By Lori Parker, Esq.
When considering options for future long-term care costs, an insurance policy that combines a traditional death benefit with a long-term care feature may be the solution.
Many of our current and future clients want to get off of the long-term care roller coaster — that thrill-a-minute ride that combines unexpected drops in Medicaid benefits with care costs that climb to dizzying heights. A ride on the “Better Care Reconciliation Act” (featuring a $772 billion reduction in Medicaid funding through 2026 and one of several measures put forward to repeal all or part of the Affordable Care Act), is particularly hair-raising for the younger cohort of our clients. Those who were born in the late 1950s to mid 1960s may not be able to rely on government benefits.
Long-Term Care Insurance—More “Downs” Than “Ups”?
Those who can afford the price of admission can look to long-term care insurance (LTCI) and life insurance as options to the heart-stopping thrill ride of having no plan at all for long-term care. But there are numerous impediments to getting LTCI coverage — even for younger and healthier clients. For example:
1. Premiums are high, and LTCI is a “use-it-or-lose-it” proposition. Clients may be disheartened by paying some $8,000 per year — with no residual benefit for their family if they die without the need for care. Further, even if the client can afford LTCI today, there’s no guarantee of tomorrow’s affordability.
2. The underwriting process is rigorous, with many exclusions.
3. The LTCI marketplace has few vendors — and thus little competition between insurers. Therefore, even those clients who are both financially and medically qualified possess scant bargaining power.
4. If the client makes it through the “getting coverage” obstacle course, they still have coverage challenges to negotiate — exclusion periods before coverage begins, non-covered services, and caps on benefits.
One possible solution is grafting a LTCI onto a life insurance policy. This hybridization buffers some of the harsh twists and turns of LTCI on its own.
The Mechanics of the Hybrid
Imagine a client who is nearing or just embarking on retirement. They have $100,000 in low-return investments, such as CDs and money market funds, or perhaps they received a lump-sum bonus or retirement incentive. They liquidate the low-yield investments (or use their windfall cash) to buy a single-premium life insurance policy. The insurance company will invest the premium at a fixed interest rate, resulting in a net return of about 1.5 percent — similar to what the client would earn on their CDs and money market funds. The results of this transaction are:
1. The client has traded one safe, low-yield asset for another.
2. The sales agent has earned a commission.
3. The client receives added value in the form of:
• A locked-in premium, and
• A known benefit amount.
Because premiums are substantial, some clients will be priced out of the market from the outset. But for those who have even a small investment portfolio, the idea of trading low-return for low-return plus a cash death benefit may be appealing — especially when the death benefit can be used to defray the cost of future long-term care. Withdrawals to cover care costs will, of course, diminish the death benefit — so if the client needs extensive care, their beneficiaries will receive less than the beneficiaries of a client who dies before long-term care is needed.
The hybrid also has flexibility that traditional LTCI lacks. If the client wants to end the policy, they can reclaim at least a portion of their premium. Further, the underwriting process is abbreviated, with no medical exam needed. The insurer typically assesses medical eligibility based on the client’s responses to a health questionnaire. This brings the hybrid within reach of clients who may not be able to qualify for LTCI, but who are likewise not on the precipice of an immediate health crisis.
Despite this sleek and streamlined profile, the hybrid has its share of awkward clumsiness.
Get in Line Early
As with many other planning options, the keys to success are getting an early start and having more rather than fewer assets to invest. Once the client is on a fixed monthly income, they may not feel secure in allocating a large chunk of their assets to a hybrid policy — making the hybrid a tool more oriented to the still-working or just-retired.
Stay on the Track
Hybrids insure against two risks: 1) the possible need for long-term care, and 2) the undeniable eventuality of death. Multi-tasking, however, drains some of the hybrid’s power. If the client dies before they need long-term care, efficiency isn’t compromised. The hybrid zips down the “death benefit” track, undistracted by concerns about long-term care. When called upon multitask, however, the hybrid can be derailed by the divergent goals of covering long-term care costs while simultaneously providing a death benefit.
Hold On — Sharp Turn for Affordability
Hybrid premiums can be five to 15 percent higher than those for regular LTCI — so it’s important to press the agent for a clear explanation of what the premium is buying and whether that purchase has value for the client’s specific situation. For example, a $70,000 lump sum might purchase $125,000 in coverage. One client may love the idea of “earning” $55,000 with no more effort than writing a check. A different client might balk, reasoning that they could independently invest in a low-to-moderate risk portfolio and achieve similar results.
If the client needs long-term care, the $125,000 will cover about one year of nursing home care (if billed at today’s rate). The client’s fixed premium controls costs within the policy — but it can’t hold down the cost of care. A client who is risk-tolerant may be able to match the rising cost of care if they go the independent route.
