Premiums on standalone long-term care insurance policies have been steadily increasing for years—and the qualification requirements attached to the policies have made standalone LTC difficult to obtain for even younger clients.
The newest development in the LTC planning arena, however, can have a significant impact on clients who already maintain standalone LTC policies—state approvals of rate increases at an alarmingly rapid rate have led to situations where clients can no longer afford to maintain LTC policies that they may have had in effect for years. For this particular group of clients, LTC planning may be even more important than for clients who never purchased the insurance to begin with—meaning that advisors should become well-versed in the alternatives that might present viable solutions for clients who can no longer afford to maintain their standalone LTC policies.
The Current LTC Insurance Landscape
While its nothing new that the cost of standalone long-term care insurance has been increasing for years, some states have recently permitted premium increases of between 200% and 300%. These increases apply to the premium cost on policies already in effect, so that many middle-income clients who have purchased LTC insurance will simply find these increases prohibitively expensive and be forced to surrender their policies.
Because state regulators can approve insurance premium increases if they find a significant need for the increase, the premium increases clients have seen to date are likely not the end of the story. Insurers have been seeking out rate increases steadily for years, and because the cost of long-term care continues to rise, are likely to continue doing so in future years. The difference today is the level of premium increases that states are signing off on.
According to a recent study, the median cost of care in a nursing home is around $250 per day, or $92,000 per year—making this type of long-term care coverage more important than ever. Fortunately, clients do have alternatives to standalone LTC insurance.
Alternative LTC Solutions for Clients
With the decline of traditional policies, long-term care insurance coverage now often comes packaged with a life insurance or annuity product. The primary appeal of combining life insurance (or an annuity) with long-term care coverage is that these hybrid policies eliminate the risk that the client will never require long-term care coverage. The life insurance policy or annuity will provide a standard death benefit—either in the form of 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 investment (usually 200% or 300% of the client’s investment). The client can also choose to purchase inflation protection, which ensures that the contract value grows at a rate that is designed to keep pace with the rising 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.
A hybrid life insurance policy is a policy that 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 (a penalty may 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 will still 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.
Typically, hybrid policies must be funded with a single premium payment, which can make them prohibitively expensive for some. However, because many individuals may have trouble allocating a large sum of money toward the purchase all at once, some carriers have developed products that can be paid for in installments over time. Exchanging a current annuity or life-insurance contract in a tax-free exchange can also allow a client to purchase a hybrid policy without significantly depleting otherwise available retirement funds.
The decline of traditional long-term care insurance does not mean that clients should leave themselves unprotected—the cost of long-term care itself continues to increase along with premiums on LTC policies, making it more important than ever for clients to plan now for future care.
- Read previous coverage of LTC-annuity products in Advisor’s Journal.
- For in-depth analysis of the tax treatment of annuity proceeds, see Advisor’s Main Library.
- Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.