We asked several long-term care insurance (LTCI) experts to suggest key points that every advisor should know about the coverage. Here’s their advice:

Combination products aren’t just for health LTCI declines

Bruce Moon, vice president of marketing at The State Life Insurance Company

Combination products, also known as asset-based LTCI, use life insurance and annuities as the foundation for long-term care protection. These products have attracted new attention as a result of (1) recent consumer-friendly federal tax legislation and (2) continuing bad news regarding rate increases from health LTCI carriers.

The target market for these products has been clarified over the past decade, and the demographics do not include those who have already been declined for health LTCI coverage. A targeted customer profile for combination products would include someone who:

  • Understands the win-win approach: win if you need LTC benefits and win if you don’t. These are clients attracted to the fact they might not need LTC, and know their unused dollars are not wasted but, instead, distributed as a death benefit.
  • Appreciates the single-premium alternative to LTC funding. Reallocating existing assets is more appealing to retirees than pulling money from their fixed income, which has been shrinking with the current low interest rates. And, single premium means no rate increase surprises.
  • Is in fair or better health because combination products are medically underwritten.

Irrevocable trusts can own LTCI policies

Karen Mellon, CLTC, CSA, vice president of long term care, MARSH Private Client Life Insurance Services

Anthony C. Stratidis, CLTC, LTCP, senior vice president at Marsh Executive Benefits, Long Term Care Benefits Planning Consultant

Several insurance companies allow ownership of a qualified LTCI contract by a third party, including a trust. Some tax authorities believe that an LTCI policy owned by an irrevocable trust can be an effective wealth preservation/transfer strategy that would work like this:

The individual will intend to pay the costs of long term health care from their assets, which would require that they have liquid assets on hand to make the payments. These payments will reduce his taxable estate. An irrevocable trust will be created which buys a long term care insurance policy. The grantor (i.e., the insured) finances the purchase of the insurance by making gifts to the trust; a portion of the gift may qualify for the medical care gift tax exclusion.

Should the individual need long term health care the insurance company will pay the benefits to the trust, which presumably would be treated as amounts received for personal injuries and sickness and as reimbursement for expenses actually incurred for medical care. The trustee would invest the insurance payments made to the trust – if the individual needs care – for the benefit of the trust beneficiaries.

When the insured dies, the amount in the trust would not be subject to the estate tax. The estate and any estate tax would be reduced by the payments from it for the cost of the individual’s LTCI. Should the individual die without having received benefits, the insurance company would refund the trust the sum of its premium payments and the refund would presumably be estate tax-exempt.

Care coordination benefits enhance policy appeal

Anthony C. Stratidis, CLTC, LTCP, senior vice president at Marsh Executive Benefits, Long Term Care Benefits Planning Consultant

Even wealthy clients cannot truly self-fund LTC without some adverse challenges to either their abilities to sustain their lifestyle or to preserve their legacy plan. It’s not just the ability to fund the expenditure: I believe the care coordination provision is an often-underappreciated benefit of LTCI. Given that much of the care provided today is provided by another family member, the stress, time, and lack of knowledge in identifying, vetting, and developing a plan of care for a family member is daunting. How do you manage the process when a family member needs extended health care? For example, who identifies what that plan of care will be? What will the schedule of care look like? All of these things are the issues that one tends to forget about.

Having the financial resources (through an LTCI policy) to cover the expense is only one side of the story. The ability to manage those financial resources appropriately with the proper set of care providers is equally important. The insurance carriers, in their program designs and their plan designs, have their care coordination components built into them. They have internal staff that manages the process and develops a plan of care on behalf of the client. Most of the major carriers have networks of healthcare agencies that they have entered into strategic partnerships with so there is some vetting and background checking.

LTCI is not a magic bullet

David Mendels, CFP(R), director of planning at Creative Financial Concepts, LLC

The single most important thing to understand about LTCI is that it does not do what most clients think it does: It does not guarantee to pay the cost of long term care if the insured needs it. It may or may not be in force if needed, depending on how costly it has become (and make no mistake about it, the premiums will rise quite a bit). If it is in place when needed, the benefits may very well not be enough to cover the costs since even the policies with inflation protection do not increase benefits as rapidly as the cost of long term care increases. Finally, unless the insured has (extremely costly) lifetime benefits, the benefits may not last as long as the need does.

As a result, it is entirely possible that the insured will end up dutifully paying his or her increasing premiums year after year and still end up becoming impoverished by the cost of long term care and dependent on Medicaid, in which case it is far from clear what was gained from owning LTCI. That does not mean that people should not own it, but they should understand what it is that they are buying – and what it is not.