Dealing With The Latest Turmoil In Long-Term Care Insurance

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This article was featured on Liberty Investor™.

The turmoil in long-term care insurance continues. In recent years, a number of insurers raised premiums substantially on existing policies or exited the market. A year ago, it appeared things would stabilize after the shakeout, but a new round of premium hikes and policy changes is taking place.

Two of the largest and most stable LTCI carriers, John Hancock (a subsidiary of Manulife Financial) and Genworth, are seeking hefty premium increases on existing policies. Hancock sought premium increases of about 40 percent a few years ago and now is seeking an average 25 percent increase on top of that. Genworth is seeking lower increases generally but is asking for significant increases on policies sold before 2002. Genworth has 23 percent of the market, while Hancock has 16 percent. Other insurers are making adjustments to terms of new policies or stopping the sale of some policies. Industry analysts expect this won’t be the end of premium increases or other policy changes.

It’s no secret why insurers are asking for premium increases. The cost of long-term care is at all-time highs and rising; insurers are earning much lower returns on their investments than anticipated; and Americans are living much longer than expected. A result of those three factors is insurers are paying more in claims than projected and, therefore, are not making their expected margins.

In reaction to the rate increases, insurers say most policyholders are still keeping their policies. They’re adjusting policy terms to reduce premium increases. For example, you can reduce a policy’s daily benefit or rate of inflation increase. I’ve discussed these and other policy terms that can be changed to make the policies more affordable, and these articles are available in the Archive of the members’ section of the Retirement Watch website. But making such adjustments means you’re paying the same or higher premiums for less coverage.

Unfortunately, most American’s will need long-term care at some point in their lives and need a plan to pay for it. Of those 65 and older, six in 10 men will need long-term care, and eight in 10 women will need it.  You can’t count on your spouse to be there to provide care, because if you are 65 or older, you have a 71 percent chance of being widowed for five or more years; 46 percent of that group will be widowed for at least 10 years.

Long-term care can be expensive. If you live in California, for example, the average cost of a semi-private room is $83,950. If you want a private room, plan on spending at least $97,820 per year. That’s in today’s dollars. You can try to save money with in-home care, but that still runs more than $52,000 per year. So you need a plan for covering LTC expenses in case you or your spouse needs the care.

One way many are dealing with the crisis in LTCI is to opt for one of the new Hybrid Combo LTC policies. These can be used to supplement an existing policy or be an alternative to the “use it or lose it” proposition of traditional LTCI.

A combo policy is an annuity or life insurance policy that has an LTCI rider. Benefit payments are triggered under the rider when you meet the requirements for needing LTC (usually not being able to perform two of the six activities of daily living, or becoming cognitively impaired).

Let’s take a detailed look at a new and attractive life insurance/LTC combo policy, the Nationwide CareMatters. My insurance expert, David T. Phillips, says the policy is one of the most attractive new entries in the market. As he puts it, “It scorches the competition for non-medical exam plans.” The policy is approved in most States.

You buy the policy with either a lump-sum deposit or a series of deposits over five years or 10 years. It is set up to allow for transfers from individual retirement accounts to fund the policy.

Your deposit buys both life insurance and LTC benefits, both of which are greater than your deposit. If you never use the LTC benefits, your beneficiaries receive the life insurance benefit. The LTC benefits are available to you immediately after the policy is in force. There’s no waiting period. You select the payout period for your LTC benefit, which is tax-free, from a range of two to seven years. When you use the LTC benefits, they reduce the life insurance benefit; but beneficiaries will receive a life insurance benefit of 20 percent of the policy’s initial face amount even if you exhaust the policy through long-term care benefits.

The amount of your LTC coverage depends on your age at the time of the deposit. The table nearby gives estimates of the death benefit (life insurance benefit) and LTC benefit for men and women of different ages who deposit a single sum of $100,000 into CareMatters and select a six-year LTC benefit period.

