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DESPITE THE NEGATIVE press, long-term-care insurance can be a smart buy. In fact, policies can be affordable for those as old as age 79. But as with any financial product, it’s important to understand what you’re buying—and make sure it fits with your goals.
In my last article, I discussed how much money you might earmark for long-term-care (LTC) costs. Need insurance to hit your goal? Today, the two main products are “traditional policies” and “hybrid life and long-term-care policies.”
Both types of policy offer similar LTC benefits. There are six core activities of daily living, or ADLs: bathing, dressing, using the toilet, transferring (getting around), continence (controlling your bladder) and eating. If you need help with two out of six ADLs, you should qualify to collect on your policy’s LTC benefits, no matter what type of coverage you have. There’s usually a 90-day waiting period before you can start collecting, though some products have no waiting period.
When you purchase an LTC insurance policy, your coverage is defined in terms of a monthly benefit amount and a total benefit amount. For example, you might purchase a policy with a $3,000 monthly benefit and a total benefit of $108,000. This means that you can draw up to $3,000 per month until a total of $108,000 is paid out. Result: The policy would cover you for at least three years.
What if you draw less than $3,000 in any month? The money stays in the pool for you to use later, so you could theoretically stretch out the $108,000 pool over more than three years. Most policies today give you the flexibility to use the funds for a range of services from home health aides to assisted living facilities to nursing homes, so you can customize care to your specific needs.
If traditional and hybrid policies offer these same core benefits, how do they differ? There are four key differences.
Difference No. 1: potential return of your premiums. Most traditional policies don’t return premiums. If you die without needing any or much long-term care, your policy simply lapses and your heirs get nothing.
By contrast, hybrids include a death benefit that returns your premiums, minus any LTC benefits you’ve collected. The upshot: With a hybrid policy, you’re always guaranteed to get at least your premiums back through LTC benefits, a death benefit or some combination of the two. Keep in mind that the death benefit is only a return of your premiums and isn’t meant to provide true life insurance coverage. If life insurance is your primary goal, a hybrid policy is not the right product and, instead, you should consider a standard term or cash-value life insurance policy.
Difference No. 2: premium guarantees. Traditional policies typically don’t have guaranteed premiums, which means insurers can potentially raise prices. We’ve all read stories about policyholders who bought coverage decades ago and are now experiencing large premium increases that force them to reduce or cancel their coverage. Because insurers now have much better data and are more conservative, we’re less likely to see such huge increases on policies sold today. Still, the fact that traditional policies include the right to increase rates is a risk that buyers should keep in mind. Meanwhile, hybrid policies have guaranteed premiums and benefits, so future price increases aren’t a concern.
Difference No. 3: premium payment period. While some traditional policies allow for payments over a limited period, such as 10 years, most involve lifetime payments, whereas hybrid policies are typically paid up in 10 years or less. Concerned about the risk of outliving your savings? Traditional policies with lifetime payments add to that longevity risk, since the longer you live, the more you pay.
Difference No. 4: premiums. Because of the shorter payment period for hybrid policies, coupled with guaranteed rates and the potential return of your premiums, the “headline” monthly premium is often much higher on a hybrid policy than it is with a traditional policy.
Given these differences, it isn’t always obvious which product is the best fit. How do you choose? When I talk to buyers, I offer three tips.
First, when starting out, be open to both types. The relative value of traditional and hybrid policies differs depending on your age, gender and coverage amounts, so it pays to consider both. For example, while you might hate the idea of prices potentially increasing on a traditional product, the initial premium might be so low relative to a hybrid that you’re okay taking that risk. In addition, depending on where you live, there may be tax benefits or a “partnership program” that makes the traditional product even more attractive. On the other hand, I’ve seen situations where the lifetime cost of a traditional policy is very close to the cost of a hybrid, which makes the hybrid policy an easy choice if you can afford the higher early premiums.
Second, look beyond the headline premium numbers, because it won’t tell you which is a better value. Ideally, you want to project total costs and benefits for both types of policy under a range of scenarios. For example, which product is better if you need long-term care in the next 10 years? What if you don’t need care until much later? What if you die without ever needing care?
