As traditional stand-alone long-term care insurance policies have become more costly, financial advisors are likely to be hearing more objections related to both premium expense and to the “what if I don’t use it” effect.
While most clients typically aren’t disappointed if they never file a claim on their homeowners or auto insurance policy, for some reason with long-term care insurance, the use-it-or-lose-it objection seems to be a real biggie. Luckily, there is a way to cover this potential need without having to buy a separate long-term care (LTC) insurance policy.
Linking LTC coverage to annuities
In responding to both consumer and agent demand, insurance companies have recently come up with “hybrid,” or linked, policies. With these plans, the benefits of both an annuity and long-term care, for instance, may be used. Yet, if the client never needs long-term care, he or she doesn’t “lose” because the benefit of using the annuity for retirement income remains.
The many hybrid annuities on the market vary greatly. These vehicles allow buyers to obtain a fixed annuity and to then attach a long-term care rider. Should annuitants have a qualifying need for long-term care services, they could access a monthly benefit for a set number of months or, in some cases, for the remainder of their lives.
A new hybrid annuity/LTC product has a built-in long-term care “multiplier” that uses a portion of the contract’s internal rate of return to pay the LTC benefit. This amount is determined by the amount of coverage chosen when the policy is purchased.
The Advantages of hybrid policies
The purchase of a fixed annuity with LTC benefits can be much less expensive than buying a stand-alone LTC insurance policy. And when a client deposits funds into the annuity, that money is theirs to spend regardless of whether they need long-term care or not.
However, by adding the LTC rider for an additional two or three percent per year, for example, there will now also be a benefit available for LTC needs, while the annuity balance is also continuing to grow over time.
This approach has a number of advantages for the client, including:
Continued access to funds through the annuity;
Cost of the LTC coverage is typically less than the premium on a stand-alone LTC policy;
LTC coverage can be obtained without health underwriting (in some policies);
The client avoids having to self-insure and deplete personal savings and other assets to pay for long-term care needs; and
Fewer products need to be purchased in the retirement planning process.
The LTC rider fee can, however, cut into the interest rate received from the annuity. So clients may have to decide which is more important: (1) obtaining a higher rate or; (2) achieving the savings associated with not having to fund a more expensive stand-alone LTC policy.
There is also the potential cost savings of a future LTC need that could run to six (or seven) figures, depending on where the client lives and how long care will be needed.
What to look in a hybrid product
Not all hybrid annuities offer the same flexibility as an individual LTC policy. Therefore, be aware of whether or not the income has inflation protection and how long income will be paid out.
Though it’s impossible to predict exactly a client’s future income needs you, as the advisor, will want to ensure that clients have a sufficient amount of long-term coverage—enough to keep from depleting other assets to cover an LTC need.
Other hybrid policies link life insurance and long-term care, whereby a death benefit is created after a single premium has been deposited. Based on the client’s age, health, and gender, a “pool” of funds for long-term care coverage is also created.
These hybrid policies, too, can provide “two forms of coverage in one” to clients who need the protection but are adamant about not purchasing a stand-alone long-term care insurance policy.