An Answer to Today’s Long-Term Care Crisis

The cost of long-term care insurance (LTCI) is moving relentlessly higher. But the good news is the cost has declined for some LTCI policies with attractive features.

LTCI has been on a wild ride for almost 20 years. After the financial crisis, many issuers of traditional LTCI left the market. Others stopped issuing new policies and raised premiums substantially on existing policies.

But sales surged of a different type of LTCI, known as hybrid, asset-based, or leveraged care insurance, among other names, because consumers find them more attractive.

There’s no use-it-or-lose-it aspect to the hybrid policies. If you don’t need LTC during your lifetime, or need only minimal care, some tax-free money is paid to your beneficiaries.

Many of these policies now have a return-of-premium feature that refunds to your beneficiary 100% of your deposit minus any benefit payments you received or withdrawals you made. No interest is paid on the return of premium.

Many hybrid policies can be liquidated without penalty after a period of years, though you’ll give up the LTC coverage. Generally, you can liquidate the policies earlier, though you’ll pay a penalty.

The premiums on hybrid policies are fixed. You won’t be hit with premium increases after a few years. Under some hybrid policies, the LTC benefits can increase over time without additional premiums or deposits.

The better hybrid LTCI policies are indemnity policies, which provide you with a great deal of flexibility.

Traditional LTCI and many hybrid policies are reimbursement policies. When you receive care, you or the provider submits invoices to the insurer. The insurer reviews them, decides which items are covered, and either pays the provider directly or reimburses you.

Under an indemnity policy, after you qualify for benefits, the insurer sends you a check for a fixed amount each month, with no restrictions on what you do with the money.

You can enter a long-term care residence and use the benefits to pay for care. Or you can choose to receive care at home. You can pay family members to provide care, without their having to be licensed.

If the benefit payment exceeds what you pay for care, you can spend the rest, put it aside for the future, or make gifts to others.

Use of the money is at your discretion. Under most policies, the benefit payments are tax free.

As with traditional LTCI, hybrid policy benefits are payable when you need help with two of the six activities of daily living or are cognitively impaired.

Your need for LTC is certified by a licensed medical professional, usually a doctor or nurse. Some insurers accept certification by your medical professional, though others require a personal or telephone review by one of their professionals.

A hybrid policy has either an annuity or permanent life insurance policy as its foundation. But LTC benefits on top of the foundation are the key feature.

Maximum LTC benefits under hybrid policies generally are three to 10 times the premiums you deposit. The exact LTC benefit depends on the type of policy you buy, the details of your coverage (such as the rate of any annual benefit growth also known as inflation protection) and how much time passes between when you bought the policy and benefits are claimed.

A hybrid LTC policy is a good way to leverage money that you already set aside to pay for LTC out of your pocket or are investing conservatively.

Under a hybrid policy with indemnity benefits, when you qualify for LTC, you’ll receive a stated amount per month for a stated number of months. You’ll know the minimum monthly benefit amount when you take out the policy.

For example, suppose Max Profits is 60 years old and relatively healthy. He deposits $100,000 in a permanent life insurance policy that will pay LTC benefits for up to 72 months, has a return of premium feature and has the LTC benefits increase by 3% compounded annually.

Such a policy recently available from one insurer initially would pay Max $7,024 per month when he needs LTC, for a maximum benefit after 72 months of $545,196.

If Max doesn’t need LTC until 10 years after acquiring the policy, his monthly benefit payment would be $9,165. If benefits aren’t claimed until age 80, Max’s monthly benefit would be $12,686.

The amount of the initial benefits depends on the insured’s age, health, the policy purchased and the policy terms selected. Benefits after that can vary with the length of time between when a policy is purchased and LTC benefits are claimed.

You select the benefit period, up to a maximum of 96 months. The most frequent choice is 72 months. There’s a 90-day waiting period before benefit payments begin, which means you have to cover the first 90 days of LTC.

You also select the growth, or inflation, factor. In most policies you can select 0%, 3%, or 5% growth, and the growth can be either simple or compounded.

If you need few or no benefits during your lifetime, after you pass away your beneficiary will receive a payment.

When permanent life insurance, instead of an annuity, is the foundation of the policy, the benefits paid to a beneficiary can be higher than the initial deposit and won’t decline over time, except for any LTC claims you are paid.

With an annuity policy, the beneficiary usually will receive the initial deposit, plus interest earned over the years, minus any benefits paid.

The original hybrid policies required all premiums to be paid in one lump sum deposit. But many people find it financially or mentally difficult to deposit that much money at one time.

Or if the money needed is in a traditional IRA or 401(k), withdrawing the lump sum in one year would trigger significant taxes.

That’s why some hybrid policies now allow annual premiums to be paid over 1, 5, 7, 10, or 15 years instead of a lump sum. You’ll pay less in total if you make a lump sum deposit, because interest effectively is charged on premiums paid over time. But the additional money should be recovered in either LTC benefits paid to you or a return of premium to your heirs.

Another improvement is some policies don’t require an interview before a policy is issued.

One policy favored by my LTCI experts, David Phillips and Todd Phillips, now requires only an online application for those who are age 66 or younger and are healthy.

Those over age 66 usually answer medical questions and take a cognitive impairment test over the telephone.

The hybrid policies generally are restricted to those age 75 or younger, though there are alternative policies available to older applicants.

I’ve saved the best change for last.

One of the top issuers of hybrid policies recently reduced its premiums so that in most age groups premiums are 10% lower than for its competitors.

For more details about LTC insurance, contact David Phillips or Todd Phillips at Phillips Financial Services at 888-892-1102. Or visit their website www.epmez.com for details about their new report, “The Return of Premium LTC.”