When Richard Becker and his wife, Flora, now both 68, purchased long-term care insurance in 1997, he thought of his father who died at 94 in an assisted living facility without benefit of such coverage. But as rates for the Pennsylvania retirees' policies soared -- doubling in seven years -- the couple calculated the cost of payments over the coming decades, then weighed their chances of ever collecting. "We dropped it," Becker says. This was not before they had paid in about $30,000. "It's goodbye to that," he says.
Such stories, and the 30% drop in sales of new long-term care insurance policies last year, have led more insurers to offer a new product: a life insurance policy with an "accelerated benefits rider" that promises to pay out all or part of the death benefit should the policyholder need it for long-term care. Depending on its terms, a $500,000 life insurance policy might pay from $200,000 to $500,000 -- or even $1 million -- toward the costs of a nursing home, as well as, perhaps, in-home care and assisted living. That amount (plus, in some policies, interest) is later deducted from the death benefit that goes to beneficiaries when the policyholder dies. This combined approach attempts to offer something more to people like the Beckers. "One of the main reasons people don't buy long-term care insurance is they think, 'What if I pay for all this insurance and never use it?"' says Robert Davis, president of Long-Term Care Quote, which sells such coverage.
Among the companies selling the long-term care add-on are National Life Insurance, John Hancock, (MFC) and Columbus Life Insurance. The feature is typically offered in conjunction with whole or universal life policies, which are more expensive than term life since they act as savings or investment vehicles -- building up cash values -- as well as life insurance. Some variable universal and term policies may offer LTC riders as well.
Those who simply want the most coverage for the lowest price will do better buying a basic term life policy for the years they need life insurance (often just until their children are grown), then adding a long-term care policy as they approach middle age. The total annual cost for both products could be half the price of a whole or universal life policy with the rider. Shopping for separate policies might be easier than evaluating life insurance tied to long-term care coverage tied to an investment. And you will likely have more coverage options if you choose a standalone long-term care plan.
Combining the care with the death benefit in a whole or universal policy costs more, but there is a payoff either way. If you go into a nursing home, you collect. If you don't need that care, there's still cash for your heirs. Plus, whole and universal policies often establish a premium guaranteed to at least maintain the basic benefit, although it may not be enough to build cash value. That eliminates the scourge of ever-rising rates on long-term care insurance that prompted the Beckers to drop their coverage.
Those who want the lifelong coverage and investment features of a whole or universal policy may find that the long-term care benefit adds little extra cost. John Hancock, one of the largest sellers of long-term care insurance, charges a healthy 50-year-old man buying a $500,000 universal life policy only $333 a year more for the rider. In return, the buyer gets up to $10,000 a month in long-term care benefits until the death benefit runs out. But shop around. Prices and terms vary widely.
If you have accumulated cash value in a life insurance policy but no longer need the coverage, you might consider trading it in for a new one with the LTC rider. You can do that through a tax-free swap. If you merely cash in the old policy, you may be liable for taxes on the investment gains. Those with a chunk of money tucked away in a conservative investment vehicle might also want to consider rolling it into one of these policies. That way, you gain both life and long-term care coverage as your money grows.
There are other ways to use blended policies. Wilma Anderson, an investment adviser with Woodbury Financial Services (HIG) in St. Paul, Minn., tells of a couple where the wife suffered from multiple sclerosis and found it tough to qualify for long-term care coverage. Anderson sold them a "second-to-die" universal life policy from Columbus Life. Although such a policy doesn't pay until the death of the second insured person, it provides long-term care to the surviving spouse. An unhealthy spouse will have an easier time getting life insurance coverage under such a policy and won't have to qualify for long-term care, because Columbus Life automatically adds an accelerated benefits rider that pays should the surviving spouse need nursing home care.
If you decide to buy a life policy with the rider, examine the long-term care benefits carefully. Does the policy pay for in-home care, assisted living, and adult day care as well as for a nursing home stay? How is the amount of coverage calculated? Some insurance companies simply pay a percentage of the death benefit -- usually 40% to 60%. Others pay 2% or 4% of the death benefit monthly. Check if inflation protection is available, and whether any benefit will remain if the LTC rider is used. Also ask under what conditions premiums could increase, and whether there's a premium that guarantees benefits. Be sure that the policy is "tax-qualified," which means long-term care benefits won't be taxed as income, and the policy conforms to federal regulations.
Finally, make sure the company you're buying from is highly rated by A.M. Best, Fitch (FIM), Moody's (MCO), or Standard & Poor's (HP). The last thing you need is for your insurer to become terminally ill.
By Carol Marie Cropper