We know baby boomers are turning 65 at the alarming rate of 8,000 a day, according to AARP. And with this aging population comes a greater need for ever-costlier long-term care (LTC) services. LTC insurance is gaining traction, despite rising premiums.
What’s less well known: More and more people are using life insurance to help with LTC expenses. But exactly how and under what circumstances? The answers are complicated.
Hybrid Or Combo Policies
To be sure, there are those who are loyal to stand-alone LTC policies. “It’s the simplest and most direct way to cover LTC risk,” insists Portsmouth, N.H.-based Paul Forte, CEO of LTC Partners, a division of John Hancock.
Yet others recommend life insurance with LTC benefits. “Many of my clients are faced with a budgetary dilemma—do I put my money into life insurance or LTC insurance?” says Gary Bottoms, president of the Bottoms Group in Atlanta. “A lot of them like the combo plans because they know they’re going to get their money back one way or the other—either through a death benefit or for long-term care. It kind of hedges things.”
LTC riders are available for universal life, indexed universal life, variable universal life and whole life policies. Riders and hybrid plans generally have less stringent underwriting requirements than stand-alone LTC policies. “You don’t have to take a physical to qualify,” says Kevan Melchiorre, a private wealth advisor at Busey Wealth Management in Champaign, Ill.
Moreover, they can “help protect savings from catastrophic LTC costs,” observes Mike Hamilton, a vice president at Lincoln Financial Group in Greensboro, N.C. “These types of policies offer income-tax-free reimbursements for qualified long-term-care expenses and income-tax-free death benefit if LTC is not needed and also typically include some form of return of premium option, eliminating the ‘use it or lose it risk’ associated with stand-alone LTC policies. [And] the cost of coverage can never increase, which has been a common issue for stand-alone LTC policies.”
But there are disadvantages. Many hybrid plans’ premiums are not tax-deductible as a medical expense, which stand-alone LTC insurance premiums are. (In either case, qualified distributions for LTC expenses are tax-free, though other payouts from life policies usually are not.) They also often require deeper pockets up front. “The LTC riders themselves tend to be expensive,” cautions Melchiorre—adding perhaps as much as 0.25% of the policy’s face value to the cost. Also, LTC payouts eat into the policy’s cash value or death benefits. What’s more, as with most life insurance plans, clients who are trying to qualify for Medicaid will have to spend down the policy’s cash value before receiving government benefits, which is not true with stand-alone LTC policies that have no cash value.
Perhaps worst of all, they “may not have all the flexibility [of a stand-alone LTC policy],” says Jeffrey M. Verdon, an estate planning and asset protection attorney in Newport Beach, Calif. They might not cover the full range of LTC services—nursing homes, assisted living, in-home help, etc.—or offer inflation protection. On the other hand, he adds, “Stand-alone products do not build up cash value.”
Chronic Care Versus LTC
In addition to LTC, some life policies offer a chronic-care rider. The difference is partly technical—they fall under different sections of the tax code—and partly practical. “For all practical purposes, the major difference is that chronic illness requires a permanent condition for a claim payment,” says Edward Kohlhepp Sr. of Kohlhepp Investment Advisors in Doylestown, Pa. “A broken hip, for example, may not be a permanent condition and could generate payments from a long-term-care benefit but not from a chronic-illness rider.”
Earlier this year, New York Life announced a chronic-care rider as a premium option for newly issued standard and custom whole life insurance policies. It requires an additional charge of roughly 4% to 6% of the premium, says Craig DeSanto, a senior vice president at New York Life, for “a benefit amount set at the time of purchase, giving you certainty in your coverage and known effects on your policy (dollar for dollar reduction in death benefit, and proportional reduction in cash value.)”
Term life insurance may offer a chronic-care rider, too, though almost none offers LTC. The reason is simple. “Most term policies end before you are likely to need LTC benefits,” says David Shucavage, president of Carolina Estate Planners in Wilmington, N.C. “Companies don’t like to sell you term when you are likely to die of old age. And if they do the premiums are so high; if you don’t die the premiums are lost.”