LTC Insurance – Your Options

Concerns about traditional long term care policies have led to the birth of at least two other options.

If you’re shopping around for long term care, there are three options available:

  1. Traditional (stand-alone) long term care
  2. Fixed annuity with LTC benefits
  3. Life insurance policy with a long term care rider

Each option has its advantages and disadvantages, and it helps to understand what each choice might mean for you. This article highlights the main factors and characteristics surrounding each option.

Stand-alone long term care policy

Traditional long term care policies are the most common option and have been around for many years. Some of the key cons with these policies are that they can be expensive, have no cash value, require strict underwriting, and are subject to premium increases. In the eyes of policyholders, perhaps the biggest issue with traditional plans is their ‘premium creep’. People are worried about paying premiums and never needing care, in which case they wouldn’t receive a dime in benefits.

Affordability also happens to be another significant issue when it comes to long term care. If you purchase an LTC policy but just can’t afford it anymore after a couple of years, there’s a high likelihood that you’re going to drop it, essentially losing your money. This is yet another reason why a number of potential traditional LTC clients are going for life insurance with a long term care rider.

Industry experts across the board agree that these objections with stand-alone long term care policies have triggered a proliferation of hybrid life and annuity products with which it now competes.

For clients who’re looking for peace of mind and best possible protection from long term care costs, traditional policies happen to be most advantageous. Think about it this way: by investing small amounts of money to an LTC policy each month/year, you’ll have much more to invest for retirement. You’ll be able to concentrate on retirement finances and income without ever having to worry about long term care costs coming in the way. Since traditional LTC policies are not diluted (where the same policy is used to do more than one thing), they tend to be very useful when it comes to providing a strong reassurance against the potentially devastating cost of long term care services.

Fixed annuity with LTC benefits

A fixed annuity is a CD-like investment vehicle that provides a steady income stream. Currently, given the low-interest rates in the market, fixed annuities are quite a tough sell. However, a lot of risk-averse shoppers are using this as an alternative to traditional long term care policy. An LTC annuity eliminates the ‘use it or lose it’ premium creep that traditional policies come with. They are generally quite less expensive than stand-alone policies.

For most fixed annuities, if you have $110,000, that’s your $110,000 to spend, regardless of whether or not you need LTC. But when you include in the rider for extra 1.5-3% annually, you might easily have double as much to use for long term care. Given that you’ve put in your $110,000 and pay the rider fee for about 7 years, your annuity will have $155,000 to $207,000 that you can for long term care.

Several advantages of the annuity approach include:

  • You retain access to your money (of course, various fees apply)
  • The LTC rider is usually less expensive than a stand-alone LTC policy.
  • You don’t need health underwriting to purchase a fixed annuity. Thus, this option also happens to be very popular with people who have been turned down for a traditional LTC policy.

The major disadvantages are:

  • You have to make a very steep upfront payment/investment
  • The rider fees can significantly eat into the interest income of your annuity
  • You’ll be locking your money at a relatively low-interest rate.

Annuities tend to not be such an excellent idea when interest rates are low. But when interest rates go up, annuities make a lot of sense to a lot of people.

Life insurance + LTC rider

The life insurance + LTC rider approach is pretty much very straightforward. This entails investing in a cash-value policy (whole, universal, or variable universal life) and an additional rider for long-term care coverage. If you end up needing care, your LTC insurance coverage is triggered and comes as your policy’s death benefit. If you don’t ever need LTC, the death benefit will be paid out to your beneficiary. Essentially, this approach offers a balance win-win situation that’s farfetched from the ‘use it or lose it’ approach to traditional policies.

The upside with life insurance and LTC hybrid policies is that it pays either way (whether as a long-term care policy or as a death benefit).

And the downside? Some of these policies tend to be quite expensive, and at the end of it, you’ll just be getting back your own money.