Ensuring Their Insurance

The newest approach to long-term-care insurance means consumers get something back, even if they never make use of the policy

May, 2004

Traditional long-term-care (LTC) insurance is like auto insurance. It’s priceless in the event you actually need it (which you hope you never do), but if you don’t use it, it’s money down the drain. That’s why some insurance-savvy consumers are opting instead for a new type of policy that combines life insurance with LTC insurance. These policies basically add LTC coverage to cash-value life insurance policies, and allow the insured to use their death benefits to pay for long-term care expenses. Their beneficiaries receive whatever remains of the insurance at death.

“Consumers don’t exactly get more money back, but they have the comfort of knowing that if they don’t use the long-term care, they’ll get back the premium as a life insurance benefit,” explains Warren Woon, vice president of Denis Wong and Associates, which brokers these types of policies for its clients. “Compared to regular long-term-care policies, if they want money back, they’d have to purchase separate return of premium riders, which can be very expensive.”

Long-term care itself is also very expensive. In 2000, the average national cost of LTC was $55,750. By 2060, it is estimated that figure will skyrocket to more than $250,000 per year. And considering that people who reach age 65 will have a 40 percent chance of entering a nursing home, and 10 percent of those people will need to be there five years or more, one more option for consumers in the market for LTC can’t be a bad thing.

While a few insurance companies have recently created variations on the theme of combination policies, Lincoln Financial Group pioneered the concept in 1987, with its linked-benefits policy called MoneyGuard. “This product is really about asset protection. Typical candidates have at least $300,000 in invested assets and want to protect those assets against financial risks,” says Margery Ziffrin, regional chief executive officer of Lincoln Financial Advisors in Hawaii. She says policies that combine LTC and life insurance generally appeal to a portion of the community that is on the fence, or would otherwise shun traditional LTC, thereby opening new markets for insurance providers.

“[These policies are] most attractive to financially astute adults who like to self-insure long-term-care risk. They usually don’t have traditional long-term-care coverage, because they perceive little value in paying for coverage they may never need,” she explains.

Woon says the combined policies benefit the insurance providers, because they’re able to market LTC insurance to a broader audience and they minimize the administrative costs of maintaining two separate policies. However, some caution that these types of policies may be too premature to assess the long-term benefits to both the consumer and insurance providers. “What’s interesting about long-term care is that the risk is relatively new to all the companies, so we haven’t come to the point where we’ve hit what we call full claims. There are claims coming in, but as boomers start moving into that age where long-term care becomes an issue, the claims will probably be higher,” says Wayne Tanaka, general manager of Mass Mutual Hawaii. “This happened with long-term disability, where there were a lot of policies, but when the claims started coming in, a lot of companies had to get out of long-term disability. In that regard, I don’t think the companies really are experienced in the risk management of long-term care, so it will be interesting to see what happens.”

Tanaka agrees that the policies are a wise choice for money-conscious consumers who would rather self-insure the risk of LTC, but advises doing a bit of homework before purchasing any type of insurance policy. “The company that’s managing the risk has to be big enough and strong enough to withstand that risk, or else the policyholders will end up having to increase their premiums,” he says. “That’s a risk I hope consumers will understand, because when you’re older and you get a bill on a premium you never thought would increase, that can be a very scary situation.”

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Jacy L. Youn