The New Hybrid Long-Term Care Insurance Policies

by Karl on May 25, 2011[printfriendly]



Only 5% of people ever need long-term care in a nursing home. Over 50% of those age 65 or older will be in a nursing home but only for rehab care which is covered by Medicare. Most people will opt to receive personal or health care services at home. At an average hourly rate of $20 with 24 hours in a day, that comes to $175,000 for 24 hour round-the-clock care at home: very expensive.


In planning for the future cost of long-term care either at home or in a facility, long-term care insurance is a solution. The negatives to traditional policies are:


1. On-going premium payments

2. If you don’t use it, you lose it

3. Difficult to qualify for  

4. Possible premium increases

5. The older you get before purchase, the more expensive the premiums


Additionally, people don’t know how much to buy in benefit and listen to the sales person who makes more commission the higher the premiums are. A usual tactic is to say that the average daily cost is $200 for a facility and the person should buy a $6,000 per month benefit payable for at least five years but lifetime benefits would be better.


The fact of the matter is that an analysis needs to be done to determine if, in a worst case scenario, the policy holder requires care in a facility, will he/she be able to get qualified for Medi-Cal benefits? Almost no insurance agent will be able to answer this question correctly.


Long-term care insurance should be the first line of defense with Medi-Cal being the safety net. This approach will help to keep insurance companies in the market, reduce premiums for the policy holder and save the State of California a lot of money.


Another problem is that many insurance companies have come and gone in the long-term care insurance market place: Travelers, CNA, Conseco, and Penn Treaty to name a few. The latest company to leave the market place is Met Life.  This follows on the heels of a proposed 40% premium increase by John Hancock.


So why are companies getting out of the market or substantially raising premiums? In my opinion, I believe that the answer lies in the numbers. Remember that insurance is based on the company’s ability to predict risk and charge an appropriate premium to make a profit and pay claims. The better the data on the predicting of the risk, the better the actuaries can determine the premiums.


With long-term care, we know that only 5% of the population will ever be in a long-term care facility and the average length of stay is 2.5 years. There is tons of data that tells us this.


But with home care, there is no data so the companies estimate and try to balance ability to sell policies at a marketable premium with unknown risk. Unfortunately they are losing money.


I remember back in the old days, there was no such thing as a comprehensive policy that paid for facility and home care. There used to be facility only policies.


But the consumer yelled and screamed for coverage on the home care side. The companies initially resisted but all it took was one company putting a home care benefit into their policies and all the rest had to do the same or lose market share.


Now with more money going out the back door in claims than is coming in the front in the form of premiums, companies have gone out of business, left the marketplace or have had to raise premiums. My theory is that this is because of the home care benefit.  


Eventually I believe that the traditional long-term care insurance policy will go back to the facility only policies and the public will be left to pay for home care on their own.


Remember that Medicare does not pay for home care. Medi-Cal is also very limited and with the budget deficit that California has, I expect that community based services will be eliminated except for the most needy.


Enter the hybrid long-term care policy. This is a life insurance or annuity policy with a long-term care rider. In the event of a claim, the cash value of the life insurance or annuity is paid out first, then the rider. This puts the initial claims risk on the policy holder because their cash value is used before the insurance company’s rider.


Unlike traditional long-term care insurance, if long-term care is never needed, the cash value will go to the beneficiary. If you don’t use it, you don’t lose it.


In addition, the policies can be surrendered and some companies like Lincoln Financial guarantee that you will never get back less than your original single premium deposit.


Because of the tax benefits of the Pension Protection Act (PPA) of 2006 that went into effect in 2010, funds used from these long-term care annuities are 100% tax free even if it is the interest. Pre PPA interest from annuities that was paid out even if it was used for long-term care expenses was taxable.


But be careful because only certain annuity policies that meet the PPA guidelines have this tax free benefit. You can, however, do a 1035 tax free exchange from a non-compliant annuity to a PPA compliant annuity and the interest will be tax free if used for long-term care expenses.


The advantage of the PPA compliant long-term care annuity versus a life insurance policy with a long-term care rider is that it is the easiest of the three types of policies to qualify for. The maximum issue age is also a lot higher at 85 years old.


My favorite PPA LTC annuity is AnnuityCare from State Life (formerly Golden Rule). My favorite life insurance policy with a LTC rider is Money Guard from Lincoln Financial and for individuals under age 70, John Hancock’s policy is very good.


Remember, do a worse case analysis first to determine if you can qualify for Medi-Cal. If you can, then buy only enough benefit, usually 3-5 years, to help for home care services. This will ensure that you don’t over buy your insurance coverage.



Karl Kim, CFP®, CLTC, is a licensed insurance broker, CA Lic #0810324. He is the President of Retirement Planning Advisors, Inc. located in La Mirada, CA. Karl can be reached at 714-994-0599.


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