Each year, the top LTC Insurance companies meet at the Intercompany Long-term care Insurance Conference . One of the big trends at the most recent meeting in Jacksonville was the visibility of carriers that offer linked life/ltc products - names like Lincoln Financial, OneAmerica and Nationwide.
Their participation is great news and shows that the desire for insurers to offer products that can help families plan for long-term care is strong and growing. However, it also means that advisors will have to help their clients who do choose to plan ahead navigate the choice between a standalone, or health based LTC Insurance product and the life-insurance based linked products now available. Since I would argue there is more in common with the products at this point than differences, I would suggest three questions can help make the decision easier.
First, it's important to understand that the linked life/ltc insurance products represented at the conference are first and foremost long-term care insurance built on a permanent life insurance chassis. These products include the 7702(B )tax-qualified (i.e tax-free) benefits with standardized benefit triggers - just like standalone LTCI. They pay for care at home, assisted living or a nursing home and include options for automatic inflation adjustments.
If a clients main interest is is life insurance protection or accumulating savings there are better options than linked life/LTC plans. With linked life/ltc plans the long-term care protection is always primary (through an acceleration of the death benefit and an extension of benefit rider) if a LTC need arises - but if a life insurance need happens much of the death benefit may be been used on a LTC claim.
Why are linked life/ltc plans built on a permanent insurance chassis? It's because term insurance would end just as a LTC need might be greatest. That's is why these plans are built on a whole life or universal life chassis.
Linked life/LTC plans are often purchased with a single premium, but what's changed recently with hybrid life/LTC plans is that they now offer longer pay periods- such as 5-payments, 10-payments, payments until age 65, and even lifetime pay policies.
Interestingly, you can often make standalone LTC products look like these life/ltc products as well! Companies like National Guardian Life, with their Essential LTC product, offer options such as single premium payments or 10-payments, return of premium upon death (a/k/a life insurance), and policy surrender benefits.
What else is similar with these plans, especially compared to chronic illness riders on life policies? First, all the underwriting for LTC benefit is done up front - if you need LTC just a few months after the policy is issued, you'll know exactly what benefit you are entitled to. Some chronic illness riders underwrite at claim time to determine life expectancy and the possible benefit.
So how does your client choose between the health insurance based LTC plans and life insurance based LTC plans? Here are three key questions to ask.
How important are guaranteed premiums? This is the most important question to ask. Standalone LTC Insurance does not offer guarantee premiums, and some older plans have had rate increases which advisors have had to deal with. However, as we know with investments, past performance is not indicative of future results. Just because older polices received rate increases does not mean that newer products face the same risk. In fact, the chances of rate increases on current standalone are estimated by a recent actuary study of being less than 10%.
Even if standalone LTC carriers wanted to offer guaranteed premiums, regulators would be hesitant to approve such plans because they might have unintended consequences. Imagine if the policies written by Penn Treaty, a LTC company currently undergoing liquidation, were guaranteed - the state guarantee funds would be responsible for a much larger bailout.
Despite the lower chance of a premium increase on standalone products if someone truly wants a zero chance of a premium increase they will want to buy a life-based LTC plan, although the policies may be subject to interest rate risk if interest rates go higher, as blogger Michael Kitces points out.
What is your premium budget? Because older policies were under priced, those buyers tended to overinsure and try and cover 100% of any LTC need. With newer plans being more expensive fitting a LTC Insurance premium into a realistic budget is critical.
First, it is helpful to know what policies cost today. The average premium for standalone LTC Insurance is about $2,500, the average premium for single pay linked LTC insurance is around $80,000, and the average premium for lifetime pay life/ltc is about $4,000.
One way to look at premium tolerance is look at premiums as percentage of income. For standalone plans, and since LTC is less expensive at younger ages, one idea is to allocate 2% of income for premiums at age 50 increasing to about 5% of income for people who wait to buy at age 65. A "good-better-best" approach can pinpoint the best premium. Life based LTC plans, with the life insurance benefit and the ability of a policyholder to surrender their plans and get their money back will obviously cost more than "pure" health based LTC plan and the percentage of income should be adjusted accordingly.Another thing to keep in mind with premiums. Standalone LTC plans will waive premiums when on claim, while life LTC plans may not. The reason - the linked products use a combination of insurance and self-funding so not paying all premiums due may impact benefits available. For those clients looking at a 10-pay life/ltc plan, they have to make sure they will be able to complete all premium payments.
Can you benefit from LTC tax advantages? Being able to deduct premiums can make large difference in the after-tax cost of plans, and tax issues should be considered. First, all tax qualified LTC policies, whether health or life based, allow for benefits to be received tax free for actual care.
Health based standalone LTC insurance is treated similarly to health insurance. For non-business owners, premiums are only deductible for amounts above 10% of adjusted gross income. However, people who have Health Savings Accounts can take money out of their account to pay LTC premiums. For buyers who are business owners, they can deduct the standalone premiums as a business expense without having the premiums be included as income to the employee.
Some Life based LTC plans with extension of benefit riders also allow policyholders to similar tax treatment - for plans that break out the rider premium. OneAmerica is a company that does this, but overall business owners may benefit more by looking at standalone plans.
The good news is there are more similarities than differences in types of LTC Insurance and the both can play a role in paying for healthcare in retirement. Don't go directly to a recommendation without considering answers to these questions.