As you are beginning to probably realize that one product that I believe in most is Long Term Care insurance. Reason being, I have witnessed first hand the devastating effects that not having it can have on someone and the ripple effect that is passed down to children (and even grandchildren). I do not say this as a fear mongering tactic in effort to sell more Long Term Care, these are just facts. 85% of women will need some form of Long Term Care…. almost an inevitability!
Long Term Care expenses can dwindle assets quicker than any other health claim. What are your options to protect yourself and consequently, your loved ones?
We are going to explore 2 different forms of protection: Asset Based Long Term Care insurance (LTCi) and Traditional LTCi
Both Traditional and asset-based LTCi offer similar long term care benefits. Where they differs in the underlying policy structure, with asset-based plans built on a life insurance chassis and traditional LTCi plans built as a “stand-alone” pure Long Term Care benefit.
The Impact on Pricing
A traditional long term care plan must only account for the possibility that you may claim for long term care. This (typically, not always) results in a lower price structure with a lot of leverage since everyone will not file a claim. Traditional LTCi hit the market in the early 80s, back then, people couldn’t give long term care insurance away. This plans resulted in low premiums and lifetime benefits. Consequently, as time went on and as life expectancy increased and more and more people needed LTC for Alzheimers or Dementia , the insured realized what a good deal they had purchasing these policies. Here in lies the problem for the insurance carrier; carriers assume a certain percentage of policies will lapse due to non-payment, this is money in the bank for the insurance company. The problem is a much lower percentage of insureds had policy lapses than anticipated and because most of these plans had lifetime benefits, the insurance carriers became upside down and were consequently hemorrhaging money! So by the 90s, the landscape of the long term care market was changing significantly , carriers had to have premium increases north of 23% and/or reductions in benefits. However, the policyholders were holding onto their plans. They now recognized the importance of having this protection.
Insurance Carriers make money by the following ways:
1)Premiums paid greater than claims filed
2)lapses in policies due to non-payment of premium
3) Return on their investments…. Yes, they use your money to make money. Insurance Carriers have to maintain specific reserve requirements relative to the total pool of liabilities. That excess is used to invest.
Asset-based plans are generally funded with a single payment by repositioning an existing low-yield asset resulting in net-zero cost. They provide the following benefits:
–Guaranteed Premiums (or a 1 time premium)- Rates will never increase!!
-Death Benefit- Payable tax-free to your beneficiary
–Surrender Provision- Cancel your policy for a return of premium
In Sum: Traditional LTCi- Use it or lose it! Federal Tax Deductions and State Tax Credits vs Asset-Based LTCi- You are getting paid one of several ways; 1) Long Term Care benefit; 2) Death Benefit; 3) Return of Premium – If you don’t use it (for LTC), you don’t lose it
Feel free to reach out to me with any additional questions.
Beau Singletary, ChFC, CLU