It is widely agreed upon that the market for traditional long-term care insurance (LTCI) is all but dead—the number of clients who purchase LTCI has continued to decline rapidly in recent years and several major LTCI carriers have simply pulled out of the dying market.
Unfortunately, as most clients realize, the need for long-term care is as robust as ever, meaning that advisors will continue to be called upon to suggest methods for funding the rising cost of long-term care. This enduring need for funding care, however, has sparked a relatively new line of hybrid products designed to fill the gap left by traditional LTCI—and combining LTCI with life insurance or an annuity is a solution that may appeal to many clients who still need long-term care coverage.
In today’s LTCI market, many clients are simply unable to obtain the insurance coverage that was available in the past. Because the costs of long-term care have consistently continued to rise, and the likelihood that the need for care will arise is high, many carriers have raised premium levels on traditional LTCI to the point where most middle-income clients cannot afford the policies.
Further, carriers often impose much stricter underwriting requirements today—meaning that the client’s medical history is now examined more closely, making it more difficult for many clients to even qualify for LTCI.
Carriers have also begun focusing LTCI on shorter-term policies that provide less generous benefits. While these standalone policies may be less risky for the insurance company and more affordable for the client, they are unlikely to provide the level of coverage that clients may need.
The Rise of Hybrid LTCI Alternatives
With the decline of traditional policies, many carriers have developed LTCI coverage that is bundled with a life insurance or annuity product. One appealing aspect of combining life insurance (or an annuity) with long-term care coverage is that these so-called “hybrid” policies eliminate the risk that the client will never require long-term care coverage. The life insurance policy or annuity continues to provide a standard death benefit—either in the form of life insurance 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. Because the cost of long-term care continues to rise, many clients may also wish to purchase inflation protection, which is designed to ensure that the contract value grows at a rate that keeps pace with the actual 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—many individuals who have purchased LTCI in recent years have opted for shorter terms (such as three years or less) because of the cost of these policies.
Essentially, the hybrid life insurance-LTC policy 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 (often, a penalty will 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 simply 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—eliminating some of the negative perceptions that clients may have about locking funds into one particular financial product.
For many clients, a hybrid life insurance policy or annuity contract may be the only way they are able to fund long-term care coverage in the future—making it important that advisors gain an understanding of the types of options that are becoming available.
For previous coverage of short-term care insurance in Advisor’s Journal.
For in-depth analysis of long-term care insurance, see Advisor’s Main Library.