Long-term care insurance is often a tough sell. Many people don’t want to pay premiums on a policy that would only pay out if they become dependent in their old age. Partly in response to this reluctance, life insurance policies with a long-term care rider have soared in popularity as an alternative. But do these combination products make sense for boomers?
Denial notwithstanding, many people will need help with long-term care for themselves or a loved one. Medicare doesn’t pay for long-term care supports and services, yet seven in 10 people turning age 65 can expect to use some form of long-term care during their lives, according to the U.S. Department of Health and Human Services. Studies have shown that many workers haven’t saved enough to cover their basic needs in retirement, much less nursing homes that can cost more than $80,000 per year, or in-home aides at about $19 per hour, in today’s dollars.
For many consumers, a deterrent to buying a traditional, stand-alone long-term care policy has been the fact that premiums are forfeited if care isn’t needed. To be sure, the same goes for auto insurance and homeowner’s insurance, and consumers seem pretty much resigned to that fact.
But a long-term care purchase taps into fears that many don’t want to confront, experts say. “People can imagine their house burning down or an auto accident, but no one wants to envision going into a nursing home,” said Joe Heider, regional managing principal with Rehmann Financial in Cleveland, Ohio, who sells life insurance policies with long-term care riders to his clients.
Enter so-called combination insurance, which can pay a benefit whether the policyholder ends up needing care or not. These are typically whole or universal life insurance policies with a long-term care insurance rider. More than 86,000 combination policies were sold in 2012, an increase of 19% compared with 2011 results, according to the insurance industry group LIMRA. Meanwhile, growth in individual, stand-alone long-term care policies was essentially flat during the same period, LIMRA reports, with 233,000 policies sold in 2012.
A typical combination policy will pay out a benefit if long-term care is needed and a death benefit to a designated beneficiary if it is not, or if care expenses don’t exhaust the value of the policy. People are attracted to this flexibility and like the fact that they’ll get some money back no matter what happens, Heider said.
In fact, some stand-alone long-term care insurance policies offer their own answer to the unneeded-coverage problem: a return-of-premium feature. This isn’t a death benefit—it’s simply a return of paid premiums, less any claims paid, to a policyholder or his heirs. But this option can add more than 50% to premium costs versus a use-it-or-lose-it policy, and it hasn’t caught on with either insurance sellers or consumers, according to Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
A have-it-both-ways combination
Combination policies typically require a bigger upfront payment than traditional long-term care policies. Combination policies usually require a lump-sum premium payment, or one spread out in a few installments, in contrast to the continuing annual or monthly premiums for stand-alone long-term care policies.
In one illustration offered by Lincoln Financial Group for the company’s MoneyGuard Reserve Plus combination policy, a healthy 60-year-old nonsmoker pays his $100,000 premium in three annual installments of $33,333. If he needs long-term care benefits, the man can receive a maximum monthly benefit of $5,787 for a maximum of six years. (Relatively few older people need such care for longer than six years.)
If he doesn’t need care, his designated beneficiary will get $138,896 in income tax-free “death benefits.” If he uses just some of his care benefits, that amount would be subtracted from his death benefits. A third option would be a full return of premium, or $100,000 paid back at any time after year 5, provided all planned premiums are paid.
On the other hand, a 60-year-old male purchasing roughly equivalent coverage via a traditional long-term care insurance policy would pay $2,100 per year, according to the American Association for Long-Term Care Insurance. And while that’s no small financial commitment, it looks relatively modest next to the big upfront payment typical of a combination policy.
Running the numbers
For this and other reasons, some advisers argue that hybrid policies don’t offer the best deal for the protection they provide. “Anything they can package together, I can probably put together for cheaper,” said Jeffrey Boyer, wealth adviser with RegentAtlantic Capital in Morristown, N.J.
Insurance products will typically deduct their costs—for the broker’s commission, the company’s operating and underwriting costs, and other expenses—from the product’s payout, and their marketing materials don’t state an explicit product fee like, say, a variable annuity or mutual fund would. So Boyer and his colleague compared the payouts in three hypothetical scenarios of a combination policy versus a stand-alone long-term care policy plus a stand-alone, 30-year term life insurance policy that together offered a very similar benefit to the hybrid policy.
Their calculations included the assumption of some future rate increases on the stand-alone long-term care insurance policy, as many policies have had such increases of late. Their hypothetical purchaser was a healthy 60-year-old woman. (Like long-term care insurance, life insurance gets harder to buy as one gets older and, presumably, sicker.)
In the RegentAtlantic analysis, the hybrid policy offered the best deal in just one scenario: the one in which the purchaser died at age 91 without having needed any long-term care. In the case where the purchaser needed long-term care from age 84 to 89, the stand-alone long-term care policy plus term life insurance offered $348,325 more in total benefits, net of premiums. If the policyholder died at age 65 without using any long-term care benefits, the stand-alone policies would have provided an additional $138,604 in benefits.
The reason for this differential, Boyer said, is likely the opportunity cost of paying a large upfront premium instead of investing the money in stocks or another growth vehicle (their analysis assumes a 5% investment return on money not needed to pay premiums) and the high expenses and commissions built into the hybrid policy.
Do you need life insurance?
Families considering their insurance options should start with the question of what risk they’re trying to insure against, said Keith Klovee-Smith, head of life management services forWells Fargo Private Bank. Many people in their 50s and older have no need for life insurance. Their kids are grown, and they don’t have estates large enough to owe estate taxes that could be covered by an insurance payout.
For all their differences, both combination and stand-alone long-term care policies have some similarities that families should keep in mind, experts say. Both require prospective buyers to pass medical underwriting. “Basically, you have to be healthy,” said Marvin Feldman, president and CEO of the Life Foundation, a nonprofit organization that educates consumers on insurance.
And once the long-term care policy is in force, consumers who buy either traditional or combination products must meet standard criteria for needing care to tap their benefits. For example, it wouldn’t be enough for a healthy older person to simply move into an assisted living facility. She would also generally need help with at least two activities of daily living, such as bathing, dressing, or eating, and that need must be documented according to the insurer’s precise specifications.