According to a recent article from Financial Planning magazine, sales of traditional long-term care (LTC) insurance have significantly fallen in recent years, but it’s not because people don’t think they need it or don’t want it. It’s just that the strategy for gaining long term coverage is changing.
“Many people don’t want to use the traditional LTC approach,” said Randy Becker, a planner and owner of Becker Retirement Group. “They’re concerned about rising premiums, the risk of a company failing or the possibility of not needing the care…all at a time when they will have limited resources.”
Cue the surge in sales of life insurance policies and annuities that carry LTC benefits.
LIMRA recently reported that sales of new standalone individual LTC policies fell from 372,000 in 2004 to 91,000 in 2016, with over 65% of that drop occurring after 2011. And the numbers continue to drop in the first half of this year. So where are Americans finding LTC coverage instead? The new solution includes options in hybrid, or “combo” life insurance and annuity products. In fact, new premiums for combination life-LTC insurance rose to $3.6 billion last year from $2.4 billion in 2012, and annuity-LTC hybrids more than doubled in sales.
“Some clients are concerned about paying for standalone LTC insurance and not using it,” said Herb Daroff, and advisor with BAystate Financial Planning. “People don’t hope to get ick to use their health insurance, but LTC insurance has high premiums and the concern exists.”
President of Unity Financial Advisors, Jaime Cowper, admits that she recommends life- and annuity-L TC combinations to clients more often than traditional LTC insurance these days.
“The main reasons are that asset care products have guaranteed premiums, offer lifetime benefits, and provide for money for beneficiaries if a client never needs LTC,” Cowper stated. “Although a traditional policy initially may be a little less expensive than the asset care products, there is no guarantee that the premium will not go up in the future and become significantly more expensive,” she added. “This, along with the option for lifetime benefits and the ability to leverage money to beneficiaries if clients never need it, has made asset care very attractive.”
On that same logic, Becker refers to LTC hybrids as “asset-based LTC,” claiming most of his clients are happy with the approach. “They’re effectively parking money where it will do its job, if needed for LTC,” he said. “However, the death benefit will ‘bring those assets back home’ if the LTC portion is not needed.”
In addition to some potential for liquidity, Becker is also quick to point out that any LTC benefits will be tax-free under the IRS guidelines for a tax-qualified LTC plan. On the other hand, while premiums paid for standalone LTC insurance may be tax-deductible, those paid for LTC hybrids are not.
But just like most financial planning products, the devil is in the details, and these combo products aren’t necessarily right for everyone. Some aspects of LTC hybrids are relatively straightforward, but the finer points should be carefully considered. Premiums are not tax-deductible, and combo products often require a large upfront investment.
“We’ve looked at the combo policies by haven’t recommended any,” said Dave Yeske, managing director at Yeske Buie, a financial planning firm. “It seems like they might be a fit where someone has a cash value policy that we want to convert. Also, in situations where someone may not medically qualify for straight LTC, my understanding is that the underwriting for the combo policies is more liberal.”
As with any major financial decision, it is always advised to speak to a trusted financial planner, ensuring complete understanding of a product before signing on the dotted line.
Written by Rachel Summit