It is continually reported that 70% of people over age 65 will need long-term care services as they age. Do you or your parents own some form of long-term care insurance coverage? If not, you need to determine if you need this coverage and how best to get at least a minimal amount of coverage. In this post, I will discuss the new combination life insurance policies available that provide life insurance and long-term care coverages in one policy. I will not discuss chronic illness coverages that are also available to keep this post to a reasonable length. Combination policies have been out for over a decade, but consumers are rediscovering them after they looked hard at their coverage needs as a result of the pandemic.
Background
Have you ever thought of who pays for the full cost of care for one of your aging relatives who has a severe illness, must be institutionalized and needs full-time nursing care? These questions were brought home visually as the pandemic spread with images of patients in nursing homes and assisted care facilities dealing with the COVID-19. What chance do you have of needing long-term care coverage?
Genworth Insurance, one of the nation’s leading private long-term care insurers, predicts 7 out of 10 people over age sixty-five will incur long-term-care-related costs in their lifetimes. The key question that arises is how to pay for these costs. This is a shock to those faced with needing long-term care services as most people do not know that Medicare does not cover long-term care needs. If your household has been fortunate to have accumulated meaningful assets, you can protect them from an accelerated spend down that occurs when a long-term care event happens. The costs associated with a long-term event can wreak havoc on an investment portfolio and permanently damage its ability to produce income or leave a legacy.
The life insurance industry has recognized these coverage needs and has created what are called “combination policies” to provide consumers with a more comprehensive solution for their insurance needs. These combination policies are designed to cover the multiple risks of premature death and long-term care events with one insurance policy for a reasonable price. A price that is generally less than paying for separate policies to fully cover each risk.
What's is a Combination Life Insurance Policy?
Combination life insurance, or a hybrid policy, provides long-term care benefits within a life insurance policy. A combination life insurance policy simply adds a long-term care rider or additional benefit to a permanent life insurance plan. There is usually an additional cost for this rider.
You pay a premium for the policy in either in a lump sum or over several years. The long-term care rider is there to help if you need it. The benefit is usually paid as an advance payment of the life insurance policy’s death benefit with the amount paid out in long-term care benefits deducted from the policy’s death benefit. However, the benefit of buying long-term care coverage this way is if you don’t tap into the long-term care benefit offered, your policy will still pay out a death benefit to your beneficiaries. However, if you need long-term care, your policy benefits will kick in to cover these costs. This coverage is generated by the life insurer accelerating payment of your policy’s death benefit and you can use these funds to pay for long-term care – usually tax-free.
To qualify for this benefit, your doctor must diagnose you with cognitive impairment or deem you unable to perform what is normally defined as at least two of the six activities of daily living, which include:
Bathing
Continence (the ability to control bladder and bowel movements)
Getting dressed
Eating
Toileting (getting to and from the toilet)
Transferring (moving to and from a bed or a chair)
Once you're approved for long-term care benefits, the coverage amount you receive is usually a percentage of your overall death benefit, based on what's in your insurance rider. For example, if you have a $200,000 life insurance policy and a rider that designates 3% a month for long-term care costs, your insurance company will pay out $6,000 a month for your long-term care expenses.
Long-term care benefits paid out are subtracted from the life insurance coverage you purchased ($200,000 in our example). Whatever amount is left over will be used to pay a death benefit to your beneficiaries. For example, if you received a full year of benefits, your remaining death benefit that would be paid to your beneficiaries would be $128,000 or $200,000-$72,000. Exact calculation details vary by insurance company.
A Recent Study Shows How Consumers are Responding to Combination Policies
The Life Insurance Marketing and Research Association (LIMRA), a non-profit organization, recently surveyed more than 2,000 Americans to determine if the pandemic has shifted their thoughts about long-term care and insurance. What follows was excerpted from a press release about the survey’s results.
In January 2021, more than a quarter of Americans (26%) said it was very likely they would consider a life combination product (a life insurance policy with a long-term care (LTC) insurance component) if they were shopping for life insurance. Overall, 6 in 10 consumers said it is at least somewhat likely they would consider a life combination product if shopping for life insurance.
While Millennials expressed the most interest in life combination products — 35% said it was extremely likely they would consider life combination products — Baby Boomers are decidedly less enthusiastic. Just 17% say it was extremely likely they would consider these products and nearly a third said it was not likely at all.
“Baby Boomers, who are approaching or in retirement, may not feel the need for life insurance or may mistakenly believe Medicare will cover LTC expenses,” said Karen Terry, LIMRA’s senior research director. “Younger individuals, however, may find life combination products appealing because they mitigate the financial risk of dying unexpectedly and the costs of long-term care.”
The top five reasons people give for considering a combination life insurance product include:
Concern that LTC costs may deplete or exceed my savings – 35%
It is a more economical use of my current assets – 33%
Benefits will be paid even if I don’t incur LTC expenses – 29%
LTC insurance (on its own) is too expensive – 26%
I can't afford two separate (life and LTC) policies – 25%
The study found consumers facing high levels of stress as caregivers for adult relatives and/or children showed the greatest interest in life combination products. More than a third (36%) of caregivers with high stress levels said they were very likely to consider buying a life combination product, compared with just 21% of those who said they had low stress levels.
“These consumers recognize better than anyone the demands of providing care for aging parents or other relatives with declining health,” noted Terry. “Their experiences as caregivers make life combination products, which offer financial protection against their own long-term care needs, that much more attractive.”
Consumers are attracted to life combinations products for several reasons. From a product design standpoint, consumers place the greatest value on having the option to receive care at home or a facility. The study found 6 in 10 consumers would prefer to receive long-term care at home (unconditionally or until they must move to a facility). This preference increases among older consumers.
Summary
Most people do not know that their health insurance policies or Medicare do not cover long-term care needs they may have. If your family has been fortunate to have accumulated some meaningful assets, protect them from an accelerated spend down with some amount of insurance coverage. A long-term care event can wreak havoc on an investment portfolio and permanently damage its ability to produce income or fully pass a legacy as intended. This coverage is something worth looking into as part of your financial plan.
To discover the answers to key questions of buying life insurance and to get more information on the benefits of coverage, check out The FinancialVerse: Today’s Life Insurance — A Protection Tool for Your Future.
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