Blending life and LTC coverage for optimal results

Mention traditional long-term care insurance (LTCI) to clients and you're likely to encounter a chorus of objections:

"It costs too much."

"I've read that the premiums keep increasing."

"What if I don't use it? That means I've wasted all the premiums."

These can be valid points. But the refusal to hedge against LTC costs still leaves clients exposed to expenses that could ruin their retirement finances.

In response to LTCI objections, some advisors are combining life insurance and LTC policies to achieve the coverage clients need.

That solution appears to be going over well with consumers. LIMRA's 2015 Individual Life Combination Products Annual Review reported that more than 200,000 combination policies sold in 2015, a 37 percent increase over 2014. Chronic illness riders are the more common features, but sales of policies with long-term care acceleration riders also showed strong growth for the year.

William Borton, CLU with W.R. Borton & Associates LLC in Marlton, New Jersey, has found that clients want an ideal policy that doesn't exist. They want leverage, flexibility, guarantees and cash benefits but there is no perfect policy that provides all these features.

A better approach is to pull multiple products together so that their combined benefits come close to the client's ideal, Borton says. The result is a customized coverage solution that he describes as a diversified risk management portfolio.

"We can't customize insurance because it's a filed product," Borton says. "But we can tailor solutions. We take the policy off the rack and then we tailor it so it looks like it's made for you."

Kim Natovitz, CLU, CLTC, and an associate with TriBridge Partners in Bethesda, Maryland, takes a similar approach. She explains to clients that nowadays they can choose from a portfolio of products to address the LTCI and life coverage needs simultaneously.

"We may achieve the right solution for the client by looking at different types of products where we would either claim benefits simultaneously or sequentially," she explains. "While 20 years ago we only had the traditional health insurance model, there are other products and solutions that are available."

Combining LTCI and life insurance provides a tailored solution for each client. (Photo: iStock)

Building a Portfolio

A key factor in Borton's method is recognizing that men and women have different morbidity and mortality profiles. For example, he notes that women outlive men and typically need care for two to two-and-half times longer than men. He cites a hypothetical couple, both in relatively good health, in their mid-fifties to illustrate how he blends the life and LTC coverages.

See also: 9 factors that affect longevity

For the LTCI foundational coverage, Borton recommends traditional individual LTCI policies with shared benefits, a two-year benefit period and a 3 percent compound inflation rider. These features keep the combined annual policy premiums in the $4,000 to $5,000 range for the assumed benefit. The husband supplements that coverage with a hybrid universal life policy with an accelerated death benefit LTC rider. Because hybrid policies lack inflation protection, Borton grosses up the death benefit to cover the projected LTC cost that the client could incur in the future. The wife's life coverage comes from a single-premium life-linked policy with no elimination period or a 90-day elimination period only for facility care. Her policy also includes a return of premium feature.

Borton detailed this approach in an August 2015 article for the Society of Actuaries' Long-Term Care News.

Combining policies this way protects against potential LTC expenses while recognizing gender-based claims differences and attempting to minimize premium outlays. It also addresses the "use-it-or-lose-it" objection to LTCI because the life policies' death benefits are likely to offset much of the spouses' long-term care premiums.

"The reason why I use the LTCI as a base is because of the leverage it affords, if one of the spouses needs care," he explains. "The shared benefits rider and short benefit period creates a nearly certain premium payback. The life insurance death benefits are a second source of the guaranteed payback."

Keeping track

A potential drawback to using multiple insurance policies in a combined solution is that the client must keep track of how the coverages are designed to interact. That task can become a problem if the client's ability to manage multiple policies declines with age, says Natovitz. It's not just a question of which policy does what—the claim-filing sequence is also critical for deriving maximum benefit.

For example, a client with both a traditional LTCI policy and a life policy with care benefits would want to use the traditional LTCI coverage first to activate that policy's waiver of premium feature while preserving the life policy's death benefit. Claiming in the wrong order leads to the opposite, undesirable result: the client continues to pay LTCI premiums as the life policy's benefit depletes. "That's why it's important at the time of claim to really understand of the products that we have where should we initially be filing a claim," says Natovitz.

See also:

Annuities for retirement income

How to battle irrational financial behavior

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