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Lock into Long-Term Care with Hybrid Policies

Combining life insurance and annuities with long-term care policies can protect against premium hikes or the risk of never making a claim. Here’s how to make sure they are right for your clients.

Life insurance and annuities with long-term care benefits eliminate two key problems of long-term care insurance.

Not only do they provide clients with some asset protection if long-term care is unnecessary, but they also eliminate the possibility clients will be dealing with premium increases as they age.

Those benefits are catching on. The latest available data from LIMRA shows there were $2.2 billion in sales of combined life insurance and long-term care in 2011—up 56% from 2010. These life combination products now represent an estimated 16% of all long-term care policies and contracts sold.

Premium increases on long-term care policies are a recurrent problem. Genworth Financial, a provider of long-term care insurance, announced in August plans to raise rates on standalone long-term care policies by 50%, pending state regulatory approval. Patrick Keller, Genworth’s executive vice president, cited low profitability, lower-than-expected lapse rates and low interest rates for the increase. Because long-term care costs are rising, those activating long-term care benefits exceeded the estimates. So the insurer said it needed to raise premiums.

The California Department of Insurance reports that since 1990, over 50 life insurance companies have raised standalone long-term care insurance premiums a number of times on specific blocks of business, including Bankers Life and Casualty, Continental Casualty, Genworth, Knights of Columbus, John Hancock, Metropolitan Life Insurance Company, Mutual of Omaha, Physicians Mutual, Transamerica Life and UNUM Life. 

In fact, these premium hikes have been so dramatic that California Gov. Jerry Brown signed a bill, slated to take effect next Jan. 1, which modifies the criteria for rate increases. It also requires the insurer to fully disclose to affected policyholders its intention to raise rates in the future—both the timing and amount.

Premium hikes for senior citizen clients can create ill will. Expect even your more affluent clients, living on fixed incomes, to be unhappy with premium hikes. 

“Combination life insurance and annuity long-term care policies mean that clients don’t have to worry about premium rate increases when they age,” says Bruce Moon, vice president of product development with One America, Indianapolis. “If they never use the policy for long-term care, they can leave money to their beneficiaries.” 

There are a couple of ways combo policies are set up. Recurring premium policies can be more attractive to middle–age buyer still working. Single premium policies can be attractive to older consumers with invested assets they have set aside to "self-insure" their health and long-term care needs in retirement years.

Moon says that those in their mid-to-late 60s buy combination coverage. Typically the product is permanent life insurance with an optional long-term care rider.

Jesse Slome, director of the American Association for Long-Term Care Insurance, says that some policies will provide multiple long-term care benefit options. Say your client buys $200,000 of life insurance: They could have access to $400,000 to pay for qualifying long-term care costs. Any portion of the death benefit not used for long-term care may go to client beneficiaries as a death benefit.

Moon, of One America, adds that for a 30% increase in premiums, clients can get a rider on his company’s policy that covers lifetime long-term care coverage, inflation protection, and a return of premium.

A combination annuity-long-term care product is particularly attractive for clients with other savings they can use to fund a policy. It typically costs less than a long-term care standalone policy. Many do 1035 exchanges from existing annuities.

Combination annuity-long-term care policies typically work this way: If long-term care is needed, it is paid first through accelerated benefits, ranging from, say, 1% to 6% of an annuity-long-term care policy’s accumulated value. Once those funds are exhausted, the long-term care insurance coverage kicks in, continuing payments at the same monthly level for a specified period, often 25 to 50 months. If the policyholder never needs to tap the policy for long-term care, he or she still has access to the annuity’s cash.

Premium sales for life insurance and annuity policies combined with long-term care rose nearly 20% over the past year ending July 2012, according to the American Association of Long-term Care Insurance. And the number of covered lives rose 13.5 percent over the same period.

People under age 65 typically are the buyers, it reports, and they typically are paying a single premium of $100,000 for combination coverage.

There is no free lunch with long-term care insurance. Today’s newly issued standalone policies do not offer lifetime coverage. Hybrid policies typically cover someone for just three years to four years. And 96% of the combination life insurance long-term care policies do not offer inflation protection, according to the AALTCI study.

What if a client lives longer than expected and uses up the coverage? You may need to deal with elder law issues involving Medicaid, a public assistance program that pays for long-term care if an individual has some $2,000 or less in assets.

One solution for clients with a modest net worth may be a long-term care partnership program, which is offered by most states, says attorney Robert Carlson, Fairfax, VA.

Partnership programs--between the state and private insurers--are designed to encourage the purchase of long-term care insurance to relieve pressure from Medicaid budgets. The programs exempt assets equal to the client’s long-term care insurance benefit amount from Medicaid spend-down requirements, permitting clients to retain those assets. 

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