One thing I hear a select group of senior retirees lament is that they feel they have put “so much money” into their long-term care insurance policies and, as yet, have received little or no benefit.
Some wonder, as they continue to pay premiums, whether they will ever see a return for the dollars they have contributed. Others speculate that they may have done better had they invested their premiums rather than handing them over to an insurance company.
A few thoughts about such concerns.
So far, these particular folks are fortunate in that they have not had major expenses for extended care. It seems fair to say that, at least for this, they should be thankful.
Another point is that anyone’s circumstances can change quickly. The unhappy premium payer of today may face the spectre of extended care costs tomorrow. One would expect such an individual to become a reformed believer in the value of his or her policy as a key form of protection.
Regardless, there seems to be a disconnect with how some people perceive the ongoing value of their long term care policies. By contrast, most of these same individuals have never filed a major claim under their homeowner’s insurance. Yet, I seldom hear similar complaints about having “paid all that money” over the decades with so little to show for it.
What if there were a way to solve this problem?
What if the “bottomless pit effect” which leaves insureds feeling like they keep paying and paying, yet receiving little or no benefit in return could be eliminated?
In my humble opinion, there is an answer.
It is called “hybrid” or “asset based” long-term care insurance.
Asset Based Long-Term Care Insurance
When the first long-term care insurance policies were introduced decades ago, they were new to everyone, including insurers. Companies tested many different plan options and actuarial assumptions to price policies affordably and effectively.
In some cases, insurers underestimated their future costs and ended up having to raise premiums. Over time, the shape and form of long-term care insurance has continued to evolve.
On August 17, 2006 the Pension Protection Act (PPA) went into effect and changed the long-term care insurance landscape even further.
Importantly, the PPA opened the door for insurance companies to offer riders on qualifying life and annuity policies to provide tax free withdrawals for the purpose of funding certain long-term care expenses.* This set the stage for the introduction of new “hybrid” or asset based long-term care policies.
Under the right circumstances, such policies can serve as an alternative to traditional long-term care insurance policies.
Here are a few characteristics of asset based long-term care insurance,
- Asset based long-term care insurance is a life insurance policy or annuity that includes a rider (or riders) which expand coverage to include qualifying long term care expenses.
- In general, if you don’t end up using the policy for long-term care expenses, you won’t “lose” the money you put into it. This is the case because the underlying policy can still carry out its base function as either an annuity or a life insurance policy.
- If benefits are never needed, either the death benefit of a life insurance policy, or accumulated funds of an annuity can be left to heirs.
- Insureds can live a long life with the certainty of having coverage and without the anxiety of constantly shelling out premiums.
- Most policies require a fixed, upfront premium to be paid, though some contracts may allow for annual contributions.
- Internal funds grow on a tax-deferred basis and qualifying long-term care expenses can be paid on a tax advantaged basis.
- At least one insurer offers a policy that can be purchased jointly. This allows both individuals in a couple to benefit from coverage under a single policy.
- Depending on the contract, additional riders may be available to provide protection for inflation as well as other extended benefits.
- Asset based policies are medically underwritten, but some individuals may find it easier to qualify for certain types of these polices.
Moving dollars from one pocket to another
Where appropriate and as part of a comprehensive plan, asset based long-term care policies can provide an opportunity to leverage low-risk nest-egg funds to safeguard against the cost of extended care.
- Conceptually, funds shift from “one pocket to another”
- A portion of dollars allocated to safe, low-risk positions – such as cash, intermediate and/or long-term bonds – are reallocated into asset based long-term care insurance.
- If long term care benefits are not needed, these repositioned funds serve as added support for legacy planning.
Long-term care insurance is not right for everyone and there is no one-size fits all solution when it comes to choosing a policy. If you live in the Cincinnati, OH area you are welcome to contact me through my agency to discuss the suitability of such coverage for your situation.
For readers in other areas, an excellent resource is the American Association for Long Term Care Insurance. Their website has a trove of great articles as well as links for finding an advisor, if you need more help.
Think a long-term care event will never happen to you?
Do you believe you are invincible? If somehow it turns out you’re not, can you guess who will have the most to lose if you fail to make a plan for long-term care? This article explores the answer: If you were sick or disabled, who would chew through a wall to take care of you?
*Note: Neither I nor my agency provide investment, legal, or tax advice. If you need help with such issues, be sure to consult with a qualified advisor.