Recent developments in the long term care insurance business have seen premiums rising or benefits decreasing.
This is occurring as insurers grow more concerned about escalating costs for the coverage, reduced interest rates available on insurer portfolios and the instability in the stock market.
This has given rise to insurers seeking alternatives to help people provide for the potential that they may need expensive care at some time in their lives.
For a long time, the axiom for LTC insurance was that those who needed it could not afford it and those who could afford it did not need it. Those at the lower end of the economic scale are likely to have the public sector provide for their LTC needs. At the other end, the very wealthy can provide for themselves.
It is those in the middle who are at risk. These people are too affluent for public assistance but not rich enough to have the security of knowing they have enough resources to provide for LTC.
We have written in the past about how life insurance coverage can help to provide a tax-effective means to supplement retirement. We do not say that annuities are not essential to provide funds that cannot be outlived but that the ability to obtain tax-free loans from a life policy can be an essential element in providing for secure retirement. Further, we believe life insurance can provide additional security in the event LTC is needed.
We also have written that life insurance is, in reality, the perfect tool for a myriad of purposes. It can provide protection against dying too soon and living too long, and for a vast number of other financial needs that may be unforeseen.
Insurers have developed and are marketing life insurance products that are designed to provide additional protection against the need for LTC. Again, we do not suggest that these policies are a substitute for LTC insurance itself. Rather, as is the case with planning for retirement, well-designed life insurance coverage can provide much additional security in the event that LTC is needed.
Moreover, such coverage provides a good hedge against other financial needs, even if LTC is not required. The death benefits can provide a good financial cushion for loved ones, and the ability to make tax-free loans from a life policy can enable policy owners to use accumulated cash values to supplement retirement or for other purposes.
Most of these products are fixed universal life insurance policies. However, there is no reason why a variable universal life product or a combination product also could not be used. A combination product has particular appeal because it can provide a floor as well as a potential hedge against inflation. Moreover, it allows policy owners to select their risk tolerance and to make changes in investment orientation as their perception of economic conditions requires.
Although the ability to make tax-free loans against a UL policy provides a degree of protection in the event of an LTC need, the UL contract also is helpful in providing security for LTC if the policy has riders that enable the UL death benefits to be accelerated in the event of an LTC event. Other riders also may be available that provide for enhanced benefits. These can include a rider that extends benefits after the entire death benefit has been paid.
Many of these new enhanced policies are desirable because they are designed specifically for the LTC situation.
However, it may well be that existing UL policies can be almost as useful. If a UL policy does not have a rider that permits acceleration of death benefits, it may be possible to acquire such coverage.
Otherwise, if the insured is in good health, perhaps the advisor and client should consider making a tax-free exchange into one of the new policies.
Whats more, policy loans still can be used to fund LTC. However, if this is done, the advisor and client will need to monitor the remaining cash values. They must do this to ensure that adverse tax consequences do not occur if the policy lapses due to inadequate cash values (which have been depleted by the loans and also payments of policy costs).
Some insurers are developing riders for UL policies (both fixed and variable) that contain an “overloan” provision. This says that, in the event the accumulated loans against the UL would cause a lapse, the insurer will continue the UL in force so as to prevent that lapsation. There is an extra cost for this feature, but it is not prohibitive.
No doubt everyone in the life insurance business is convinced that providing financial security to customers involves complexity. It should be clear that “one size does not fit all.” There always remains the necessity for the professional advisor to help consumers to understand what they need, the alternatives to meet these needs and how to find the resources necessary to provide them. Life insurance continues to be the most flexible tool available to answer the majority of financial needs.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P. C. Their e-mail is: [email protected].
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.