Recently an advisor brought to us an opportunity to help someone plan for long-term care. Like many purchasers, this was someone who had personal experience - a 50-year-old single man who was overseeing the care of his mom with Alzheimer's. He is self-employed, lives in Illinois and has an annual income of about $150,000. We presented the advisor with two options for their client - a traditional policy and a linked-benefit life/ltc plan.
We could have come up with a budget and solved for benefits, but we decided to instead design the plan benefits and then solve for the premium. We designed a plan with the following benefits:
We ran the numbers based on those benefits and the results are below. (This comparison is for illustrative and education purposes only).
| Product Type |
Traditional (standalone) LTCi
|
Linked-benefit Whole Life + LTC
|
| Annual Total Premium |
$2,862.93
|
$5,091.84
|
| Annual LTC Premium |
$2,862.93
|
$1,866.24
|
| Pay Period |
Lifetime
|
Pay to Age 95
|
| Premiums Guaranteed |
No
|
Yes
|
| Benefit Period |
4 Years
|
4 Years (2 acceleration of death benefit + 2 extension of benefit)
|
| Initial LTC Pool |
$288,000
|
$288,000
|
| LTC Pool at Age 85 |
$810,392
|
$810,392
|
| Initial Monthly Benefit |
$6,000
|
$6,000
|
| Monthly Benefit at Age 85 |
$16,883
|
$16,883
|
| Inflation Rider |
3% Compound
|
3% Compound
|
| Initial Death Benefit |
N/A
|
$144,000
|
| Death Benefit at Age 85 |
N/A
|
$144,000
|
| Cash Value at Age 85 |
N/A
|
$103,510
|
As you can see, the LTC benefits are very similar. The big difference is annual premium due to the additional benefits for the linked plan - which pays for the death benefit and cash value at age 85.
To find out if that additional premium is worth it, it's helpful to ask the question: "what's the opportunity cost of purchasing the linked-benefit plan?"
We answer that question by taking the $2,229 annual difference in premium and hypothetically investing it in something like US treasuries so we can calculate what that would grow to.
Let's say the post-tax return is 3.47% for our 50-year-old. At age 85, this "side-fund" would be worth $147,740. That is more than the age 85 illustrated cash value of $103,510 for our linked-benefit plan.
On the other hand, you've got a death benefit of $144,000 for the linked-benefit plan available on day one. That death benefit will be accelerated for any LTC need, but it's a very nice feature in case of a premature death.
Considerations for making a decision:
Premium affordability and budget:
You have to make LTC planning fit within someone's budget. With an annual income of $150,000, the traditional LTC premiums represent about 2% of annual income while the linked plan is around 3.4%. In our experience, premiums more than 4% of annual income may result in some client pushback because of competing expenses.
Tax treatment of benefits and premiums:
Both the traditional and linked plan feature 7702(B) tax-qualified treatment. In most cases, that means benefits will be received tax free. In addition, self-employed can deduct premiums up to age-based limits as a medical deduction.
In our example, from ages 51-60 the annual deduction is limited to $1,860 in premium and at age 61 the allowable amount increases to $4,960. So, until age 61, both plans offer the same deduction amount. At age 61 the traditional options allow a higher deduction due to the higher LTC premium. (Please note that the amount deductible can vary based on cost-of-living adjustments.)
Premium Guarantees:
Another difference is the premium guarantees. The traditional product doesn't have premium guarantees while the linked-benefit plan has guaranteed premiums.
This does not mean the traditional product won't have level premiums for the life of the product. The current assumptions for traditional LTC insurance are very conservative. Neither carriers nor regulators want to see a repeat of the large premium increases that have occurred on older LTC products due to a combination of low lapse rates and a historical period of low interest rates. If guarantees are critical to someone, there are traditional plans with guaranteed 10-pay premiums.
Conclusion:
You really can't make a bad decision here. If a long-term care need occurs, both products will work very similarly at claim time. That's what these products are designed for - LTC protection. The question is what happens if LTC is not needed. Are you comfortable with a pure protection product like traditional? Or is a death benefit for a beneficiary important? How critical are guaranteed premiums?Answers to these questions will help make a decision that is best for each prospect.