As thousands of baby boomers retire every day, there is a growing concern about the future need for long-term care, whether that be in a nursing facility, assisted living facility, or even variations of in-home care. Many baby boomers are thinking, “What is long-term care insurance? How does it work? Do I need it and what are my options?”
The options have changed in recent years and now include not only traditional long-term care insurance, but also linked-benefit policies and life insurance with long-term riders as well. Each has its own set of pros and cons and the best option always depends on your specific situation.
Traditional long-term care may be thought of as the most basic type of long-term care coverage. Historically, traditional long-term care policies have seen years of drastic rate increases up to 40% or more. This link shows the historical rate increases for 13 top insurance companies for the state of Illinois. Because the long-term care industry is somewhat still in its early stages compared to the life insurance industry, underwriters and actuaries have had to alter initial projections made in the last 20-30 years. These alterations have resulted in some policy owners having to pay 40% or more in additional premiums over the last few decades. However, the industry seems to have stabilized in recent years as steep rate hikes have become less common.
Traditional long-term care insurance insures only against a long-term care need, so it will typically provide more “bang for your buck” compared to other “dual-benefit” insurance policies. Traditional LTC also provides a few tax benefits, including deductibility of premiums and tax-free treatment of dollars received for personal injury or sickness.
One downside of traditional long-term care coverage is that it typically has a “use it or lose it” type of structure, meaning that if you don’t “use” the coverage through a need for long-term care, then you “lose” your premium dollars. This is similar to how your homeowner’s or auto insurance would also work. Some products may have riders (or add-ons) that allow for a return of premium if there is no need for long-term care during the insured’s lifetime, but these riders will come with additional costs in most cases.
Another negative is that premiums are usually paid for life or until a there is a need for care. For retirees on a fixed income, this may provide additional challenges. This is also why it’s very important to be diligent in your search of an insurance provider so that you can increase your chances of choosing a company that is less likely to have steep rate increases in the future.
Linked-benefit long-term care policies provide one alternative to traditional long-term care coverage. Linked-benefit, or sometimes known as asset-based, long-term care provides long-term care benefits in addition to a potential death benefit for the insured. Premiums can also be guaranteed to not increase and policies also carry a cash value that gives policy owners a “walk-away” option. Another potential benefit is that the premium-paying phase can be designed to best fit the insured and can include lifetime payment or payment for a certain period of time. Like traditional long-term care policies, linked-benefit claims are also paid out on a tax-free basis.
On the downside, these policies tend to require more premium than traditional policies for the same level of long-term care benefits. However, if the additional benefits are important to a potential long-term care policy owner, then linked benefit policies might be worth the added cost.
Life Insurance Hybrid LTC
For some, the need for long-term care might be secondary to the need to pass on wealth to beneficiaries in an income-tax free manner. In this case, an individual might consider purchasing a life insurance policy with a long-term care rider.
On the plus side, a life hybrid product still provides a dual-benefit for the policy owner. So, premium dollars will either go toward a death benefit or a long-term care benefit (there is no “use it or lose it” with this strategy). Assuming the same LTC benefit, the death benefit on a life hybrid product would likely be higher than a death benefit on a linked-benefit product. And, LTC benefits can be paid as an acceleration of the death benefit, which means that the benefit would be tax-free.
However, because of how these products are designed, they may not provide as much “bang for your buck” toward a long-term care need compared to the first two options. Again, this strategy might be best for those who primarily have a life insurance need, but would also like additional protection against a long-term care event.
The Bottom Line
Invariably, there will always be exceptions to the “norm” when it comes to product design. Insurance companies have the ability to alter products, add riders, and explore with product innovation to add to or alter the options mentioned above. The moral of the story is this: all products have both advantages and disadvantages to them. There will be a tradeoff with any financial product and the goal of the consumer is to make sure those tradeoffs fit your needs in the most efficient way possible. What makes an insurance product “bad” would be that it doesn’t effectively meet your needs. So, be sure to evaluate your situation thoroughly and perform the proper due diligence on all options available before making a long-term care insurance purchase.
CarsonAllaria Wealth Management does not give tax or legal advice. Please seek tax and legal advice from either a qualified tax specialist or an attorney.
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