According to the LIMRA Secure Retirement Institute, (Secureretirementinstitute.com), people could live 30 years or more in retirement. While baby boomers approaching or in retirement can expect to enjoy their retirement longer, they also face greater incidents of chronic illness and the need for long term care. Approximately 70 percent of individuals turning 65 can expect to use some form of long term care.1 Long term care costs can substantially deplete or even wipe out a retiree’s assets. On rare occasions, a patient’s children have been held liable for a parent’s unpaid long term care bills.2
There are many insurance products and riders that can help protect a client’s nest egg from long term care expenses. They include traditional long term care insurance (LTCI), hybrid long term care, fixed and variable annuities with long term care, etc. In this article, I’ll compare the basic provisions of traditional LTCI and life insurance with accelerated death benefit for chronic illness riders. I’ll also discuss what types of clients may want to consider a chronic illness rider as a supplement or an alternative to traditional long term care solutions.
LTCI has evolved since it was introduced about 30 years ago. It typically provides coverage for personal or custodial care, intermediate care, and skilled care in various settings including nursing homes and at-home care, adult day centers and assisted-living facilities. Benefits may be in the form of reimbursement of expenses, usually up to a limit, or payment of a defined amount. Insureds qualify for LTCI benefits through two criteria known as benefit triggers, but they are required to meet only one of the two triggers. The first trigger is the inability to do two of the six activities of daily living (ADLs) for a period of at least 90 days due to loss of functional capacity. The six ADLs are bathing, continence, dressing, eating, toileting, and transferring (moving in or out of a bed or chair). The second trigger is that substantial supervision is required due to cognitive impairment. Cognitive impairment refers to deficiencies in comprehension, judgment, memory and reasoning.3
An accelerated benefit for chronic illness rider (chronic illness rider) cannot be called long term care insurance. Additionally, agents can sell the chronic illness rider without an LTCI license. Benefit triggers associated with the chronic illness rider are similar to those of traditional LTCI. The insured is certified by a licensed health care practitioner as unable to perform two ADLs or is suffering from severe cognitive impairment. A physician does have to certify the chronic illness is non-recoverable and will likely last for the rest of the individual’s life. Once the insured is eligible to make a claim, the benefit is paid with no restrictions on how the funds are used, and documentation of expenses is not required.4
Chronic illness riders are available either for an additional charge that is added to the total policy premiums or via a “discounted acceleration” of the death benefit. The additional premium version of the chronic illness rider may have a higher premium, but it offers the advantage of knowing what the benefit will be when the policy is issued.5 The discounted acceleration option is added to the base life insurance policy at no additional cost. If the benefit is needed, the total death benefit is reduced or discounted. The benefit discounting is based on several factors, including the client’s age, gender, risk class, interest rates, and policy cash values at the time of claim. While clients do not pay additional premium for the discounted acceleration version, a claim could significantly reduce the total available death benefit.
The rest of this article focuses on three important factors to consider when designing a plan to address the expense of long term care. They are the person’s financial means, age, and health.
A client with modest means may perceive little benefit to purchasing an LTCI policy. According to the Center for Retirement Research, 44 percent of men and 58 percent of women over 65 will spend some time in an assisted care facility. Of these people, 50 percent of the men and 40 percent of the women will stay 100 days or less. While Medicare covers nursing home care for 20 days, and then a portion up to 100 days, Medicaid coverage is much more expansive for those with relatively little assets.6 Chronic illness riders could be appropriate for people who have approximately $200,000 or so in liquid assets, because they have too much wealth to qualify for Medicaid to pay for nursing home care, and they would likely spend down their assets within a couple years if they required long-term care for an extended period of time.7
Clients with $2 million of assets will be able to cover the cost of nursing home or home care. However, these clients may consider a chronic illness rider as a way to minimize—with little or no additional cost—the impact of nursing home or home care expenses, provided life insurance is already a part of their financial plan.
Age is another important consideration. It’s generally advised to purchase LTCI around age 50 to 55. A client who is 65 will pay about $250 per month, while a client who is 45 will pay approximately $100 per month. Although the premium is lower for the 45-year-old, it is likely that the younger client will pay premiums for 30 years or more before he or she needs to use the long term care benefit. So while a 55-year-old will pay higher premiums, he will likely pay premiums for 10 years less than a 45-year-old, and run less risk of being rejected for insurance due to poor health than if he waits until age 65.8 As a result, younger clients also might consider a chronic illness rider to be a better value and will delay the purchase of a traditional LTCI policy.
Finally, it is said that clients pay for LTCI with their good health. The medical underwriting requirements are usually less stringent for chronic illness riders than for LTCI. Chronic illness riders tend to have less stringent underwriting because they pose less risk to the insurance company.9 Life insurance is also purchased with a client’s good health however. So for unhealthy but insurable individuals, an accelerated chronic illness rider on a life insurance policy might be a good alternative. If the client is uninsurable, he might want to consider other strategies such as annuities.
Long-term care expense could pose a serious threat to your client’s retirement plans. Whether or when to purchase LTCI requires a comprehensive review of a client’s situation. In cases where LTCI isn’t the right fit, a life insurance chronic illness rider could be an option for those clients who don’t fall within the suggested age, financial means, or health guidelines for traditional LTCI.
Footnotes:
1. www.longtermcare.gov.
2. www.Nolo.com, “Your Obligation to Pay a Parent’s Nursing Home Bill”.
3. Individual Health Insurance Planning, 15.4.
4. Investopedia, “How Long Term Care Insurance on Life Insurance Work”.
5. Ibid.
6. Center for Retirement Research, “Long-Term Care: How Big a Risk,” November 2014, Number 14-18.
7. www.longtermcare.gov.
8. Forbes, “Ten Questions to Ask Before Buying Long Term Care Insurance”.
9. Milliman Research Report, April 2012.
