Fifteen years ago, National Underwriter featured a discussion of “combination” life/long term care policies that were just beginning to be offered in the insurance market, with an emphasis on the senior market.
Today, combination products are still in the market, but they are evolving. This article spotlights their direction. First, a recap on the original designs.
The most common versions of the early combination products featured LTC riders attached to universal life policies. These riders accelerated death benefits in the event of specified triggers related to LTC needs, typically with monthly benefit payments during the period of care.
The cost to the insurer of accelerating death benefits was very modest, since future death benefits were reduced dollar for dollar under this recipe for insurance. In addition, a portion of the accelerated payout in reality was taken from the cash value of the contract, which was typically available to the policy owner in any event.
In contrast to these low-cost riders, which essentially included a form of self-insurance, the NU article also discussed an alternative design. That approach featured LTC benefits that were independent of the underlying life insurance policy, with the LTC benefits having no effect on future cash values or death benefits payable under the base life policy.
Proponents of this second structure argued that seniors’ life insurance needs did not necessarily decrease with the need for LTC services, particularly as the life coverage was often intended to address estate planning needs.
Further, they noted that, in many cases, the accelerated benefit designs fell short of providing comprehensive LTC coverage, particularly for smaller life contract face amounts. As for the independent benefit design, it didn’t offer meaningful savings versus costs of a stand-alone LTC policy, in contrast to accelerated benefits. However, both approaches served to fund the cost of LTC insurance through a flexible premium, tax-deferred accumulation vehicle.
What impact have these products had in the market over the last 15 years?
A few companies that focused on these innovative combinations have had considerable success, but they have represented a small portion of the overall LTC insurance market. Now, several factors suggest changes are ahead.
1) Convergence of the two designs. Companies specializing in these markets in the last few years have recognized the strengths and weaknesses of each approach, and have put together combinations that include a menu of choices from both structures.
For example, a life base plan may be offered with a selection of a 24-month or 36-month LTC insurance payout of some or all of the full death benefit, with some residual death benefit preserved to address the needs of the life insurance beneficiary.
In addition, an independent LTC rider may also be attached to the same policy, extending the LTC coverage beyond the 24-or 36-month period for another range of months as selected by the policy owner.