Long term care riders vs. long term care policies -- which is best?
By Adam Stohlman
Stohlman Financial Services, LLC
The necessity for some form of long term care protection as we get older is not, or should not be, in dispute. People are living longer, and the statistics for both the likelihood of needing LTC at some point, as well as the duration of care and cost of care continue to increase. With the proliferation of alternative forms of LTC in the past decade or so, however, some may be wondering whether covering the potential need for long term care is most effectively handled via LTC riders on life insurance or annuity contracts, or via stand-alone LTC policies.
First, let's clarify our terms. An LTC rider is a provision that can be added to a cash value life insurance policy (though there is now at least one product on the market, and perhaps more than one, that actually offers an LTC rider on term life) or to an annuity contract to provide coverage for long term care that would otherwise not be covered in the primary contract. In addition, an extension of benefits rider often can be added to the basic LTC rider to provide coverage for a period of time, even after the life specified amount or annuity contract value has been depleted. The LTC benefit amount is based upon and determined by the primary contract specified amount or value at the time the LTC need arises.
A traditional LTC policy, or what has become more commonly referred to as a "stand-alone" LTC policy, is a policy designed solely and specifically to provide comprehensive coverage for costs associated with long term care, and that provides a pre-determined benefit amount for a pre-determined period of time, as chosen by the applicant insured. Coverage is generally triggered when the insured can no longer perform a given number of "activities of daily living" (ADL's) unassisted, are determined by testing to have reached a stated level of mental or cognitive impairment, or de facto, if they are suddenly forced into a nursing home or assisted care situation by illness or accident.
For many reasons, LTC riders have become increasingly popular over time. Typically, those looked upon by the public as "investment gurus" have denigrated traditional LTC policies as a waste of investment resources -- particularly if a long term care need never arises -- due to their desire to bring as many of their clients' dollars as possible into their investment portfolios, rather than see their clients spend those dollars on guaranteed insurance protection. Also, clients' natural, persistent denial of their own morbidity and the real possibility of a long term care need striking at some point, and their consequent delay in addressing the issue until stand-alone LTC premiums become prohibitive for some, have also been contributing factors. The failure of the insurance industry itself to "stick to its guns", in promoting the need for and virtues of comprehensive, stand-alone LTC policies is still another reason, although the industry would surely retort that it is just responding to marketplace demand. Another key is that adding an LTC rider is usually no- or low-cost, due to the fact that the insurer is simply paying out the life policy's proceeds before death, versus actually increasing the specified amount. In the end, the fact is that demand for easier, less expensive ways to address the potential need for long term care has arisen and grown over the past several years, and thus, life and annuity riders have proliferated.
On the other side of the question, traditional stand-alone LTC policies have grown more flexible and added more and varied provisions, such as benefit banks versus set benefit amounts for set periods of time, or even offering return of premium features. Some policies today may also have broader and more easily triggered ADLs. These changes have been the result of not only more accrued experience and underwriting history for these products in the industry, but also market demand and the competitive pressures brought by the LTC rider phenomenon. The core function and purpose of stand-alone LTC has remained, however, and that is to provide a comprehensive policy designed solely and specifically to cover costs associated with LTC needs, whether in an actual nursing home facility, in the home, in an assisted living or adult daycare facility, etc.
So, which is better? Which makes the most sense to offer to clients -- an LTC rider or an LTC policy? As always, the answer depends upon the client and their needs, means, and preferences, as well as their age and health. However, when considering LTC riders, there are some important points to consider in counseling clients regarding this vital planning question.
In regard to life insurance LTC riders, make sure to review the features, benefits and premiums offered, such as whether the rider pays in a reimbursement or first dollar basis, whether it pays the insured directly, as most do, or actually pays only to the facility providing care, etc. Also, the rider normally allows the policyholder to utilize some or all of the policy's specified amount, or death benefit, for long term care costs, either for a period of time or until the available coverage amount has been exhausted, under stated terms -- usually 2 percent or 3 percent of the specified amount per month. Make sure you are clear on how much the rider will pay, how, to whom and when. Again, premiums are often not the critical issue.
