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How life insurance riders can pay for long-term care


Since long-term care insurance was introduced in the mid-'60s, the biggest objection from prospective buyers was paying for coverage they may never use. In response, insurance companies began introducing products that combined long-term care benefits with life insurance.

insurance decisionsToday, combination policy sales are doing well. Annual premium of combination policies grew roughly 40 percent from 2008 to 2009 and will probably increase by another 20 percent this year over last, says Peter Gelbwaks, chairman of Gelbwaks Executive Marketing Corp. in Plantation, Fla., which sells life insurance, annuities and traditional long-term care insurance. Premium of traditional long-term care insurance products, meanwhile, fell by about 30 percent in 2009 from 2008, Gelbwaks estimates, yet is expected to rebound 12 to 13 percent this year over last.

However, combination policies are still a small portion of the market. Most people who buy long-term care coverage purchase standalone policies.

But linked products are finding a niche among high-income baby boomers looking for a way to shield their retirement portfolios against the risk of long-term care expenses. Lincoln Financial Group, which markets the Lincoln MoneyGuard Reserve, calls it the "live, quit or die" solution. These universal life policies (most of which have a single, lump-sum premium) include long-term care benefits and an income tax-free death benefit if long-term care insurance isn't used. They also have a money-back guarantee on premium if the policyholder decides he doesn't want the insurance after all.

For example, let’s say a 65-year-old woman bought a single $100,000 premium for a Lincoln MoneyGuard Reserve policy with a two-year convalescent care benefits rider and four-year extension of benefits rider. If she needs long-term care, she’ll receive up to $83,208 annually for six years to reimburse her for long-term care costs. If she never uses the long-term care benefits, her beneficiaries receive $166,407 after she dies. If she uses only some of her death benefit for long-term care, the remaining benefit passes on to her beneficiaries. What if she changes her mind? She gets the $100,000 premium back.

Ripe conditions for life insurance with long-term care benefits

Demographics are among the factors driving interest in combination policies, says Michael Hamilton, assistant vice president, linked benefit product leader at Lincoln Financial Group.

"A lot of people who are interested in MoneyGuard Reserve have seen their parents go through long-term care without a good solution in place," he says.

Today's products are simpler and provide more flexible options than their predecessors, which were simply life insurance policies with accelerated riders tacked on to let policyholders use some of their death benefits for long-term care expenses, Hamilton says. Underwriting has been simplified, too, so it's easier to qualify and the process is quicker than for life insurance or standalone long-term care coverage, Hamilton says. A review of medical history and a telephone interview -- but no medical exam or lab work -- are required.

Combination policies mainly appeal to people with enough money to self-fund their long-term care needs but want some protection for their assets.

"Long term-care costs can eat through someone's portfolio quickly," Hamilton says.

The economy is another motivating factor for buyers, Gelbwaks says. Investors are looking for safe alternatives to the volatile stock market and ultra low-rate CDs and money market accounts. Combination products offer a place to stash cash with the choice of a payoff for beneficiaries, protection against long-term care costs or money back.

But these policies aren't for everybody. For one thing, a lot of people don't have a lump sum of $75,000 or more to buy a combination policy, notes Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

"It's a product that serves a very special niche," he says.

Combination vs. standalone long-term care insurance

Which one is better for you? Choosing between a combination or standalone policy depends on your circumstances. Slome says many people who buy combination policies spend just enough to give themselves two to three years of long-term care benefits.

"If you never need long-term care before you die, you'll be glad you picked the linked product because your heirs will get some benefit," he says. "But if you do need long-term care, and that care goes on for more than three years, you'll regret you didn't buy a traditional long-term care insurance policy."

Stand-alone long-term care insurance rates vary depending on applicants' ages and conditions and levels of benefits. Gelbwaks pegs the average annual premium at around $2,100.

More than one-third of people with recently purchased long-term care protection pay less than $1,499 per year, according to a 2010 “What People Pay For LTC Health Insurance” report by the American Association for Long-Term Care Insurance. Among buyers under 61, 43.5 percent pay less than $1,499 a year, while 73.6 percent of buyers between 61 and 75 pay $1,500 or more.

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