“Even before the pandemic, the senior health care marketplace was experiencing rate increases, capacity shortages, and changes in coverage. The pandemic further deepened these trends.” Ken Reeves
As you plan your eventual exit from the workforce, it is likely your retirement and income
planner has talked to you about the need for long-term care insurance.
Long-term care insurance allows you to maintain your dignity and independence when faced
with an illness or chronic health issue. LTC insurance can also take some of the burdens off
family members who must care for you.
Most of all, LTC is a way to protect your assets and savings from the high cost of long-term
care needs.
Most people know the statistics. Over half of all Americans will need long-term care at least once in their lifetimes. Nearly all of us know a friend or relative whose life savings evaporated after staying in a nursing home or memory care facility. Planning for long-term care needs is crucial to retirement success.
Like many people, though, you may have balked at the high cost of long-term care (LTC) premiums. Currently, the average LTC premium is over $300 a month. The pandemic ensures that prices will continue to increase substantially in the future.
There is also pushback from retirees and pre-retirees when they realize that if they can no longer afford premiums, they will be forced to drop their policies and will not get a penny of their money back.
Traditional long-term care insurance, then, seems a zero-sum proposition for most people.
There are, however, alternatives to traditional long-term care insurance that people within
five to seven years of retirement may want to explore.
Asset-based “hybrid” long-term care policies
In 1996, Internal Revenue Code (IRC) section 7702B and the HIPPA Act set forth requirements
for so-called “asset-based” tax-qualified LTC policies. The result of this act is that LTC coverage
and insurance may now be combined into a single policy.
Asset-based hybrids link LTC benefits to either a specially-designed life insurance policy or a
deferred annuity. Paid-out LTC benefits are tax-free.
When the long-term care portion of these policies is unused, those benefits transfer to heirs at the insured’s death. Hybrid policies differ dramatically from traditional LTC coverage, which
offers no benefit to heirs and no tax advantages to the insured.
Asset-based long-term care (LTC) protection links LTC benefits with either life insurance or a
deferred annuity. When there are no LTC expenses, LTC benefits are paid tax-free. If LTC is
not needed, assets go to heirs upon the insured’s death and are tax-free under IRC section
101(a).
Unlike those of health-based LTC coverage, traditional LTC coverage benefits have no cash
value and few, if any, tax benefits. Essentially, then, traditional long-term care insurance is a
“use it or lose it” proposition.
How are “hybrid” policies different?
LTC annuities are deferred annuities, which are contracts with an insurer that promise to pay
either a lump sum or regular income at a future date.
You may be familiar with these kinds of annuities as they are often included in retirement plans
as a supplement to Social Security or investment income.
Long-term care deferred annuities include an LTC rider. You purchase these annuities, usually
with a lump-sum amount of money. If you eventually need long-term care, you receive either a
lump-sum payment or monthly payments from the annuity company to help offset expenses.
On the other hand, LTC life insurance is configured somewhat differently than annuity-based
LTC.
An asset-based insurance contract usually involves what is essentially a prepayment of the
permanent life insurance policy’s death benefit for qualified LTC claims.
A hybrid insurance contract may provide a maximum LTC benefit that is a percentage of the
policy’s death benefit. For example, this kind of hybrid policy may offer a maximum monthly
amount of 2% of the death benefit. So, if your policy had a $500,000 death benefit, your
maximum would be $10,000 per month for 50 months. Every payment reduces your total death
benefit.
Some insurers offer “Continuation of Benefits” coverage, or COB, for an additional premium.
COB kicks in when your LTC policy balance has been depleted and continues your benefits for a
specified length of time. A few insurers also offer lifetime COB coverages. You should be
aware, however, that additional premiums for COB can be expensive. COB is also medically
underwritten, so certain people may not qualify.
Summing it up: Next to outliving their money, many seniors worry most about encountering
serious health issues at retirement. These seniors recognize the need for long-term-care planning. However, traditional long-term care is becoming more difficult and expensive to acquire.
Recent withdrawals from the market by multiple insurers have limited consumers’ choices when
it comes to LTC. Many companies are also tightening underwriting requirements and adding
exclusions, such as infectious diseases and pandemic exclusions, that make traditional LTC
coverage a poor choice for retirees.
Fortunately, many life insurance and annuity companies have responded to these trends by creating asset-based “hybrid” policies and annuity products. Hybrid policies are customizable to an individual’s goals, financial situation, and desire for asset protection. Hybrids may also be more tax-advantageous and less expensive than regular LTC.
Traditional long-term care and hybrid LTC coverage are complicated products that you must
understand thoroughly before purchasing. You should consult an LTC expert who understands
the product thoroughly, knows what is currently available, and can help you discover the best
options.