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How a Life Insurance Policy Can Provide Certain Benefits of a Long-Term Care Policy

Properly structured life insurance policies can provide many of the benefits of long-term care policies without some of the disadvantages. Many of us in the business have had clients ask our advice on whether they should purchase a long-term care policy. Unfortunately, the answer is rarely clear-cut. There are always tradeoffs.

Purchasing a long-term-care policy is a difficult decision for many clients. The reason for hesitation is not every long-term policy incorporates the certainty of other insurance products, especially life insurance. The ideal LTC policy is both “guaranteed renewable,” and “non-cancellable,” but not every company offers this type of policy.

If an LTC policy is “guaranteed renewable” and is “non-cancellable,” the policy must be renewed even if the health of the insured has deteriorated. Further, the policy cannot be canceled, premiums cannot be increased, and benefits cannot be reduced. Since this is the best of all possible worlds, policies with these features have the highest premiums.

If a policy is only “guaranteed renewable,” the policy will remain in force as long as the insured pays premiums as set by the carrier. These premiums can be raised. If the insured can no longer pay, he or she will usually lose all the money they have paid in because few policies provide for cash value accumulation. As an alternative, some companies may allow the insured to keep the policy in force by reducing the benefits to match the original premium.

Insurance carriers can and do raise rates on entire classes of long-term care policyholders based upon age bands, i.e., males 70- 74. If the insurance company begins to lose money on a specific class, such as seventy-year-old males, then the premiums will be raised for that entire class. The company cannot single out one person in a class and raise their premium. It’s all or none. With a guaranteed renewable policy, as long as you continue to pay your premium, the insurance carrier can’t end your coverage.

Long-term care policies and the longevity revolution have collided. As a supplement or alternative to a LTC policy, you might consider a life insurance policy which has a long-term care rider. But employ caveat emptor (buyer beware) as your guiding principle as you traverse this field because the policy definitions on the same type of insurance differ by company. You’ve heard the expression “the devil is in the details,” but when it comes to purchasing an LTC rider or anything associated with insurance, remember the devil is in the details of the policy definitions.

Pay close attention to what events trigger benefit coverage under an LTC rider. Insurance carriers measure impairment by your ability to perform “Activities of Daily Living.” These include feeding yourself, walking unaided, dressing, cooking, and performing several activities associated with personal hygiene. If you are unable to perform two of the six “Activities of Daily Living,” that will usually trigger benefit payments. But some insurance companies require you to be unable to perform three of the activities before benefits begin.  

Cognitive impairment can also be covered, but you must ensure that provision is in the rider. Another issue is this classic pitfall from the website of the AARP:

Pay close attention to what the policy uses as a trigger for paying benefits if you develop a cognitive impairment, such as Alzheimer's disease. This is because a person with Alzheimer's may be physically able to perform activities but is no longer capable of doing them without help. Mental-function tests are commonly substituted as benefit triggers for cognitive impairments.

You should note how this one small detail could have a serious impact on your coverage.

 

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Resources:

https://www.aarp.org/health/health-insurance/info-06-2012/understanding-long-term-care-insurance.html

 

Contributing Writer: Subject Matter Expert Charles McCain