Archive for June, 2013

Cheap Long Term Care Protection?

June 30, 2013

Maybe.  Life insurance policy riders that can pay for long term care services are being promoted as an inexpensive alternative to long term care insurance.  How do these riders work?  Can they really cover the long term care risk? 

Note: This discussion does not apply to hybrid life insurance/long term care insurance policies such as PremierCare (by Pacific Life Insurance Co.) & MoneyGuard (by Lincoln National Life  Insurance Co.).  People buy PremierCare & MoneyGuard policies for the greatly expanded long term care benefits.  Not for the limited death benefits.

How the riders work: All of these riders accelerate payment of the death benefit when the long term care benefit requirements are met.  As a consumer, you should know that every insurance provision of every policy has a cost.  These costs must be (and are) passed on to insurance purchasers.  Early payment of a death benefit results in reduced investment earnings.  Of greater significance to insurance companies is the early benefit payout on a predictable number of life insurance policies that would have otherwise been surrendered.  By permitting a payment that may not have been made in the absence of a rider, the insurance company cost is further increased.  Some insurance companies cover additional rider costs by charging an additional premium.  Others claim the rider is “free”, but then discount the total death benefit (amount paid early for long term care).  Example: A $500,000 face amount life insurance policy may only allow acceleration of $300,000 for a long term care need, then retain $50,00 as a subsequent death benefit, for a total of $350,000.  Some companies place a lien on the advanced death benefit with annual interest charged on the lien amount.

Two kinds of life insurance policy riders:

Chronic Illness Riders (the most common): Are generally regulated under the National Association of Insurance Commissioners Model Regulation 620.  The need for long term care assistance must be permanent or irreversable before a claim may be paid.  Contrast this with the need for assistance must be expected to last at least 90 days found in stand-alone long term care insurance policies.  This type of rider is attractive to insurance companies because the probability of paying claims is low, and agents/brokers (collectively known as producers) are not required to have special ongoing long term care training.

True Long Term Care Riders:  Regulated under Internal Revenue Code Section 7702B.  These riders provide benefits that are closer to those of stand-alone long term care insurance policies.  However, there is far less flexibility in tailoring benefits to fit individual needs.  As an example, long term care riders typically offer limited or no inflation protection.  Contrast this with various compound and simple inflation percentages most often allowed by stand-alone policies.  A true long term care rider, although more costly, is never-the-less better than a chronic illness rider 

My concern:  Life insurance with a chronic illness (or long term care) rider provides an “either or” answer to two distinct problems.  It cannot cover both needs.  People buy and keep life insurance policies because they need a death benefit to provide income for loved ones, estate planning, or other business or personal needs.  People buy and keep long term care insurance to provide funds to pay for long term care services, to provide care choices, and to assure that children will not have to provide hands-on care for parents.  Even the most consumer-friendly life insurance riders cannot cover both the need for cash when someone dies, and cash to pay for long term care services.  When a life insurance rider pays a benefit that can be used to pay for long term care services, that policy’s death benefit is necessarily all but eliminated.  If a death benefit is needed, then life insurance should be purchased and retained.  If the means to pay for long term care services (without burdening family, friends, or estate assets) is needed, then long term care insurance should be purchased and retained.

Another concern: Long term care insurance is complicated.  I am fearful that insurance producers who are not knowledgable about long term care will see life insurance riders as an easy way out.  Unfortunately, the thinness of protection (for both life insurance death benefit and long term care) will not be known until benefits are needed…when it is too late.

A final word or two: If you are going to buy life insurance with a rider, make sure you understand the actual benefit amounts that will be payable in various situations.  Your financial planner or insurance producer should be able to clearly explain all the rider provisions (and back up his/her explanation with actual rider language).

Disclaimer: Actual policy language, rather than the contents of this eNewsletter always takes precedence.  Life insurance riders & long term care insurance policies vary widely from company to company & within the same company.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor or attorney for these matters.


© Raymond Smith, The Long Term Care Specialist, 2013