Linked Life-LTC Policies – Pros & Cons – 1 of 4
The main long term care planning solution for the last forty years has been a traditional long term care insurance policy. These policies continue to provide the best solution for a long term care need, and we recommend them whenever we can.
However, the insurance companies have had a very difficult time making decent profits from this product for a variety of reasons, among them the high and expensive incidence of claims. Therefore, the insurance companies have created a number of new life insurance and annuity products which provide at least some long term care protection and are more profitable for them. In the first of four blogs, let’s briefly discuss the relative merits of linked life-LTC policies.
Although Linked life-LTC products have been available for about twenty-five years, the products have become popular only in the last several. They have two important advantages over traditional long term care insurance.
First, you will not “lose it if you don’t use it.” Unlike traditional long term care insurance, you will always get either: your money back, a death benefit, a long term care benefit, or some combination of the three. Second, the rates are guaranteed and cannot be raised.
Those are significant advantages. In addition, linked life-LTC sounds like getting two benefits for the price of one, but it’s not. You are paying for both of these benefits. The cost of the long term care protection is deducted from the size of the death benefit and the growth of the cash value. The death benefit can represent something like a 2% growth on your premium if you don’t die for twenty-five years. Consequently, this is a lousy life insurance policy compared to other life insurance policies, which have far more leverage in the death benefit.
In addition, any benefits for long term care are first deducted from the death benefit. The result is that the death benefit can become minimal. There is usually a residual death benefit that is guaranteed but which will be $ 25,000 or less, enough for a nice funeral years from now, but not much more.
These policies perform better as a long term care solution. They can pay two or three times the death benefit for long term care costs. So an investment or reallocation of an asset of $ 100,000 can provide up to $ 300,000 of long term care benefits. In addition, some policies come with an extension of benefits rider which provides for future inflation protection. These features enable a linked life-LTC policy to provide robust long term care protection.
These used to be single premium only policies, but new payment options have become available. At least for now, these policies are far easier to underwrite than traditional long term care insurance. The life insurance underwriting is normally at a somewhat liberal Table 4 rating, and the long term care underwriting can be more liberal than current underwriting for traditional long term care insurance. These policies can thus be used as an alternative when a declination for traditional long term care insurance is likely.
This makes linked life-LTC policies in many ways to best solution to long term care planning other than the traditional long term care insurance policy. They are a good choice for a person with assets who is unwilling to pay insurance premiums, risking that there might never be a benefit paid from the policy.
We have a full suite of linked life-LTC products in our portfolio with the requisite expertise to explain them. Please give us a call at (800) 303-1527 for further information.