Another consideration is the duration of care that will likely be needed. About half of those who need long-term care either get better or die within a year of qualifying for coverage. For that half of the claims population, $125,000 benefit could be enough to cover all care costs — but the death benefit would be, at best, greatly diminished. Far more than $70,000 must be invested if the client wants to cover care costs for three or four years, or if their goal is to leave a substantial death benefit after accommodating care costs.
Prepare to Accommodate Lots of Riders
It’s also important to recognize that hybrids, like conventional LTCI, can be rife with exceptions to coverage. Most insurers offer a variety of riders to cover those exceptions — at additional cost to the client. For example:
1. Hybrids typically pay only a portion of the client’s care costs. If the full cost of care is $300 per day, but the policy’s maximum daily benefit is $200, the client must make up the balance. Also, some policies may restrict coverage to care delivered in a nursing home; others may pay a reduced amount if the client chooses home care rather than entering an institutional setting. Riders can bridge the gap between the basic policy and the client’s actual needs.
2. The client could outlive the death benefit. A “continuation of benefits” rider can extend the client’s coverage beyond the death benefit.
3. If interest rates rise, the client’s premium may be stuck in a low-yield environment. An inflation rider can mitigate this risk. In the alternative, the client could liquidate the policy, but that only makes sense if surrender charges are nominal.
A bare-bones hybrid might seem like a good deal, but if multiple riders are needed to supplement the basic policy, the client may be in for sticker-shock.
The hybrid will not work for everyone. The hefty up-front premium may be unaffordable for many middle-class clients. Those who are financially able to pay may reject a hybrid if they have sufficient investment savvy to replicate its yield on their own. If a hybrid isn’t the right vehicle, clients have other options:
1. Invest independently. A client who is financially savvy can likely replicate the hybrid’s yield — without subjecting themselves to policy restrictions, exceptions, and loopholes. This requires discipline and attention to investments’ performance, but proceeding independently provides the ultimate in flexibility.
2. Buy a regular, non-hybrid life insurance policy that allows the client to borrow from the cash value. As with the hybrid, drawing on the death benefit will reduce the amount available at death, but non-hybrid may permit the client to use the death benefit for purposes other than covering long-term care costs.
3. Use some of the growth generated by higher-return investments to pay the premiums for a traditional LTCI policy.
4. Exchange an existing disability insurance policy for an LTCI policy from the same insurer. Under these circumstances, the client may be able to avoid a new underwriting review.
5. Buy a short-term care insurance policy (STCI). STCI policies cover up to a year of care, and for many clients, they may provide a superior option to conventional LTCI or hybrids:
• Policies cost less (and cover less) than LTCI — but they are also far less costly. For many clients, a $2,000 annual STCI premium will compare favorably to an $8,000 premium for LTCI, or a $70,000 lump-sum premium for a hybrid.
• Since about roughly half of LTCI claims last for less than a year, STCI could be as beneficial as LTCI or a hybrid.
• STCI’s underwriting process is even more simplified than underwriting for the hybrid, thus STCI is an option for those who may not meet age or medical standards for other plans. Further, the client’s marital status is not considered as part of the underwriting process.
• STCI policies tend to cover the spectrum of care options: at-home services, assisted living, and nursing home care; traditional LTCI and hybrids may limit the types of care that they cover.
• STCI coverage typically has no elimination period, so payments begin immediately when the client qualifies for benefits.
Choose the Right Plan
Get quotes on several different types of policies — LTCI, hybrid, and STCI — and keep in mind that price, looked at in isolation, can be misleading. Consider what benefits the policy offers and what restrictions it imposes, and only then, add the cost component. The website of the American Association for Long-Term-Care Insurance (www.aaltci.org) offers information that may help clients to formulate questions and compare coverages.
Finally, make sure that the client reads the actual policy — those many pages of small print that are as important as they are dull. The contract’s terms should be consistent with representations set out in customer-friendly sales literature and with the sales agent’s verbal claims. If the client is unwilling or unable to review the policy on their own, do it for them. Clients sometimes take for granted the value that their lawyer brings to the table. When clients realize that our input may have saved them from future cost and stress, they may view the client-attorney relationship with renewed appreciation.
When clients question LTCI’s high annual premiums, sales agents are quick to respond: “You don’t say that you ‘wasted’ your car insurance premium if you don’t get into an accident.” There’s a superficial appeal to this reasoning — until you compare the benefits that your auto insurance provides in comparison to what an LTCI premium buys. Auto insurance payments cover us for a finite benefit period — six months or a year. Our payment for the policy period covers future claims for acts of negligence during that time frame — coverage that stays in place even if we change carriers or stop paying. With LTCI, however, a lapse in payments ends the client’s coverage — and a 40-year payment history is meaningless. That risk deters clients from shopping for a better deal once they’ve established coverage.