Category: 101(g) chronic illness rider

Hybrid life insurance with LTC benefits: tap into or pass on

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June 6, 2014

10:07 AM

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101(g) chronic illness rider, 7702B Long-Term Care rider, Accelerated Death Benefits, In your 50's, In your 60's, Increasing Face Amount for cash accumulation, Indexed Universal Life

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Baby boomers postponing purchasing long term care insurance, despite what may be going on in their parents advanced age, have plenty of reasons to balk at conventional LTC plans.

One of the six primary reasons people do not buy long term care insurance.  pdf

Sixth, the structure of policies themselves (benefits
denominated in dollars per day, inflation risk of purchasing insurance for an event that is probabilistically far away, increases in premiums for everyone when insurance companies face insolvency, denial of applications) reduces purchase rates.

Potential premium rate increases, big ones, are are the glaring weakness of stand alone LTC plan. The track record of existing policies has not been good with the double digit premium increases over the past few years.

To the rescue for viable avenue of coverage, Hybrid life/LTC insurance offers rate stability. Guaranteed Universal Life (GUL) products lock in a fixed premium guaranteed for life.  The majority of these GUL products come with some sort of accelerated benefit targeted for long term care.

Hybrid Life plans provide a benefit one way or another. If you never need LTC coverage, your beneficiaries get the life insurance. Then if long-term care becomes a necessity, accelerate out a portion of the benefit. It may be only a small portion of the benefit ends up being needed; the rest can remain as a life insurance benefit.

Life hybrids are not perfect. Look for plans that specifically titled “long-term care” for more comprehensive benefit. Life policies with “chronic care” accelerated benefits are not as inclusive as their long term care benefit counterparts. With chronic care, the condition must likely be permanent. That benefit threshold would be a problem with for example a stroke, however debilitating a stroke might be, it may be considered to be recoverable. Many more conditions like a broken hip are not going to qualify for a chronic care benefit where they would if the plan’s benefits are full fledged long-term care.

There are other limitations that pull from the edges of rock solid LTC coverage. For example, the structure of benefit is generally limited by a monthly amount or daily maximum tied to the HIPAA per diem limit currently allowed by IRS rules, but just review carefully what’s optimal given the choices for plans and your situation.

Look for plans that have indemnity benefit, paid in cash, rather than reimbursement: better to receive a check than submit bills to be repaid.

How much coverage is enough?

Fifth, a sizable portion of the population has neither sufficient wealth to protect nor income to pay long-term care insurance premiums.

Most people have a desire to leave something to their children, or if nothing else, not be a financial burden on their children. It’s hard to judge how much money would be needed to cover LTC.  It really runs the gambit but coverage for $100,000 provides at least something. One life plan with chronic care starts at a $25,000 face amount.

With the exception of certain plans like Lincoln National’s MoneyGuard, hybrid life benefits do not provide inflation protection. LTC benefits are no higher than the death benefit. Chronic Care plans have no upfront charge, but reduce the benefit with a discount charge. How big a policy is enough if determined by the face amount: $100k, $250k, $1m?  The solution to choose a plan that builds cash value with an increasing face amount death benefit, either an Indexed Universal Life or a Current Assumption UL, to access cash value through policy loans or partial surrenders.

Hybrid life premiums with accelerated living benefits for LTC are affordable, not for or some worst case scenario like Alzheimer’s, but still something is better for nothing. There are hybrid life plans with $100,000 to $250,000 face amounts for people in their 50’s or 60’s with reasonable premiums. Chronic Care riders have no up front charge for the benefit. Check them out by reviewing the sample quotes by age on this website.

