced benefit.

Also, on the pro side, the life insurance hybrid policies are often available to those who wouldn’t qualify for traditional LTC insurance, and extraordinary premium increases haven’t been a big factor with life insurance hybrid products.

For example, a 55- year-old woman who bought a policy with a one-time, lump sum premium payment of $100,000 and claims that year is eligible to receive a total $412,070 in lifetime benefits for long-term care. That breaks down to a maximum of $5,309 per month or $63,705 annually.

With 3% compound interest growth, the policyholder’s monthly care amount by age 85 will have risen to $12,886, and the annual amount will have risen to $154,629. If she opted instead to stretch premium payments over 10 years at $10,000 annually, her benefit amount would be reduced to $4,570 monthly and $54,836 annually that first year, and benefits will grow annually at 3% compound interest off that lower base.

On the con side of these policies, there is interest rate risk. As the policies are being issued amid low rates, if rates rise, companies could keep returns level, and the consumer could lose interest, effectively equal to a premium increase.

A few companies offer these products, including Lincoln Financial and Nationwide Mutual Insurance.

As always, when reviewing new products, it pays to read the fine print and do one’s homework.

This story is part of a 30-30 series on preparing for retirement.

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