Life Insurance with Long Term Care Riders – 3 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 third of four blogs, let’s briefly discuss the relative merits of life insurance policies with long term care riders.
Long term care riders have been added to many life insurance policies from major life insurance companies. There are four major permutations:
Long term care riders which conform to tax-qualified long term care legislation. These provide many but not all of the benefits of a traditional long term care insurance policy, and will be discussed below in more detail;
Critical illness riders. These provide a single cash payment, deducted from the death benefit, for any of a list of serious illnesses, including heart attack, stroke, and cancer. There are partial payments for less serious heart attacks, strokes and cancer scenarios. The cash payment is an acceleration of the death benefit, and is deducted from the death benefit.
Terminal illness riders. These provide large acceleration of the death benefit if the policyholder has a terminal illness and is expected to die within a short period of time…usually a year or six months.
Chronic illness riders. These provide a series of monthly benefits if one has been chronically ill for at least ninety days, with no chance of recovery. These payments are also an acceleration of the death benefit.
There are times where critical illness, terminal illness, and chronic illness riders can be offered as separate riders in the same life insurance policy, or they may even be included as a part of the cost of the life insurance. They can be offered as free riders, but the cost is hidden in the cost of the life insurance. The policyholder isn’t getting something for nothing. Like other riders, these riders don’t come free, but they can provide substantial acceleration of the death benefit.
New let’s discuss the long term care riders. Although these policies are often described as linked life-LTC insurance policies, they are different. In the linked life-LTC insurance policies, the cost of the long term care benefit is deducted from the size of the death benefit and the growth of the cash value. In life insurance policies with long term care riders, the cost of the long term care is built into the initial premiums and is an acceleration of the death benefit, rather than a deduction in its size.
This is great from the insurance company point of view. If the company has to pay for a long term care event, it first pays out of the premiums paid by the policyholder. This can be a far more substantial amount that the policyholder investment in a traditional long term care insurance policy. Once this has been paid out, the insurance company is merely accelerating, maybe by a very short period of time, the death benefit it is obligated to pay out anyway. The insurance company is better able to estimate its profitability from such a product.
These policies are offered by major life insurance policies with substantial assets. Some of them are also very experienced in long term care claims and the long term care industry in general. The riders are also offered in some term insurance policies, many of which may be converted to whole life or universal life policies without new underwriting. Their cost in term policies at the younger ages is minimal because there is so little utilization.
These policies often will provide a long term care benefit equal to 2 % or 4 % of the death benefit, resulting in a 25 or 50 month benefit period. The good ones have many of the attributes of a tax-qualified long term care insurance policy. But they lack a shared care rider and are not Partnership qualified…two major advantages of traditional long term care insurance policies.
The big difference between the linked policies and the pure life insurance policies is that there is very little or no growth in the long term care benefit. It normally is equal to the death benefit. Therefore, if the death benefit is small, say $ 100,000, the long term care benefit will also be $100,000. A fairly short future long term care scenario could easily wipe out the death benefit. The policy would not cover the cost of a long term care scenario which lasts longer than a year.
The policyholder would consequently have to pay a great deal out of other assets and income for long term care costs and have nothing left to leave to his or her family. I believe that agents would be in violation of their fiduciary duty if they represented that they were protecting a client for both life insurance and long term care insurance with a small policy. They would invite a lawsuit by the policyholder’s children, who would have lost their inheritance, and the agent would probably lose in a trial.
However, a robust permanent whole life or universal life policy, say with a $ 500,000 death benefit or more, would provide very good long term care protection, albeit for a far larger premium than for a similar benefit from a traditional long term care insurance policy. This is an excellent strategy for a relatively young prospect who has both a permanent life insurance need and a long term care need.
We have a full suite of life insurance products in our portfolio with the requisite expertise to explain them. Please give us a call at (800) 303-1527 for further information.