Regardless of which type of coverage you purchase, generally speaking, a long-term care claim is established by being unable to perform two of six activities of daily living (ADLs - eating, bathing, dressing, toileting, transferring, and continence).
This type of insurance has been around for decades with the purpose of addressing a number of various needs and benefits regarding long term care. It’s designed to reimburse the potential costs of formal care. Formal care is care given within a facility or at home by a skilled professional.
The policy creates a bucket of LTC money from which the insured can pull benefits to offset the cost of care.
The individual considerations here include how long premiums are required to be paid and whether or not those premiums could increase in the future. Sometimes carriers will offer insureds a benefit decrease in lieu of a rate increase. There’s no death benefit of which to speak, so if the insured passes away without ever using the benefit, those premiums are lost.
The long and short of it is that traditional LTC is a functioning option, but it’s limited to helping with only LTC. Additionally, because most carriers are raising premiums due to rising healthcare costs, many clients are opting to decrease benefits in the face of those rising premiums to maintain a lower cost for coverage.
These products can also be referred to as “Hybrid” products in that the death benefit can be accelerated for formal or informal LTC care as long as the individual qualifies for care. With this strategy, if you qualify for the life insurance, the death benefit may be accelerated for LTC services once you qualify for care. Depending on the product purchased, you may be able to receive the LTC benefit for formal or informal care. Another potential benefit is that the premiums may be more flexible to better suit your individual budget, or guaranteed never to rise.
For example, let's assume someone has purchased a life insurance policy with a LTCi rider. The death benefit of that policy can be accelerated while the client is still living to cover the cost of long-term care, as long as they are certified as having a long-term care need, via the two of six activities of daily living qualification.
Sometimes this acceleration of the death benefit can be a reimbursable expense, or it can come as cash indemnity, which can help in the event that the individual is receiving informal (i.e. from a friend or relative) care. However, as the LTC benefit is drawn down, it lowers the death benefit as well. Once the death benefit has been exhausted, there is no LTC benefit or death benefit remaining and the policy is considered paid out.
This product is beneficial to clients who want to receive a little more for the premium that they pay into a policy. The death benefit provides added protection for the insured’s beneficiaries in the event that the LTC rider is not utilized, and offers some sort of benefit in each scenario as a client ages. They will either live long enough and utilize the LTC benefit if they get sick, or they will pass away and their beneficiaries will receive the death benefit.
In the event that only a portion of the death benefit is used for LTC, the beneficiaries would receive whatever death benefit amount is remaining.
These are similar to life insurance with LTC riders, but the overall LTC benefit is usually larger than the death benefit. With this type of coverage the premiums and benefits are guaranteed and premiums may be paid in a lump sum or over the course of 5-10 years. One of the most popular features of these products is that most of them offer return of premium options, generally at an additional cost, so that if you change your mind or need the premium paid back, you have the potential to receive all or a portion of it back from the carrier (subject to the terms and conditions of that particular insurance carrier and product).
Arguably, this product offers the most flexibility for an insured that is at or near retirement. Also called an Acceleration+ product, these products offer three main options for insureds. It's referred to as the “live, pass, or quit” option.
Here’s how they work: In the "live" option, the insured will live long enough to use the LTC benefit, which is a large bucket of money - even larger than the death benefit offered. Sometimes, this can be 4-6 times larger than the premium paid into the policy, and can even grow over time by using an inflation rider. This allows the insured to have a policy that could cover their LTC needs for upwards of six years if necessary, and usually provides hundreds of thousands of dollars in potential LTC benefit.
In the "pass" option, the insured passes away without using the LTC benefit, or only a portion of it, and the remaining death benefit goes to the insured’s beneficiaries. Even in the event that the insured uses all of the LTC benefit (meaning the death benefit is exhausted as well), there is even a residual death benefit left over to help cover final expenses.
In the "quit" option, it allows the insured to be able to receive a portion or the entire premium paid into the policy, in the event their needs change. Changing needs could include investments not performing as expected in retirement, income needs increasing, or some other unexpected event. What these products do is give the insured some sort of “safety valve” that can allow them to recoup some or all of their premiums if absolutely necessary.
Plus, an added benefit is that all the numbers provided in product illustrations are guaranteed.
Usually these are single premium products, but they do offer the flexibility to be paid in over time. They tend to be a little more expensive than some of the other options available, but due to the return of premium option, it’s important to look at these products as leverage vehicles. More money is being spent now, but one can sometimes recoup those costs later, so in essence, they’re not spending the money as much as leveraging it for greater value right now.
What to Look for in a Long-Term Care Policy