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Insurance Matters: Shopping For Long-Term-Care Insurance

Rates are rising, but there are ways to find good deals for your clients.

With baby boomers hitting retirement and living longer lives, and with the costs of long-term-care insurance going up, it's becoming increasingly crucial for financial advisors to shop around for good long-term-care policies for clients. Jonathan Sard, a licensed broker, CFP and insurance agent with Sard Wealth Management Group in Atlanta — who recommends long-term-care for those with investable assets of $250,000 to $5 million — suggests checking the policies of at least three or four companies per client. “One may be good for one client from a cost standpoint and not quite as favorable for another,” he says.

Long-term-care coverage typically kicks in when a client is unable to perform basic functions like eating, dressing or bathing. It often includes coverage for (at least) assisted living, home health care and nursing homes. Nursing homes today run $68,255 a year, or $187 a day for a semi-private room, according to the U.S. Department of Health and Human Services. The cost of an assisted living facility runs $36,096 a year, or $3,008 monthly; a home health aide costs $29 an hour.

Policy costs rose about 4 percent in 2007 over the prior year to an average of $709 per year for a married 55-year-old, according to the American Association of Long Term Care Insurance (ALTCI). That's based on $115,000 in benefits with at least three years of coverage and an annual 5-percent compound inflation option. This is due, in part, to a long stretch of historically low interest rates, which have severely depressed insurance companies' returns on reserves. It's also related to general increases in health care costs, as well as to the fact that as our society ages, more Americans will presumably need to cash in on their long-term-care benefits.

But for existing long-term-care policyholders, some relief from major cost hikes may be on the way. A June U.S. Government Accountability Office study noted that since the year 2000, more than half of states nationwide have adopted new rate-setting standards aimed at enhancing rate stability for long-term-care insurance. Whether a client will experience a rate increase once he or she has taken out a policy depends largely on when the policy was purchased, which state is reviewing the proposed increases and the insurance company selected, according to the GAO study, which involved an in-depth review of 10 states.

Despite the rate increases, there are numerous ways to make long-term-care coverage more attractive — even for well-heeled clients. Sard, for example, typically avoids costly new riders like the so-called “return-of-premium” rider, which basically allows the owner's beneficiary to collect the full premium if the owner dies prior to the age of 65. Sard estimates that this feature raises premiums by 5 percent to 10 percent. “You'd be better off saving that money on the premium and investing it yourself,” he says.

Meanwhile, discounts are generally available to younger clients in good health, as well as for those who are married. Lower rates can also be obtained via selection of shorter benefit periods and longer elimination periods. Exclusions are also important to monitor.

Daniel S. Mensh, an independent insurance agent and owner of Mensh Insurance in Winston-Salem, N.C., easily allays one chief concern over long-term-care insurance rate increases to existing policyholders. You can avert those entirely through an accelerated premium structure. Clients pay about double the cost of an annual level pay policy, but at the end of 10 years, there are no more premiums to pay, he says. This eliminates any chance of a rate increase going forward. For slightly lower premium payments, he says, he can also create a 15-year payment structure.

Advisors with clients who own a business or a partnership should also be aware that long-term-care insurance premiums paid on behalf of an employee are tax-deductible. While federal ERISA laws generally prohibit employee benefits from applying to select employees, these laws do not apply to long-term-care insurance. As a result, a business owner may be able to “carve out” certain key executives or employees and their spouses for a long-term-care insurance benefit. Not only is there a tax-deduction for the contribution, but the employee may also access benefits tax-free.

Beyond Cost

Meanwhile, insurers are unveiling “life stage” products. These qualify a client for insurance health-wise, but let them change policy terms without additional health underwriting as budgets and needs change. MetLife's LTC LifeStage Advantage, for example, lets the insured purchase up to double the original total benefit amount and monthly benefit amount every three years up to age 75 — with no additional underwriting.

Sharon Luker, a certified financial planner and president of LTC Planning Consultants in Plano, Texas, warns that getting the insurance for clients when they are young is critical. She says she was recently stunned when a 58-year-old client was rejected for coverage. She had thought the client would be a shoe-in because she had recovered as long as 15 years ago from cancer. But the carrier's underwriting criteria happened to reject stem cell transplants, which her client had received during treatment. “There's an instance in which I thought I had done my homework,” Luker lamented.

But once she knows the exact reason for the rejection, Luker says she typically can find another insurer. Jesse Slome, executive director of the American Association for Long Term Care Insurance, Los Angeles notes that if advisors are having trouble getting a client insured due to a health issue, Penn Treaty, a company in Allentown, Pa., specializes in difficult cases and might be worth turning to.

Indeed, it can help to work with a long-term-care specialist. Luker says sometimes there are deals available from the insurance companies that only the specialists know about, as insurance companies introduce new policies periodically. While competitors might have moved on to a new policy with a higher pricing structure, it's often possible to find one that has not yet revised pricing for “the cheapest deal of the hour.”

Long-term-care insurance has become particularly friendly to the gay and lesbian community, Luker says. While most states don't acknowledge gay and lesbian marriages, “A gay couple living together can get the same discounts with a lot of carriers.” Luker says she has been able to work with tight budgets by using such features as “shared care,” which lets a couple pool their benefits. With “survivorship,” if you hold the policy for, say, 10 years, and one spouse dies, the other partner's policy is paid for life, she adds.

“You should not be giving a person a policy without inflation protection,” Luker warns. Although some agents might recommend a higher daily benefit in lieu of an inflation rider, she says that typically does not work out. The only exception may be if the client is at least 70 years old. Don't think the client will be paying premiums forever either. With most insurers, once a client is on a claim, he or she needn't pay premiums for life.

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