Asset based long-term care insurance as an alternative to traditional long-term care policies

Asset based long-term care insurance as an alternative to traditional long-term care policies

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. 

Pooled Income: The secret to getting more out of your retirement savings

One of the hardest things for people to do in retirement is translate nest-egg savings into reliable income that lasts. A way to do so – and generally get back more income per dollar compared to other alternatives – is through “pooled income.”

Though entities as commonplace Social Security and defined-benefit pension plans utilize pooled income approaches, few are aware of how such arrangements actually function.

Baby Boomers – especially those with 401(k)s and no traditional pension to fall back on – can benefit tremendously from a better understanding of the benefits of pooled income.

Below, from the writings of economist Moshe Milevsky, PhD., is one of the best – and most entertaining – descriptions I have ever read on how pooled income works.

The 95 Year Old Bridge Club

“My 95-year old grandmother loves playing bridge with her four best friends on Sunday every few months. Coincidentally, the five of them are exactly 95-years old, are quite healthy and have actually been retired – and playing bridge – for 30 years. Recently this game has gotten somewhat tiresome and my grandmother has decided to juice-up their activities. Last time they met, she proposed that they each take $100 out of their purse wallets and place the money on the kitchen table. “Whoever survives to the end of the year, gets to split the $500…” she said. “And, if you don’t make it, you forfeit the money…Oh yeah, don’t tell the kids.”

Yes, this is an odd gamble, but you will see my point in a moment. In fact, they all thought it was an interesting idea and agreed, but felt it was risky to keep $500 on the kitchen table for a whole year. So, the five of them decided to put the money in a local bank’s one-year certificate of deposit paying 5% interest for the year.

So what will happen next year? According to statistics compiled by actuaries at the U.S. Social Security administration, there is a 20% chance that any given member of my grandmother’s bridge club will pass-on to the next world during the next year. This, in turn, implies an 80% chance of survival. And, while virtually anything can happen during the next 12 months of waiting – actually, there are 120 combinations, believe it or not — the odds imply that an average four 96-year olds will survive to split the $525 pot at year-end. (I sure hope
grandma is one of them.)

Note that each survivor will get $131.25 as their total return on the original investment of $100. The 31.25% investment return contains 5% of the bank’s money and a healthy 26.25% of “mortality credits”. These credits represent the capital and interest “lost” by the deceased and “gained” by the survivors.

The catch, of course, is that the average non-survivor forfeited their claim to the funds. And, while the beneficiary’s of the non-survivor might be frustrated with the outcome, the survivors get a superior investment return. More importantly, they ALL get to manage their lifetime income risk in advance, without having to worry about what the future will bring.”

Click to view the original paper, “Grandma’s Longevity Insurance,” from Moshe Milevsky, PhD.

Important notes on the story:

In a real pooled income arrangement, the people don’t get to keep the money at the end. Instead, funds are allocated to assure that income for the remaining participants persists.

Those who live the longest do reap the greatest rewards. But, that’s really the point. People have the choice to cling to the funds they have and risk running out of money at later ages, or, let go, “jump in the pool,” and rest assured they will always have a guaranteed income no matter how long they end up living.

Few argue that individuals should put all of their funds into pooled income products. The key is to cover basic living expenses – food, shelter, utilities, everyday expenditures. Therein lies security. Once basic expenses are covered, more traditional investment alternatives would be preferred due to their liquidity, growth potential, and suitability for inheritance planning.

Relative to the issue of inheritance, it is useful to recall the warning flight attendants give to airline travelers, “Put the oxygen mask on yourself, before putting it on your child.” Similar logic applies to retirement funding, “Make sure to cover your basic income security, before worrying about leaving money to your kids.” (One idea is to leave kids your “stuff” instead – house, physical assets, etc.)

Mentioned in the story above is the concept of “mortality credits.” Mortality credits are what create the magic and give pooled income arrangements – including Social Security, pension plans, and individual annuities – the ability promise more long-term income to participants than other comparable mechanisms.

Assuming proper funding, mortality credits allow for the assets of pooled funds to be invested in highly safe instruments, such as intermediate and long-term bonds, and still deliver superior results.

Arguably, mortality credits may afford pooled funds the ability to take on a bit more risk to achieve their objectives. In grandma’s story above, if the group had put the $500 into a hot growth stock and lost 20%, the survivors would have still each gotten their money back.

Finally, securing basic living expenses with pooled income can give individuals more freedom to pursue higher investment returns with their remaining funds. This happens because a person’s “base” income is safely separated from his or her overall investment risk.

In summary, here are several major benefits provided by pooled income mechanisms,

  • They serve as a form of insurance to cover basic expenses in retirement.
  • They generally provide more retirement income per dollar allocated.
  • They protect against the risk of living too long and outliving retirement funds.
  • They insulate retirees from the ups and downs in the market.
  • They allow greater freedom to pursue higher returns with remaining retirement funds.
  • They provide a simplified means of translating retirement savings into steady, reliable income.

If you would like to learn more about the suitability of pooled income products for your situation, you are welcome to contact me by email or through my Cincinnati, OH based insurance agency, McCarthy Stevenot Agency, Inc.

Bonus content: Use this simple method to calculate how much basic income you may need in retirement.

Amazon links to other works by Moshe Milevsky, PhD. (Purchasing books through these “sponsored” links help defray the cost of this website. Thank you!)