Long-term care coverage continues to represent one of the largest expenses that retirees will face—but John Hancock’s recent announcement that it will no longer issue traditional long-term care insurance policies may indicate that the final nail has been placed in the coffin of the long-term care marketplace as we know it.
John Hancock has followed a growing trend in the industry, meaning that clients who are looking for traditional long-term care insurance may simply be unable to find it. Fortunately, many of the same insurance carriers who have exited the traditional long-term care insurance market have developed alternative products that provide long-term care coverage in conjunction with a product that serves another purpose (such as retirement income or life insurance protection).
Clients who need long-term care protection now need to become familiar with these options in order to ensure that their future long-term care expenses are adequately covered.
The Current Long-Term Care Landscape
Many insurance carriers have chosen to exit the traditional long-term care insurance market because of a basic lack of consumer demand. This reduced consumer demand has been driven largely by increases in the premium costs associated with long-term care policies (even the premiums on in-force policies have been increased in many cases).
Further, clients are living longer than ever—meaning that many will require long-term care over an extended period of time, increasing the price that the insurance carrier must pay for the care and decreasing the profitability of the policy.
However, because long-term care expenses have continued to rise, it is important that clients explore alternative paths to ensuring they have adequate coverage—meaning that emerging hybrid products should be explored.
With the decline of traditional policies, long-term care insurance coverage now often comes packaged with a life insurance or annuity product. The primary appeal of combining life insurance (or an annuity) with long-term care coverage is that these hybrid policies eliminate the risk that the client will never require long-term care coverage. The life insurance policy or annuity will provide a standard death benefit—either in the form of death proceeds or annuity payouts—to the contract beneficiaries even if the long-term care feature is never accessed.
Typically, the value of the long-term care benefits that will be available to a client under an annuity with long-term care coverage is based on a percentage of his or her initial premium investment (usually 200% or 300% of the client’s investment). The client can also choose to purchase inflation protection, which ensures that the contract value grows at a rate that is designed to keep pace with the rising costs of long-term care. The cost of the product will also be impacted by how long the client wants the long-term care coverage to last.
A hybrid life insurance policy is a policy that provides a traditional death benefit to the client’s beneficiaries, but also allows some or all of this death benefit to be withdrawn to pay for long-term care expenses after a certain period has passed (a penalty may be imposed if care is needed too early). The client may also purchase a rider that requires the carrier to continue to pay for care even after the death benefit and cash value of the policy are exhausted.
With these policies, if the client never needs long-term care coverage, his or her beneficiaries will still receive tax-free life insurance proceeds as they would under any traditional life insurance policy.
Many modern-day hybrid products have even evolved so that they contain a return of premium option that allows clients to access the investment during life if they decide to use the funds for other purposes.
Typically, hybrid policies must be funded with a single premium payment, which can make them prohibitively expensive for some. However, because many individuals may have trouble allocating a large sum of money toward the purchase all at once, some carriers have developed products that can be paid for in installments over time. Exchanging a current annuity or life-insurance contract in a tax-free exchange can also allow a client purchase a hybrid policy without using a large sum of money.
While the long-term care insurance market as we know it may be disappearing, the new hybrid policies that have emerged can continue to allow clients to fund future long-term care expenses while simultaneously achieving other retirement and estate planning goals.
See these additional blog postings by Professors Bloink and Byrnes:
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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