Sample   Benefits – $100,000 Deposit

Issue Age

45

50

55

60

MaleDeath Benefit

$227,324

$182,470

$150,602

$130,524

LTC Pool

$672,972

$547,410

$451,806

$391,572

FemaleDeath Benefit

$237,038

$205,760

$173,479

$142,626

LTC Pool

$711,114

$617,280

$520,438

$427,877

 

There are other benefits to the policy. There’s no medical exam required to qualify, only a telephone interview. Also, this is an indemnity policy, not a reimbursement policy. Once you qualify to receive the LTC benefit, monthly payouts begin with the amount based on the amount of your deposit and the payout period you selected. With a reimbursement policy, you’d have to wait to be billed by the long-term care provider, submit receipts to the insurer and wait for reimbursement. Another benefit is this policy will pay for LTC received outside the United States.

CareMatters also provides immediate 100 percent liquidity. Your deposit earns interest, but you can receive all or some of it back for the asking while the policy is in force.

Combo policies overcome the No. 1 complaint of those who shy away from stand-alone LTC policies: You and your heirs receive nothing if you never trigger the LTC benefits. With combo policies, you or your heirs receive something when the LTC benefits are unused. The combo policies also are attractive to some who can’t meet the medical qualifications for stand-alone policies, because the combo policies tend to accept some people who don’t qualify for stand-alone coverage.

Longtime readers know I haven’t been a big fan of the combo policies. Most don’t offer adequate benefits for the costs. But I try to identify the exceptions. I’ve also long recommended that potential LTC expenses be covered with a combination of strategies instead of relying only on one insurance policy or not having any coverage.

An annuity/LTC combo is attractive to someone who has conservatively invested money that primarily is for either emergencies or heirs. Putting that money in the combo policy can provide more income if LTC is needed but is available for the other purposes if LTC isn’t needed.

In the past, I’ve said that you should buy a life/LTC combo policy only if you need the life insurance. The Nationwide CareMatters policy is an exception. It has substantial benefits if you trigger the LTC rider, and the LTC benefits actually are better than the life insurance benefits. In addition, the interest on your deposit and 100 percent liquidity provide the same cash-reserve benefits of an annuity/LTC combo.

To learn more about the Nationwide CareMatters life insurance/LTC combo policy, contact David T. Phillips at 888-892-1102 or david@epmez.com.

Bob Carlson

is editor of the monthly newsletter and web site, Retirement Watch. Carlson is Chairman of the Board of Trustees of the Fairfax County Employees' Retirement System, which has over $3 billion in assets, and was a member of the Board of Trustees of the Virginia Retirement System, which oversaw $42 billion in assets, from 2001-2005. He was appointed to the Virginia Retirement System Deferred Compensation Plans Advisory Committee in 2011.His latest book is Personal Finance for Seniors for Dummies, published by John Wiley & Co. in 2010 (with Eric Tyson). Previous books include Invest Like a Fox... Not Like a Hedgehog, published by John Wiley & Co. in 2007, and The New Rules of Retirement, as published by John Wiley & Co. in the fall of 2004. He has written numerous other books and reports, including Tax Wise Money Strategies, Retirement Tax Guide, How to Slash Your Mutual Fund Taxes, Bob Carlson's Estate Planning Files, and 199 Loopholes That Survived tax Reform. He also has been interviewed by or quoted in numerous publications, including The Wall Street Journal, Reader's Digest, Barron's, AARP Bulletin, Money, Worth, Kiplinger's Personal Finance, the Washington Post, and many others. He has appeared on national television and on a number of radio programs. He is past editor of Tax Wise Money. Carlson is an attorney and passed the CPA Exam. He received his J.D. and an M.S. (Accounting) from the University of Virginia and received his B.S. (Financial Management) from Clemson University. He also is an instrument rated private pilot. He is listed in several recent editions of Who's Who in America and Who's Who in the World.