The two ways to buy LTCi are as stand-alone (ongoing premium) policies or as riders to life or annuity policies. Many new policies have this feature integrated into the policy. However, these “combo” or rider policies reduce death or annuity benefits when you withdraw money or use the LTCi benefit.
Many people will want to separate these, but separate policies costs much more than “double duty” policies. The smartest buy is usually a large “pooled” benefit accessible by either or both spouses.
For the rider or combo version, the death benefit can be accessed (reduced dollar for dollar) if you need to pay for LTC expenses and the internal policy expenses are waived while you are on claim; the policy benefits may reach near-exhaustion, but the policy will be guaranteed against lapse (unless you exhaust it via non-LTC withdrawals).
Taking this money for LTC expenses is tax-free, even though you will have experienced far more benefit than premiums paid. The cost for this rider is, depending upon the carrier, free or very inexpensive. This is because the carrier will pay out the same dollars for death as for LTC expenses, and so only the time value of money (paying LTC benefits sooner than death) is its concern. The obvious drawback, then, is that the death benefit will be drawn down and not (or less) available for whatever purpose you had for a death benefit. If your original purpose was to create an income stream, remember that death benefit and stream with diminish as LTC benefits get paid out.
Further, the cash value decreases in proportion to the LTC benefit taken from the death benefit. In effect, you are partially self-insuring for LTC. Three factors combine to make this rider or configuration a very cost-efficient strategy: Partial self-insurance, the fact that you pay for one policy rather than one LTC plus one life policy, and the tax benefit.
It is important here to clarify the difference between DI, LTC, and Medicare or health insurance.
As noted earlier, DI replaces lost income; it’s for workers who need to pay bills when disabled.
Health insurance helps pay (directly to providers, usually) for acute care aimed at recovery or managing symptoms during illness.
Medicare is a type of health insurance, as is Medicare supplemental.
None of these pay for or reimburse chronic care situations: assistance in performing activities of daily living (ADLs—eating, bathing, dressing, toileting, maintaining continence, transferring from home to a vehicle), with short-term and minor exceptions in the case of Medicare.
Chronic care situations require at-home, community-based, or institutionalized custodial care and assistance with ADLs.
Nursing and custodial care that is under the supervision of a doctor is not paid by health insurance when that care is chronic rather than diminishing due to recovery. LTC can be obtained to meet this need. This coverage can help a spouse avoid indigence while the affected spouse qualifies for Medicaid.
The cost of custodial care can potentially ruin a family’s finances. Carriers must offer inflation protection with these policies, since the cost of this care tends to rise faster than health care. These policies come in stand-alone LTC versions that themselves have two possible structures: Either two spouses share one pool of benefits until it is depleted, or two individual policies can be obtained, usually at a discount for dual spousal coverage rather than one.
The trigger for benefits is the single most important aspect of these policies, and of the hybrid coverages that include LTC, inability to perform two of the six ADLs is the best trigger. The prescription to be confined at a nursing facility is the other. Obviously, the latter is more restrictive, since care can be at home and a doctor will not confine a patient to facility care if the patient can function at home or in an assisted care community. Some life or annuity hybrids and some stand-alone LTC policies have the more restrictive trigger, and are—in my opinion—financial catastrophes waiting to happen.
One more shopping tip, at the risk of seeming cynical: If an agent characterizes the latter trigger as being essentially the same as the two-ADLs trigger, that agent is attempting to characterize a cheap but unlikely to pay off policy as the more complete type. Do not work with such an agent. There are riders to annuity policies that double the annuity income upon either of the two types of triggers. These riders are currently priced inexpensively and do have value. But they are not LTC, and the income bonus is not tax-free, as LTC benefits are. They are not designed to pay the per-day cost of nursing or custodial care; there are no benefits for respite relief for family member caretakers; they just increase annuity income at a time when that supplement is needed, and have similar triggers for the benefit.
As one ages, it is easy to think that such riders are LTC and so may cause one to skip buying a needed LTC policy; one might even inform family members that LTC is well taken care of when this is not the case. There is nothing wrong with these “income doubler” riders and they are generally great values—as long as clear disclosure is made of benefit trigger and also of whether the rider is actual tax—qualified LTC coverage.
As with DI and medical insurance, a long waiting time for qualifying for benefits cuts the premium tremendously. One can only feel confident in obtaining an LTC policy with a long waiting period, though, if one has added the anticipated cost for that exclusion in one’s cash reserves. Do that, and capture the discount!
Alternatively, never worry about premium increases, and get yourself the single-premium version. The tax benefits are vastly superior to reserving for possible nursing care needs using a CD, savings account, real estate, or ordinary investment.
