Picture this: On the recommendation of his advisor, a wealthy business owner implements an estate plan that includes a will, durable power of attorney, healthcare proxy and business succession plan. There's also a revocable living trust and beneficiary designations for the retirement plan and life insurance policy, the latter to be used to pay estate taxes and provide for a surviving spouse and children.
To the casual observer, the plan may seem complete. But to the experienced insurance professional, there's one critical component glaringly missing: long term care insurance.
"When it comes to protecting income during one's working years and estate assets in retirement, I'm always shocked at how people overlook purchasing one of the most important insurance policies they will ever need," says Connie Golleher, a principal and chief operating officer of The Holleman Companies, Chevy Chase, Md. "Education about long term coverage is really key."
Geoff George, an LTC specialist at Brookline, Mass.-based NortheastLTC.com, agrees, adding: "There's really only one unprotected risk that could involuntarily wipe out an estate and that is a long term care event. For clients who have assets to protect, LTC insurance is something they should at least investigate so they can make an informed decision."
That decision, observers say, will hinge on answers to several key questions. Among them: Is the client prepared to pay out of pocket to meet LTC needs? If self-insuring is not an option, how much coverage is needed to adequately protect the estate? Does the client intend to bequeath assets to a surviving spouse, adult children or other beneficiaries and, if so, how much? For what policy would the client qualify given his or her age and health status? And what can the client afford to pay?
If coverage is desired but poor health renders the client uninsurable or the policy prohibitively expensive, then other options need to be considered. These include using a reverse mortgage, a special type of home equity loan for persons 62 and older; securing a medically underwritten annuity that pays a greater than normal level of income based on the client's rated age; tapping into a life insurance policy cash value; and, for those who qualify, relying on the federal government's Medicaid program.
Assuming health and age are not at issue and the client has sufficient assets and income to justify LTC insurance, then the question becomes what type of policy is appropriate. Much publicity has been given in recent months to so-called combination products–life policies and annuities that come with a long term care rider attached.
Authorized by the Pension Protection Act of 2006, which will permit the tax-free distribution of LTC insurance benefits from these products starting in 2010, such combo offerings aim to address a common objection to stand-alone LTC insurance: that premiums are wasted if the client never needs LTC. Like all life insurance policies, these policies pay a death benefit to beneficiaries. However, the client can use much of the death benefit to pay for qualifying long-term care costs.
But the combo products typically do not match stand-alone LTC policies in coverage. Assuming the cost of care is $8,000 per month–a not uncommon tab given average annual costs exceeding $100,000 in parts of the U.S.–out-of-pocket expenses can quickly deplete estate assets if the LTC rider covers only half of the outlay. That harsh fact needs to be weighed against the combo product's perceived advantages.
Such a cost-benefit analysis, sources say, might argue for a life/LTC combo for clients with minimal income or assets to spare on a stand-alone LTC policy. But for those whose net worth exceeds $100,000, the case for LTC insurance becomes increasingly compelling. However much clients might dislike the high premiums and the prospect of "losing" their investment if the need for LTC never materializes, the alternative–leaving the estate inadequately protected–outweighs the downside.
The gold standard of LTC insurance is a lifetime or unlimited policy that comes without a dollar limit on benefit payments. For high net worth clients with deep pockets, such a policy may be attractive and well within their means. But the premiums costs, which can be 2 to 3 times greater than a limited-pay policy, will be beyond the reach of less affluent clients. And sources say most policyholders won't need such extensive coverage.
"Yes, there are rare cases of clients who collect $1 million in benefits and require long term care over 20 years," says George. "But most people don't need an unlimited policy. The average stay in a nursing home or assisted living facility is between 2 and 5 years. So a limited policy should suffice."
Too often, sources say, inexperienced or self-serving agents sell the lifetime coverage without justification. Gay Rowan, a certified long-term care specialist and principal of LGR Insurance Group, San Diego, Calif., recounts the time an agent, whose experience was chiefly limited to property and casualty insurance, sold an unlimited policy carrying inflation protection to an 85-year-old client. The premium: $8,000 per year.
"I'm appalled that an agent would sell this kind of coverage," says Rowan. "No one over 60 needs inflation-protection. And to give a man this age unlimited lifetime coverage is totally a misuse of the client's funds."
In all but a few cases, market-watchers add, the client's finances will not justify a particularly expensive option: the return of premium rider. In the event the client does not need LTC during the life of the policy, the rider provides for returning his or her premiums in full. But because of its high cost–the option can increase a policy's premium by 30% or more–George says he never recommends the rider.
