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Keeping Costs Down on Long-Term Care

Keeping Costs Down on Long-Term Care

Combination products are more affordable, but there's no free lunch.

Have your clients neglected planning for long-term care — often uncovered by Medicare or health insurance? If so, you have more cost-effective choices these days.

And if they're getting on in years, it's definitely something to talk to them about. The cost of a nursing home — ranging from $70,000 to $80,000 annually — can wipe out the savings of even affluent clients.

With the newest combination insurance-long-term care products, clients can invest a lump sum and select corresponding long-term care coverage and a death benefit. The top insurance companies that sell life insurance or annuities combined with long-term care coverage are Genworth, John Hancock, Lincoln National, Hartford, Midland/North American Co. for Life and Health Insurance and OneAmerica, according to LIMRA.

It is difficult to compare the cost of these policies to stand-alone long-term care policies. The combination product is typically a lump-sum investment. Stand-alone, long-term care policyholders pay regular premiums. But the client avoids a chief flaw of stand-alone long-term care insurance: The loss of paid premiums if the coverage goes unused.

For example, a client with $100,000 sitting in a money fund, short-term bonds, or CD could purchase a lump sum life insurance or annuity that pays $300,000 in nursing home or home health care expense.

By contrast, someone age 55, would pay about $1,500 to $2,600 per year for stand-alone individual long-term care coverage, depending on the terms of the contract, according to the 2011 Sourcebook for Long-Term Care Insurance Information.

“Overall sales of combination products — up 62 percent or $1.2 billion in 2010 — were remarkable, especially coming off the double-digit growth experienced in 2009,” said Catherine Ho, LIMRA research actuary.

New sales of combination products represent 6 percent of the individual life insurance market based on new premium. LIMRA found that buyers in their 60s continue to be the biggest portion of in-force policies. But younger people are also interested.

“The message in favor of combination plans is simple, and to many buyers more compelling,” stresses Carl Friedrich, consulting actuary and principal for Milliman, Chicago. “There are potentially significant tax advantages to the payout of annuity values, including gains in those contracts, as tax-free long-term care benefits are allowed under the Pension Protection Act of 2006.”

Palm Beach, Fla. insurance broker Peter Bono says he is converting clients with annuities that have large taxable gains into annuity/long-term care policies so policyholders can tap hybrids tax-free for long-term care.

Insurance Or Annuity?

So how do you know whether to select a linked insurance or annuity product for your clients? With a long-term care rider on cash value life insurance, you generally can choose a long-term care rider that pays benefits for a specific term. Whatever is unused passes to your beneficiary when you die.

With a tax-deferred fixed annuity, you may invest a lump sum with the life insurance company. A certain amount of the cash value may be tapped for long-term care benefits.

Long-term care benefits on either of these are likely not as comprehensive as straight long-term care insurance. However, experts say the long-term care benefits are apt to be more comprehensive on hybrid life insurance policies than on hybrid annuities.

That said, if you have a pre-existing condition and can't qualify for long-term care insurance, the underwriting for an annuity/long-term care hybrid likely won't be as tough, according to Bono.

There is no free lunch with these hybrid products. On an annuity, expect to give up 0.75 percent to 1.25 percent of your interest annually, depending on your age, for a long-term care rider, says Jesse Slome, executive director of the American Association for Long-term Care Insurance in Los Angeles. Life insurance/long-term care costs are priced into policy premiums and/or benefits.

In either case, your client could lose if he or she withdraws early. Annuities may have both an IRS penalty if you withdraw before age 59 ½, as well as surrender charges if you withdraw early — often within the first seven years. On a life insurance hybrid, expect at the very least for your client to lose earned interest upon early withdrawal.

These programs can be attractive if clients have lazy money sitting in a bank account, Slome says. The objective is for them to put in enough now so that in 10, 15 or 20 years, they have meaningful coverage.

Long-term care life insurance and annuity hybrids are complex. It is important to stick with financially strong insurance companies. Consider the number of years a client will be covered for long-term care and under what conditions; and whether your client and spouse together may qualify for a discount via joint coverage.

Also analyze the tax consequences if the client does not use the long-term care benefit. At least, the earnings portion of any annuity payouts generally are taxed upon withdrawal as ordinary income. And consider whether certain annuities may disqualify your client from government benefits, like Medicaid, if they exhaust their assets and their long-term care benefit.

Hybrid policies are not for everyone. Often, they cover only a few years of long-term care. Plus, if used for long-term care, the annuity or the life insurance policy may lose the death benefit and/or future earned income.

Sales of individual long-term care policies this year are up 9 percent or $268 million through August, according to LIMRA. And nearly 115,000 Americans purchased individual standalone long-term care policies in the first six months of 2011. Meanwhile, the combined sales of individual retail and group stand-alone long-term care policies should hit 500,000 policies, up from 475,000 in 2010 or 6 percent, according to the American Association for Long-Term Care Insurance.

Slome says the latest innovation is “shared care policies” or joint policies. With these, if one spouse doesn't use the coverage or part of it, the other can use it to cover long-term care.

Financial planners say that long-term care insurance is important to business owners. A business owner may be able to “carve out” certain key employees and spouses for a long-term insurance benefit. Not only is there a tax deduction to the business owner for the contribution, but the employee gets access to the benefits tax-free.

Advisors who want to offer comprehensive coverage should specialize in long-term care insurance, Slome advises.

“Unless you really want to learn about long-term care insurance, it's best to refer clients to a long-term care specialist or partner with one,” he says.


Alan Lavineis a contributing writer to Registered Rep., and author of some 15 books on investments and insurance. He writes a column for Dow Jones MarketWatch's '''Retirement Weekly,” and is a contributing editor to Financial Advisor magazine.

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