Something strange happened to me recently - I told a friend who received an in-force rate notice to let their LTC policy lapse and to purchase a new plan.
Why is this strange? Because 99% of the time my recommendation would be to pay the increased premium level. I would explain that, in general, premiums for new policies are almost always higher than existing plans, even with rate increases.
Then I would run a quick quote comparison of existing LTC plans. Since new plan premiums were almost always much higher, this would tell the advisor and client that the rational move would be to pay the increased premiums - hoping it would be the last round of rate increases for them.
So, when my friend approached me with yet another rate increase on their traditional LTC policy, I thought the conversation would be similar. For reference, she is 60 years old and purchased the plan 15 years ago when she was 45.
To my surprise, when I compared the existing plan to a current Hybrid Life/LTC plan, I couldn't get away from the conclusion that it would make sense to let the current coverage lapse and purchase a new plan.
I explained that Hybrid plans work very similar to traditional LTC but also include Life Insurance and some cash value. She didn't need Life Insurance and wasn't looking for an investment but simply based on the economics she decided to purchase a new policy.
As you can see below, we couldn't replace her current benefits exactly - we moved from a 3-year plan to a 4-year plan, so we lowered the initial monthly benefit which grew to a larger benefit over time.
However, the advantages of the new policy are many:
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Indemnity benefits - she lives in a rural area, so indemnity is important.
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Guaranteed premiums for peace of mind.
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In 10 years, the policy will be paid up.
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She can continue to deduct the LTC premiums as a business expense.
- As shown below, if she pays premiums for 20 years, she will have big premium savings!
From an advisor (and friend's) perspective, I've turned a negative into a positive. As a bonus, she gets to keep the premiums she paid to the traditional plan as the non-forfeiture benefits to be used for care if necessary.
| Keep Existing Traditional Plan with Increased Rates | Purchase New Hybrid 10-Pay Policy | |
| Annual Premium | $9,174 |
$11,776 |
| Premium Pay Years | Every year until care is needed | 10 Years |
| Benefit Period | 3 Years | 4 Years |
| Inflation Growth | 3% compound | 3% compound |
| Are Premiums Guaranteed to not increase? | No | Yes |
| Total Premiums Paid over 25 years (until age 85) |
$229,350 |
$117,760 |
| Life Insurance Benefit | None | $151,200 |
| Cash Value at Age 85 if you surrendered the policy | None | $82,432 |
| Long-Term Care Pool of Money Available at Age 85 | $607,227 | $662,224 |
| Monthly LTC Benefit at Age 85 | $16,645 | $13,191 |
The takeaway? It’s rare, but don't assume it's always in the best interest of someone to keep their existing policy in force.