Evaluate the cost of adding an extension of a benefits rider, relative to your client's budget and long term care needs. With this rider added to the LTC rider, the policy will continue to pay long term care expenses even after the policy-specified amount or death benefit is exhausted. The actual amount the EOB rider will pay, -- as well as the duration -- should be clearly spelled out. In contrast to the LTC rider, the EOB rider will always be an additional cost, so make sure to check the costs versus benefits as well as versus a stand-alone LTC policy. Not to mention that, with both of these riders, you'll want to make sure that the client's needs for LTC protection will be met, under the terms offered, for a considerable period of time, if not until death. It's crucial to ensure that the primary policy's specified amount is sufficient to accomplish this goal. It should also be noted that one advantage to an LTC rider on an annuity is that there is usually no underwriting required, which is a great advantage to a client with a pre-existing health issue or who cannot qualify by health for life or LTC coverage.
Finally, it is essential to make certain your client understands that any pay-outs made for LTC under the rider(s) is deducted from the specified amount (and sometimes the cash-value amount as well) of the life insurance policy. At their death, the amount paid to their beneficiaries will be reduced by the amount that the policy has already paid out for long term care expenses under the rider(s). Also, there may be tax consequences in some states, which must also be considered.
As we've alluded to, although costs are often much less, there are drawbacks to relying upon LTC riders to meet LTC needs versus traditional, or "stand-alone" LTC policies. One, the life insurance death benefit is decreased by the amount actually spent on long term care, so anything left to beneficiaries will be reduced, and in fact, depending upon the primary policy and rider, the entire death benefit may be depleted in the event of an LTC need, leaving nothing to heirs. Two, under many LTC riders, the insurer pays only the actual charges for long term care expenses as they are incurred, meaning there is no set benefit amount that can be depended upon, and that the client's control over care is not maximized, as it is in an LTC policy that pays a full, pre-determined benefit amount directly to the policyholder. Three, as we've also mentioned, LTC riders usually have a cap on the amount paid per day or per month, meaning that the policy does not pay more than a certain percentage of the specified amount -- again, usually based upon 2 percent or 3 percent on a monthly basis, versus the set benefit amount paid in full, as chosen by the insured under a traditional LTC policy. This may mean maximum LTC benefits are not adequate, and again requires that great consideration be given to choosing a specified amount on the primary policy to account as fully as possible for potential LTC needs in the present and the future.
In regard to LTC policies, there are a number of factors to examine. The type of coverage is key. Will the policy only cover nursing home care, or also home care? Assisted living? Adult day care? Community care? Choosing what coverage the client wants to receive will greatly impact not only the care choices they will have should an LTC need arise, but also the cost of the policy.
ADLs and coverage triggers are also key. How many ADLs are there? Are they all reasonable? How many must the insured be unable to perform unassisted before the elimination period begins and benefits are paid? What is the coverage trigger for mental or cognitive impairments? How are those tested? Who evaluates the test results? Are there methods for redress and reconsideration if the insured or their representative dispute the claims decision of the carrier? These are all issues that should be spelled out in the LTC contract, and that should be fair to the insured.
How the LTC policy actually pays policy benefits is also central. Will it pay the insured the full benefit directly or will it only pay the facility providing care? Will it pay the full benefit upon services rendered or on a reimbursement basis? How long will the policy pay? These questions go to the heart of whether the insured will control their own care, and to what degree. If the insured is paid directly, in full, for the period of time they have chosen in the policy application, then they will have the most possible control over their own care for that period of time.
These considerations, along with handling of pre-existing conditions, waiver of premium, rate increases, inflation protection riders, non-forfeiture provisions, exclusions, etc., are all critical to determining which LTC policy may be best for your client.
As insurance and investment advisors, we must always take seriously our responsibility to protect our clients, act in their best interests, and not be tempted by the easy sale. Taking the time to examine the issues and the differences involved in choosing LTC riders versus LTC policies is essential to helping our clients provide for their potential long term care needs.
Copyright 2009 by Adam Stohlman. All rights reserved.
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