Twenty years ago, long-term care policies were the darlings of the insurance industry. Virtually all licensed life and health agents sold these policies along with brokers, financial planners and banks. But the continued rise in the cost of managed care coupled with the exploding need for it have driven all but a few major players out of this arena. Traditional long-term care (LTC) policies are slowly disappearing from the marketplace and are now being replaced with a new kind of hybrid policy that boasts some key advantages over its predecessors.
Long-Term Care Dilemma
The need for long-term care in America has reached epic proportions. The average 60-year old man today has at least a 50% chance of needing some form of long-term care before he dies, and the odds are even higher for women. This level of demand has effectively forced the cost of long-term care coverage to rise along with it, and straight LTC policies are now more much more expensive and offer less protection. This in turn has made these policies much less palatable to consumers, who face the unappetizing choice of spending a substantial chunk of change now on a policy that they may never need or risk getting crushed under exorbitant bills from a managed care provider at some point in the future. (For more, see: LTC Coverage Not a No-Brainer.)
Hybrid Life and Long-Term Care Solution
This critical dilemma has led to the creation of hybrid long-term care policies that are offered by life insurance carriers. These vehicles are sold as life insurance policies that have a standard death benefit, but also contain riders that the policy owner can purchase that will pay out for various reasons, such as disability, long-term care or critical or chronic illness. The exact benefits differ from one product and carrier to another. The accelerated riders in one policy may allow for the entire death benefit to pay out towards these expenses, while others may only allow for half of the death benefit to be used by these riders. But all benefits paid for any type of expense are tax-free just like the death benefit.
One of the greatest advantages that these vehicles offer is that there is no chance that the customer will walk away from them empty-handed like they can with a traditional long-term care policy. Clients who purchase hybrid policies are guaranteed to get their money back one way or another. If they need managed care, then the critical illness or LTC rider will pay out. If they end up not needing those benefits, then they can use the accumulated cash value for other purposes. And any remaining death benefit will still be paid to the beneficiary. Some types of riders require separate or additional underwriting, such as one that is specifically designed to pay for nursing home care. (For more, see: Long-Term Care Insurance: Who Needs It?)
The Annuity Solution
Life insurance is not the only vehicle that has been commandeered to pay for long-term care expenses. There are several fixed and indexed annuity products available now that can also pay out a tax-free benefit for who need managed care. The contract will pay either a set rate of interest or use some type of crediting formula that is based on the performance of an underlying benchmark like the Standard and Poor’s 500 Index.
But if the annuitant should need money for managed care, then the contract will pay out a monthly tax-free benefit up to a multiple of the premiums paid, such as two or three times the amount that has been invested. These contracts also typically offer a death benefit as well as all of the other features that come standard with modern annuity products. However, most of the contracts of this type that are on the market today will require medical underwriting in the same manner as a life insurance policy. (For more, see: The Top 5 Fixed Annuities for the Risk Averse.)
Term vs. Perm
As with other types of life insurance, hybrid long-term care policies are available as either term products or permanent policies that accumulate a cash value. The term policies are of course cheaper than their permanent counterparts and also provide much greater protection, but buyers who are looking for long-term care protection need to remember that if they become uninsurable for any reason at a later time, then they may not be able to renew their policy at a time when they are likely to need it. (For more, see: Advising FAs: Explaining Annuities to a Client.)
The Bottom Line
The cost of managed care in America has risen much faster than the general rate of inflation for the past several decades, and this has made traditional long-term care coverage more expensive and less comprehensive. But a new breed of hybrid life insurance is now available that allows consumers to obtain a reasonable level of protection at a much more affordable price. For more information on hybrid insurance and annuity products, consult your life insurance agent or financial advisor. (For more, see: Annuities and Baby Boomers: The Pros and Cons.)