Find an insurance agent who can help you run this type of analysis, so you can make an informed decision based on multiple scenarios. If the agent is only making recommendations based on headline premiums, you aren’t seeing the full picture. If you’d rather not use an agent, I’ve created a simple Excel spreadsheet that helps me do this comparison. I’m happy to share the spreadsheet with anyone who emails me.
Third, don’t sweat the details. Once you’ve decided how much coverage you want and whether you want to go traditional or hybrid, you’re 90% of the way there. The final step is selecting which insurer to buy from. There will be minor differences in the policies, but don’t let those sway you. If you stick with the largest insurers in the business, their core products are similar. My advice: Just pick the policy that gives you the biggest potential benefit for your premium dollars.
For those interested in learning more about long-term-care insurance and getting some sample pricing, check out the free tool on the website that I help run.
Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for life, disability and long-term-care insurance, as well as income annuities. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles include Don’t Ignore It, Value for Your Cash and Waiting Game. Dennis can be reached via LinkedIn or at dennis@saturdayinsurance.com.
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As an example, here’s how the numbers worked for me: In 2001 TIAA offered an LTC policy (later taken over by MetLife) covering $200/day, $365k lifetime max, with benefits increasing 5% compounded annually, at a fixed annual $2580 premium. Being single and childfree, and aiming to retire in 2021 to a particular CCRC, I bought it for two reasons:
(1) By the time I retired, the total premiums paid so far would be (nominally) offset by the $60k discount on the entry fee at that CCRC. On the other hand, accounting for inflation, the continuing annual premium would feel easier on the wallet.
(2) I knew the power of compounding. Sure enough, the CCRC director evaluating my finances chuckled saying if I ended up using the coverage, I’d be making a profit every day. And if I don’t use it, well, like any catastrophic insurance, that’s good, too.
Do many LTC policies come with lifetime benefits? How about with a five-year elimination period? The ones I read about have like a three-year payment cap. I know the statistics are that most people don’t need LTC for much longer than that, but the risk of being in that few percent that does is precisely why I’d want the insurance, not to pay me for three years and stop.
I’m curious about something. By what measure do you believe that LTC policies won’t continue to face significant premium increases given that by 2030 practically all baby boomers will be at or over 65(estimated to be about 20% of the population at that time)? You can check the Census Bureau to check this fact. States like NY often moderate these increases. However, I have seen high double digit premium increases for a number of insurers as recently as a year ago for a variety of companies that I investigated with the NYS insurance guarantee association that regulates these companies. Also, isn’t it very important to pick a very highly rated company? While the insured is usually protected up to $300,000 in benefits if the insurer goes bankrupt, it is better to pick the strongest company so that it is much less likely to go bankrupt and also is likely to report lower future premium increases because of an insurer’s better financial position.
Only about 8 million Americans have LTC insurance and about half of them are in their 50s or older. It’s just a tough sell to get people into LTC. I tried offering group LTC many years ago, but hardly anyone signed up out of 10,000 employees.
In addition to the 6 activities of daily living if there is cognitive impairment that alone is a qualifier. Another benefit of hybrid policies is that they can be of unlimited duration so that the long ‘tail risk” can be covered. Unfortunately the sordid LTC pricing history has soured too many potential buyers so that there is distrust of both traditional and hybrid products. If I hadn’t researched hybrid products myself for over a year I doubt I would have trusted someone else’s presentation!
I seem to remember 3 groupings for the discussion of how to handle old-age health concerns and LTC (Edit: The numbers below are placeholders, I don’t remember the exact ranges quoted but tried to get the magnitude about right):
1. People who will be living of SS plus maybe a pension or small savings. These are people best served by gov’t programs, as they really don’t have the resources to purchase LTC in general.
2. People with savings between maybe $500K and $1M. This group
may benefit from LTC (assuming the policies last and act as
purported)
3. People with savings over $1.5M, who likely should self-insure.
There are gaps between the groups, which allows a lot of room for personal circumstance, and on top of that I am sure there are caveats, exceptions, and clarifications, but I’m curious if this jives with your experience?
Fortunately the Rate Stability Regulation now in effect in 41 states helps protects consumers who buy long-term care insurance today.