By JOHN F.
WASIKMARCH 4, 2016
There’s a good
reason to have long-term care coverage in your wealth management plan. If you
need to go to a nursing home, it can cost more than $90,000 a year for a
private room, according to a survey
by Genworth Financial, an insurance
company. The costs, especially for longer stays because of Alzheimer’s disease,
can deplete your estate.
The financial
impact of prolonged long-term care expenses concerned Brian Cassell, 55, a
veterinarian in Denver, and his wife, Linda. Although they had looked at
several stand-alone policies for long-term care, they didn’t like them because
they were expensive and the premiums could rise. They wanted something more
flexible.
Working with financial
planners, the Cassells looked at a relatively new option, hybrid
policies that package coverage for long-term care with a universal life
insurance policy or a fixed annuity. Such products can be tapped for
reasons other than long-term care and even passed on to heirs, although the
amount available for other uses is reduced if you use the hybrid to pay for
long-term care.
The Cassells
decided on a universal life policy that included long-term care coverage. They
paid a $97,000 lump sum with a fixed $4,800 annual premium. Unlike conventional
policies for long-term care, theirs allowed them to tap into all the money paid
in after seven years for any reason. The money grows with interest and is
invested.
“It’s a triple
threat,” Dr. Cassell said, “because it could be viewed as a fixed-income
investment, cover long-term care and provide a life insurance benefit.”
Sales of such
hybrid or combination products have more than doubled since 2008 to more than
$2.4 billion last year, according to Limra, an insurance industry research
group. In comparison, $300 million in stand-alone policies for long-term care
are sold annually, which are now actively sold by only 16 insurers, compared
with nearly 100 a decade ago, as companies face higher costs and drop out of
the market.
A hybrid policy
for long-term care works by keeping a certain amount of cash within the policy.
The cash can
later be used to pay for long-term care benefits. For a hybrid life plan, for
example, you may pay a single premium of $100,000 and be entitled to $400,000
in payments for long-term care after a certain period. Many hybrid plans have
such so-called surrender periods that put the money off limits for a certain
number of years. A penalty is imposed if the money is withdrawn during that
period.
Kevin Couper, a
certified financial planner with Sontag Advisory in New York, says he
recommends hybrid policies for clients with $3 million to $4 million in total
assets, if they are seeking insurance for long-term care. With this kind of
insurance, though, the insurance company gets quite a bit of cash upfront. Once
you pay into a policy, the insurance company will be holding and managing the
money, and it may be difficult to get it out in the short term because of
surrender fees.
“Not all of my
clients can write a $100,000 check,” said Kristi Sullivan, a certified
financial planner in Denver, who advised the Cassells. “It’s not for
everybody.” She said clients with $500,000 to $2 million in assets should
consider the policies. Above those thresholds, it’s possible to self-insure, or
cover the costs out of pocket. Below that range, clients could spend down their
assets to eventually qualify for Medicaid.
Hybrid
long-term care plans can become complicated and, given their varying features,
it is hard to compare their value with traditional long-term care coverage. And
you can be denied coverage — a difference from standard health
insurance.
Insurers will
carefully review your medical history for chronic diseases like diabetes and
acute events like strokes. Such so-called health underwriting is an obstacle
for those who may need long-term care insurance the most, particularly those
with a family history of dementia, debilitating maladies or Alzheimer’s
disease.
Before deciding
on a hybrid policy, you’ll need to consider: Do you need monthly income? If so,
you should lean toward an annuity. Does a spouse or partner need coverage? Do
you need a death benefit for survivors? How long must you wait for access to
the money in the policy?
Many insurance
products may have riders that provide features like accelerated benefits, which
allow policyholders to tap the cash in the policy before death, or coverage for
chronic conditions. But you will certainly pay more for policies with riders
than for conventional stand-alone life or annuity products.
When surveying
the policies, work with a fee-only financial planner or adviser who doesn’t
make a commission on selling the plans. You want objective advice and need to
know how such a policy will fit into your overall financial or estate plan — or
if you need it at all.
A version of
this article appears in print on March 6, 2016, on page F2 of the New York
edition with the headline: Flexible Long-Term Care Coverage
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