Understanding Long-Term Care Insurance

It's security for the question, "What if?"



Illustration by Arthur Budak

If you’re a baby boomer, then long-term care insurance presents a Hobson’s choice. It’s wickedly expensive and you may never need it, but should you buy it?

Whether to take it or leave it is certainly a high-stakes decision for millions of aging Americans. Recently, the long-term care insurance industry introduced innovative products that may help you sort out this complex conundrum.

The new twists on this type of insurance are the hybrid policies, which are also known as linked-benefit products. Unlike traditional, stand-alone long-term care insurance, which comes with the “use it or lose it” component, these policies package life insurance or a fixed annuity with long-term care benefits.

“They’re a hedge for people who aren’t really sure if they’re going to use their long-term care services or not,” says independent insurance broker Claude Peltz, ChFC, CLU, RHU, of Peltz Financial Services in Windham. “These are best for people who don’t think they’re going to use the services, but still say, ‘What if?’ They usually opt for the hybrid program.”

How do they work? By keeping a certain amount of cash within the policy.

“When a person puts in, let’s say, $100,000, then the insurance company says, ‘We will give you between two to four times that amount of money you deposit with us for annuity benefits if you need long term care services.’ If you don’t need the services, the monies will simply accumulate in some type of tax-deferred savings program, which would be an annuity,” explains Peltz, who has been in business since 1979. “It’s based on the person’s age, so the younger you are, the higher the multiple will be. It may be up to four times the deposit you put in. If you’re 75, it might be two times.”

“The other type of hybrid is when people use it with a life insurance program. They overfund the life insurance program and they use it as a savings program. If you never have to use it, it builds up cash value,” he continues. “But if you do need long-term care services, you would use your own savings that you have and then the death benefit would reimburse the surviving spouse for the monies that you paid out of pocket for long-term care services.”

A New York Times article published last winter hailed the hybrid policies as a “triple threat” because they could be viewed as a fixed-income investment, cover long-term care and provide a life insurance benefit.

Moreover, your costs are covered upfront, meaning there is no need to worry about the ever-rising premium spikes that plague the traditional plans, often to the point where many people are forced to drop their policies as they can no longer afford those monthly or annual payments. When that happens, they forfeit every dime they’ve invested to that point in addition to all coverage.

Despite the many advantages of the hybrids, they come with some distinct disadvantages too.

For one, they carry a pretty steep initial price tag, and not everyone can write a six-figure check. You can get a policy that costs less than $100,000, but of course it pays less in benefits.

Also, the hybrid plans can be complicated and, given their varying features, it’s hard to compare their value with traditional long-term care coverage, as the Times article mentions.

Nevertheless, the AARP noted that, with hybrid policies, your returns are likely to be less.

“You get a bigger bang for your buck with a traditional long-term care policy. The hybrid gives your money back to you, but the cost of getting your money back is that you get smaller benefits come claim time,” says Peltz. “The downside [to a traditional policy] is that all of that money [spent on premiums] would be lost if you never have to use it. But the upside is that if you do have to use it, for every dollar that you spend, you get more benefits for your long-term care than with a hybrid.”

Just like with a traditional policy, an insurance company can deny you hybrid policy coverage for a variety of medical reasons, even those found in your family history, and especially where there are incidences of dementia, Alzheimer’s and/or other debilitating conditions.

Almost 40 percent of long-term care insurance applicants are turned down for health reasons, and it’s almost a certainty that, once coverage is denied by one insurer, every other will automatically do the same.

It’s also crucial to realize that hybrid policies are not “one-size-fits-all.”

Experts universally agree that if you’re single or don’t have children or other dependents counting on an inheritance, then you don’t need a policy that is combined with life insurance. So why would you ever buy a hybrid with a death benefit for survivors?

But if you need monthly income, a policy packaged with an annuity is the way to go.

A sensible move is to consult with your financial consultant and tax advisor to gather as much objective advice as you can. And be sure to work with an insurance broker who represents several different companies and can match you with the best plan for your needs.

Peltz says that while there are only three or four insurers left in New Hampshire that sell traditional policies, there are at least five or six companies currently offering hybrids.

“If you go to a broker who only represents one company, it’s like shopping for a car but the dealer only shows you the black Fords. Unless you’re Henry Ford in the 1920s, you can’t get away with that anymore,” says Peltz.

Another thing to consider is that the winds of change are blowing through Washington, DC.

President-elect Donald Trump promised on the campaign trail that he would work to repeal and replace the Affordable Health Care Act in his first 100 days in office. No one knows yet how his administration may alter the rest of government-backed insurance coverage, especially Medicare, which currently covers your care only after a hospital stay of up to three days and for just 20 days thereafter. Then there is the looming question of tax code reform and how that may affect any deferments that are part of a policy.

“As an industry, we have no idea whatsoever what could be coming or when,” says Peltz. “Stay tuned.”

But there is help nearby when trying to solve the long-term care insurance puzzle and stay on top of any changes. The New Hampshire Department of Insurance (nh.gov/insurance) is a resource and maintains a consumer hotline at (800) 852-3416.

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