Traditional long-term-care insurance and combination life insurance-LTC policies are the primary products through which advisers look to secure LTC benefits for clients. But there are subtle differences between them that advisers should be aware of when considering how they fit in a client's financial plan.
Deciding between traditional and combination products is causing some advisers to avoid discussing LTC coverage with clients.
Traditional LTC has floundered over the past several years, partly due to rising premiums, at the same time that combination policies have boomed.
Combination policies, also known as linked-benefit products, are life insurance products with a long-term-care component. They fall under two categories: hybrid life-LTC policies, and traditional life insurance policies with an LTC rider.
There was a 60% dip in new traditional LTCI policies sold from 2008 to 2014, from 300,000 policies to just 120,000, according to the American Association of Long Term Care Insurance. At the same time, there was a 525% growth in combination policies, ballooning to 100,000 from 16,000, according to Limra.
“Right now [linked-benefit products] are a juggernaut,” said Jesse Slome, executive director of the association.
Through combination products, investors accelerate their life insurance benefit, dipping into that pool of money ahead of death in order to cover long-term-care costs. The death benefit reduces dollar for dollar with the amount of LTC care needed. In the event that life insurance pool is extinguished, an LTC benefit is triggered. Those benefit can differ between contracts, but they often provide an additional LTC asset pool to draw from until exhausted.
“If I have a death benefit, I can turn that into a living benefit,” said Caleb Nitz, vice president of insurance marketing at ValMark Securities Inc., an independent broker-dealer.
For clients who need both life and LTC insurance, advisers should consider a linked-benefit product, according to Gregory Olsen, partner at Lenox Advisors Inc. But, if a client doesn't want to pass on a death benefit to beneficiaries, a traditional LTC policy without a life insurance connection is better, Mr. Olsen said.
The difference between the two linked-benefit types comes down to leverage, or how much of a benefit a policyholder gets in a particular area, Mr. Nitz said. Advisers have to weigh what's most important to a client, between a combination of long-term care, life insurance and contract liquidity.
For example, Michael Fontanini, director of advanced sales at distribution company Lion Street, refers to hybrid products as “asset-based” — they're typically sold through a one-time upfront premium, and have a return-of-premium liquidity feature built in if an investor surrenders the policy and hasn't used any of the benefits.
Clients can cancel the policy and get back the cash value without penalty, sometimes immediately or after a number of years, depending on the contract. In this case, liquidity might make the policy more attractive to a policyholder than traditional life policies with an LTC rider, which don't have a similar liquidity mechanism.
“If you have buyer's remorse, you can get your money back. The only thing you gave up is the opportunity cost of investing that money,” Mr. Nitz said.
That opportunity cost is something advisers need to explain to clients, according to Mr. Slome. Clients should consider they could earn higher returns outside the contract, especially if they buy a policy during the current low-interest-rate environment and lock in a low rate, he said.
Traditional LTC insurance is the cheapest way to buy long-term care, Mr. Nitz said.
Traditional LTC is approximately three to four times cheaper than other vehicles, according to a recent cost analysis published in the Journal of Financial Planning. The analysis shows the normalized initial cost of capital needed to fund LTC products.
For example, in order to receive a $6,000 per month LTC benefit from a traditional LTC policy, investors would need to invest around $70,000. That compares to $210,000 for hybrid LTC, $268,000 for universal life insurance with an LTC rider, and $290,000 for variable universal life.
“You're buying a product doing double duty, and that's been calculated into the price,” Mr. Slome said. “Something that does two things will always cost more than something that does one thing.”
Traditional LTC policy premiums were $2,400 on average for contracts bought in 2014, according to Limra, an industry group. However, it's important to remember that traditional LTC premiums beyond the first year aren't guaranteed, and could go up, according to Zachary Hurst, an investment marketing analyst at ValMark.
Peter Gaines, a financial planner for Integrated Financial Partners, said he doesn't consider hybrid products for clients who can't pay a fairly substantial upfront payment, which could be $100,000 or more. Some products allow the phase-in of premiums over a number of years, but it's still much more than the typical premium on a traditional LTC contract, he said.
The flexibility to put a client's money to work in more than one way inside combination policies is an attractive quality, according to advisers. That's different from the use-it-or-lose-it scenario of traditional LTC — much like auto insurance, if policyholders don't tap benefits, they won't receive any sort of money back for the contract premiums they pay.
Explaining that combination policies provide an LTC and death benefit, and allow money to be tapped for income in case of emergency, is “very easy to explain and is very desirable for my client,” Mr. Olsen said.
REIMBURSEMENT VS. INDEMNITY
To qualify for most LTC benefits, people must demonstrate a need of assistance with two of six activities of daily living — bathing, dressing and eating, for example — or have a cognitive impairment, such as Alzheimer's Disease.
Depending on the specific policy, insurers may pay out LTC benefits on a reimbursement or indemnity basis. Under reimbursement, benefits are equal to the expense of care, and costs will only be reimbursed if they are qualified under the contract.
Indemnity offers a cash benefit — if policyholders meet eligibility criteria, meaning they are receiving a particular type of care as defined by the contract, they can receive a regular check in the mail for, say, $1,000 per month, which they can distribute however they wish, Mr. Fontanini said.
Reimbursement generally doesn't allow payment for expenses incurred by family caregivers, he added. According to figures cited by the Family Caregiver Alliance, two-thirds of older people with disabilities receiving long-term services and supports get all care exclusively from a family caregiver. A quarter receive a combination of family care and paid help.
Language is different from contract to contract, though — some may not pay benefits for care by an immediate family member, while others could extend to all family — so it's important advisers understand the restrictions of each, according to Mr. Fontanini.
There are two types of riders that can be tacked on to life insurance policies: chronic-care and LTC riders. Chronic-care riders differ in that they pay out benefits in the event a medical condition is expected to last for the rest of someone's life. They're also all offered on an indemnity basis, Mr. Fontanini said.
Advisers need health and life insurance licenses to sell policies with LTC riders, whereas they only need a life insurance license to sell chronic-illness riders.