Costs of Long Term Care 2013 and Insurance Trends

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April 16, 2013

9:37 AM

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101(g) chronic illness rider, 7702B Long-Term Care rider, Accelerated Benefits, Accelerated Death Benefits, Chronic Illness Accelerated Benefit Rider, Chronic Illness Accelerated Death Benefit, Chronic Illness Rider, indemnity plans cash benefit, reimbursement plans repay expenses incurred

Genworth, a leading provider of long-term care insurance, for the last 10 years has published a very informative cost of care survey, and a they released their 2013 report last week.   The report breaks down cost by state and within the state by location, so it’s a useful for comparing LTC costs if considering a retirement location.   The executive summary  shows LTC costs remain relatively stable for home health care, in the 1% range for 5 year compound annual growth, but for facility care: assisted living, nursing home, 5 year costs increased well over 4%.  The average cost of a private nursing home room is $83,930 a year.  The lower cost increase trajectory of home health care, currently averaging $17 to $18 an hour, is better news overall since 70% of Genworth’s first time claimants choose home health care.

Though costs for long-term care followed a fairly predicable upward pattern, traditional LTC insurance was roiled by market forces. Major headwinds exist.  Prudential exited market for covering individuals.  Other carriers increased premiums significantly on existing policy holders and made a series of revisions to current products with stricter underwriting.

Price and product restructuring in 2013 offers some hope to stabilize traditional LTC insurance going forward, but inherent flaws to that kind of insurance exist.  The most fundamental: policy premiums are subject to rate increases. I became licensed for to sell LTC insurance in 2003 in an era when it was a still selling point that the major carriers had never had a rate increase on existing customers. Significant rate increases have now occurred, so the obvious conclusion is that the premium instability undermines the trustworthiness of that coverage for retirement planning.

Alternatives

Life insurance, hybrid benefit plans, are a viable alternative to conventional LTC insurance.  Many life insurance products offer chronic care benefit riders that accelerates a portion of the death benefit out of the policy if the individual qualifies as needing assistance in 2 out of 6 activities of daily living or for cognitive impairment.  Some flaws to traditional LTC insurance are not contained in many plan options: guaranteed level premiums, indemnity benefits i.e. payment in cash, higher disbursement levels. Other plan riders, depending on the product or coverage structure, are not as advantageous: fixed benefit, a capped monthly benefit cap, uncertain fees and charges to accelerate the benefit, reimbursement type benefits.  Cost of the chronic care rider is either up front with the premium or back ended at time of election.  Despite some inherent limitations to chronic care riders, one main advantage is that one way or the other either the coverage delivers a benefit, either as a death benefit or living benefit, unlike traditional LTC insurance which may never be required.

For couples one option is to establish life insurance policies on each other with the death benefit as a contingent asset for LTC for the surviving spouse.  If used in conjunction with a life policy with chronic care benefit the policies would serve a dual purpose.  Since woman tend to live longer and require more often LTC, coverage on the husband could likely help in that direction.

Annuities offer another alternative.  Some annuities have long term care riders, or set up an annuity to commence a payout at a given age.

Traditional LTC insurance 

Every situation is different, and it never hurts to compare, so if considering a traditional LTC insurance plan with lower premiums, look to what is called a short and fat structuring of a plan.  Short meaning number of benefit years, as in 2 or 3 years.  Fat meaning a benefit amount to cover major care under a worst case scenario.  Since the average private nursing home is nearly $84,000 annually structure the monthly benefit, not as a daily benefit to avoid a daily cap, to be $7,000 a month.  Since costs for private care is experiencing 4% to 5% compound annual growth, opt for inflation protection at 4% or 5%.  Inflation protection has been an inherent strength to traditional LTC insurance, but higher levels like 5% compound have been targeted for higher premiums and higher policy rate increases, so starting with a higher base monthly benefit with a 3% inflation protection should be considered.

How much is enough?

One basic concept to long-term care insurance is to establish a pool of money to cover its potential cost.  It now costs, on average nationally and rounding off, $84,000 a year for private nursing home care, and the average stay in a nursing home is 2.5 years.  That comes to $210,000.   Is that enough?  To cover health care or assisted living would probably be less.  The average life expectancy for a person with dementia is 4.5 years. That comes to $378,000 currently for private nursing care.