Living and dying with dignity: The right combination of life, LTC and critical illness
By Jeff Reed
Kestler Financial Group
We have discussed the merits of long-term care and chronic illness riders in this forum on more than one occasion, always in an effort to understand the nuances that differentiate one offering from another. The hope, of course, is that there is a clear winner.
The reality, unfortunately, is much more complicated.
Consider some of the elements that we have discussed previously:
- The potential challenges presented by the need for any claims under a chronic or critical illness rider to be based on a "permanent" impairment.
- The specter of future premium increases in traditional long-term care insurance policies.
- The challenge presented by asset-based, single-pay contracts that may be out of reach for some clients without significant liquid assets.
- The uncertainty at claim time based on mortality discount factors that accompany some chronic and critical illness contracts.
- In the U.S., approximately 78 percent of care is provided by family members.
- These family members are not compensated and do not generate any billable expenses. Under a reimbursement contract that is a big problem, and most LTC coverage is reimbursement coverage. No expenses means no receipts to submit and no benefits paid, or at least a reduced benefit by the insurance company based on documentable expenses.
Confused yet? Solving the riddle
In review, in a perfect world, we would want coverage that has the following characteristics:
1. No waiting or elimination period.
2. Pays under either a permanent or temporary condition.
3. Uses both an indemnity and reimbursement benefit structure.
4. Has a guaranteed benefit amount, defined at the time of policy issue.
5. Has a flexible, guaranteed premium structure.
6. Keeps pace with inflation.
That product, unfortunately, does not exist. What does exist, however, is a carefully selected combination of products that may satisfy the majority of our objectives. Consider the following.
Plan 1: Traditional LTC coverage
Fails the guaranteed premium test.
Plan 2: True LTC rider
May fail the indemnity/reimbursement test; fails the inflation test.
Plan 3: Chronic/critical illness rider
Fails the waiting/elimination period test; fails the inflation test.
Plan 4: Asset-based coverage
May fail various tests, depending on the specific contract, including indemnity/reimbursement test, waiting/elimination period test.
Plan 5: Asset-based coverage combined with a chronic/critical rider
- Passes the first test if using certain products as the asset-based component.
- Passes the second test based on use of two contracts, one using each definition.
- Passes the third test, although there may be a waiting/elimination period involved with an indemnity claim under the chronic illness rider.
- Passes fourth test for a portion of the benefits based on asset-based LTC contract.
- Passes the fifth test if using an asset-based solution that offers flexible premiums.
- Passes the sixth and final test if inflation protection is included on the asset-based product.
Based on my hypothesis that the combination strategy is the best option from a risk management standpoint, I turned my attention to how to fund the strategy, using four different approaches:
- Single pay for both an asset-based LTC contract and NLG contract with CCR
- Single pay asset-based LTC contract, combined with a level pay NLG contract with CCR
- Ten pay for both an asset-based LTC contract and NLG contract with CCR
- Ten pay for asset-based LTC contract, combined with a level pay NLG contract with CCR
The story is even more compelling if we push out 20 years, as the impact of the inflation adjustment begins to take hold:
It’s important to note that the economics of these plans, relative to the LTC rider options, as well as traditional LTC, are vastly superior, with total benefit pools far in excess of what is attainable for a similar outlay. Of course, these two stand-alone solutions fail any number of the tests we established, so even if the economics are similar, the increased flexibility of coverage provided tips the scale in favor of a combination strategy.