The Four basic Solutions to Long-term Care Planning
There are four key types of insurance strategies: traditional health-based LTC insurance, Linked-Benefit life/LTC plans, Life Insurance with Chronic Care riders, and Annuity LTC plans.
Traditional health-based LTC: Traditional LTC plans continue to be a viable alternative in many situations and are focused on just addressing the risk of long-term-care costs. However, these traditional policies have faced struggles in recent years because of lower than expected lapse rates and a longer than expected low interest rate environment. Due to these factors, there have been many unplanned in-force price increases that have caused consumers and advisors consternation.
However, once those advisors and policyholders find out what a new policy costs today (which is much higher), they normally are willing to pay the increased premium.
From a plan design perspective, the most up-to-date products allow a purchaser to select a total pool of money, say from $100,000 to $1 million. That pool can be used in the future for care, up to monthly withdrawal limits either expressed on a percentage of the pool basis monthly (1% – 4% of the pool monthly) or a daily or monthly maximum flat amount. The most important differentiator is how claims will be paid.
One key difference is with the benefits for home care. Some plans allow for a “cash alternative” that can be used in lieu of the reimbursement benefit. Other plans offer expanded definitions of what qualifies as a home health care agency in order to support the newer private-pay home health care franchises that are rapidly growing throughout the country.
Another important difference in LTC plans is how they handle future inflation requirements. Today, inflation options abound on products. Options include:
- Policies that increase automatically with the CPI
- “Dial-your-own inflation,” from 1 percent to 5 percent in 0.25 percent increments
- Inflation that increases by 5 percent to age 61 and 3 percent from ages 61 to 75
- Step-rated increases that increase premiums and benefits each year
- A plan that increases benefits if the carrier’s underlying investment portfolio performs well
With so many options, how does someone decide what they need? One growing way to design a plan is focus on a premium budget first and then back into an appropriate plan design. You could call it the “name-your-price” option.
Who is most likely to choose traditional LTC products? There are four likely buyers.
- First, business owners or those who have a health savings account because they offer premium deductibility.
- Anyone who has had experience with a family member needing care or even using an LTC policy may be very interested.
- Those who like “pure protection” products like term life
- Those wanting automatic inflation adjustments also may be interested in traditional LTC products.
Linked life/LTC plans: Linked-benefit life-LTC plans have been available since 1987, but most recently have been growing in popularity and market share. One big reason: plans often offer guaranteed premiums. Because linked plans have the life insurance component, there is no use-it-or-lose-it mentality like there is with traditional LTC plans. If a policyholder dies before using any of the LTC premiums, the full life benefit goes to the beneficiary.
In addition, linked policies work as a form of leveraged self-insurance. The policyholder is accessing the life insurance death benefit first, through the acceleration of a benefit rider. Any portion of the death benefit not collected to pay for long-term care will eventually pass to the beneficiary. In some contracts, once all the death benefit has been accessed for long-term care, an Extension of Benefits rider is activated. As the name implies, the long-term-care benefits will continue for an extended period which in total could provide total benefits received that triple or quadruple the original deposit. With inflation options, that leverage could be even more at older ages when care is likely needed. There is also at least one company that provides an extension option for lifetime benefits and that rider will provide benefits that will continue for as long as care is needed.
These plans have been designed for the investor who is accustomed to addressing their financial issues by proper allocation and management of their portfolio. Most of these linked-benefit strategies are adopted by moving savings in the portfolio to a life insurance cash value account that supports the leveraged benefits with tax free interest. Go here for a complete Executive Summary.
We often talk about how to more effectively set up an “emergency fund”. Linked Benefit Life may be an appropriate “emergency fund” that could really work in an emergency, like a long-term health issue.
Life insurance with chronic care riders: There is an explosion of carriers offering life insurance policies with living benefits. The concept is simple: You don’t have to die for a benefit from your life insurance. Those who need to access policy benefits to cover costs of care for a condition such as Alzheimer’s can accelerate the death benefit to do so. These are not true long-term-care insurance policies, as the condition must be permanent to qualify for a claim and most policies are unclear about the amount of benefit that can be accelerated until the point in time of a claim. However, younger individuals who have need to provide a large amount of insurance for family protection should be sure that these riders are attached to the policy they own.
Annuity LTC plans: Annuity/LTC plans with tax-qualified benefits allow a holder of a non-qualified annuity to access benefits from the policy, tax free, to pay for long-term care. A few such plans include Benefit Extension riders that will double or triple the value of the annuity if long-term care is required.