Although financial advisers have been leery of life insurance with long term care benefits, the products appear to be generating interest among consumers trying to insure against multiple risks and search for a place to store assets, according to a new study.
Buyers of asset-based LTC insurance — life insurance with an LTC rider — are shelling out more for their coverage, with average single premiums for these policies hitting $70,975 last year, according to sales data from 5,014 policies collected by the American Association for Long-Term Care Insurance of Westlake Village, Calif. In 2007, the average single premium paid for such policies was $68,300.
The association's study also noted that purchasers of asset-based LTC policies were almost equally divided among age groups, with 49% belonging to buyers under 65 and 51% belonging to those over that age.
By comparison, buyers of traditional LTC tended to skew younger, with 84% of those individuals under 65, according to the association.
Additionally, 49.7% of the policies had a base life insurance face amount between $100,001 and $200,000, while 30% had a face value between $50,001 and $100,000, according to the data.
Although the face value may be on the low side, buyers generally have access to a much larger payout if they become unable to perform at least two activities of daily living. Often, the coverage for the LTC is distributed through an accelerated-death-benefit rider.
But there are limits on how the products can be used. For instance, the policy's face value may not be large enough for the payment through the rider, or the client may require a lot of care, leaving behind very little for heirs in the way of a death benefit.
Depending on the policy, a total policy value normally comprises two buckets, one for long term care and one for life insurance, so the full value of the policy isn't necessarily the same as the total value of life coverage. Rather, it is a reflection of the maximum benefit consumers can receive from both buckets combined, said Frederick A. Fisher, a manager of new business at Ostrofe Financial Consultants Inc. The Grass Valley, Calif.-based firm manages $160 million.
Advisers also have been skeptical of the complexity involved in combining two planning purposes in one product. “I don't like to mix functions, because it becomes so hard to compare apples to apples,” John Sullivan, an adviser with World Equity Group Inc. in Arlington Heights, Ill., which manages $1 billion, wrote in an e-mail.
However, those who advocate the use of the product say that it is an easier way to get clients talking about LTC coverage when they see traditional policies as a “use it or lose it” proposition.
“It's not a difficult product, and it's simple enough to understand and explain,” said Jesse Slome, executive director of the association. “If you don't qualify for care, you have the coverage, and it's not a loss of your money.”
Advisers who have recommended asset-based LTC insurance have found other uses for the product. For instance, the product provides a place for clients to use idle cash that isn't necessary to cover day-to-day expenses, said Mr. Fisher, who has recommended a combination of universal life insurance with an accelerated death benefit.
“It's a good way to leverage that money, and you can use it as long term care coverage or life insurance,” he said. “You're not adding another expense but reallocating to another asset.”
Mr. Fisher noted that an individual can put money into such a policy and let it earn interest, but a withdrawal could be treated as a taxable event.
Also, the asset-based LTC insurance likely will cost more than a stand-alone life or LTC policy, while maintaining similar underwriting standards, he said. Someone who can qualify for LTC insurance but is only marginal on the life insurance side may not be cleared to use a product that serves both functions.
Because the products pay out when clients' activities of daily living have been compromised or when they need nursing home care, advisers said that they need to draft additional plans.
Not all companies offer home care coverage through riders, noted Bob Straka, president and owner of GrandView Financial Group, a Birmingham, Ala.-based firm with less than $100 million under management.
He gave an example of an affluent client with $300,000 in certificates of deposit. Using $50,000, the client could purchase a life insurance product with an LTC rider and get coverage. If a need for acute care arises and it isn't covered by the rider, “then that's what the other $250,000 is for,” Mr. Straka added.
Still, if a client needs additional LTC coverage and can afford it, it may make more sense to buy an individual policy.
Proponents anticipate greater acceptance of the LTC product if advisers become accustomed to recommending it. “When there's a health qualification, you have to ask questions that an investment person wouldn't normally ask,” Mr. Slome said.
E-mail Darla Mercado at [email protected].
