“Combo” Products for Long-Term Care Coverage
By the AICPA
If you or a loved one ever need help with daily living activities, you will discover that custodial care can be expensive. That’s true whether the care is provided at home, in an assisted living facility, or in a nursing home, and it’s especially true if care is needed for many years.
Long-term care (LTC) insurance is available, but insurance companies have learned that these costs can be steep. Premium increases for LTC insurance are in the news (for example, some press reports tell of cases where premiums have tripled in the last three years), and some insurance companies have dropped out of this business. Consumers face the prospect of paying thousands of dollars a year, every year, and never getting any benefit at all if it turns out that custodial care is not needed.
Some people might prefer another path to LTC coverage, such as a hybrid or “combo” product. These come in two varieties: a combination with a life insurance policy or with a deferred annuity. Here, a consumer buys a product that will deliver a death benefit (life insurance) or future cash flow (deferred annuity). With a combo product, the consumer can obtain a rider that will offer a payout if the covered individual needs LTC.
Example 1: Ted Moore has an insurance policy on his life, payable to his son Paul. Ted’s policy has an LTC rider. So, if Ted needs LTC, that insurance policy will provide a benefit to help pay those bills. Regardless if Ted needs care and collects an LTC benefit, his life insurance policy will pay a death benefit to Paul at the time of Ted’s death.
Generally, in this situation, Ted would receive an “accelerated death benefit” to pay for care. When someone receives such a payout, the amount of the lifetime benefit is subtracted from the death benefit that eventually will be paid to beneficiaries. Typically, a combo life insurance product would be some form of whole life or universal life, rather than term life insurance.
Example 2: Rita Smith decides to invest in a deferred annuity, attracted by that particular product’s features, which include guaranteed withdrawals. Like Ted in the previous example, she has an LTC rider for this annuity. In retirement, Rita can receive cash flow from the deferred annuity, and the LTC rider will provide money to pay for care, if needed. Depending on how Rita handles the annuity, there also may be a payout to beneficiaries she has named at the time of her death.
The common aspect of those two tactics is the absence of a “use it or lose it” drawback. With standalone LTC insurance, the money spent could wind up generating no return. With either life insurance or a deferred annuity, there will be a payout to someone at some point. The extra LTC coverage is another benefit that possibly will come in handy.
Acquiring LTC coverage in this manner usually avoids the threat of future premium increases. As another attraction, existing life insurance policies or annuities might be exchanged, tax-free, for a new contract that includes an LTC rider.
The attractions of LTC combo products, however, come with negatives as well. The underlying problem here includes the potentially disastrous costs of LTC, and this problem can’t be escaped by switching from one type of insurance to another. There often is a cost to adding an LTC rider to an insurance policy or a deferred annuity. These combo products may require a substantial outlay, which must be paid upfront or within relatively few years.
In addition, tax advantages may be lost with combo products. With most standalone LTC insurance policies, certain amounts of your premium count as a medical expense, which can potentially be deducted. That’s not the case with a rider to a life insurance policy or to a deferred annuity.
As of 2017, people age 40 and younger can include LTC premiums up to $410 as a medical expense; that amount scales up as premium payers age, maxing out at $5,110 for those 70 and older. Those outlays are added to other medical expenses and the amount that exceeds 10% of adjusted gross income can be taken as an itemized deduction.
Putting needs first
Combo products vary widely, and so do individuals’ concerns on this issue. However, generally, people who only want LTC insurance might be best-served with standalone coverage, working with an insurance professional to hold down premiums. That said, if you are interested in life insurance such as whole life or universal life, it may be worth exploring the idea of adding LTC coverage, perhaps for an added fee. The same may be true if you are seriously considering a deferred annuity.