Looking for Long-Term Care Coverage? You Might Not Find It.
April 10, 2012 by William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.
By William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.
April 9, 2012 •
The cost of long-term care can be devastating to your clients if they are not prepared. Unfortunately, the long-term care insurance (LTCI) business has not been financially rewarding for major insurance carriers—they are abandoning the business in record numbers. As a result, advising your clients to purchase this insurance is not going to provide a solution to the modern long-term care dilemma. The need to plan for the costs of long-term care is not going away with the insurance plans. So, what do you tell your clients?
Several options exist, but a smartly crafted annuity strategy may provide the solution and simultaneously offer your clients a substantial tax break.
What is the problem with LTCI?
The cost of long-term care has skyrocketed recently—it may cost as much as $4,000 to $8,000 a month to cover the cost of in-home care or nursing home expenses. The costs increase exponentially when today’s longer lifespans are taken into account.
To prepare for these costs, insurers have relied on the fact that policyholders will generally make payments over an extended period of time before making a claim and have invested these payments to build adequate reserves. Lower-than-expected investment returns coupled with increasing claims have left many insurance carriers inadequately prepared for the rate at which long-term care costs have risen.
As a result, 10 of the 20 largest insurance companies have stopped offering long-term care insurance in the past five years, with Prudential and MetLife exiting the business most recently. Consequently, it has become much more difficult for your clients to purchase adequate long-term care coverage.
Though insurers who have policies outstanding cannot cancel the policies, they can petition state insurance commissioners to allow premium increases. Some insurers have chosen to take this route to manage the costs of the policies currently in effect, in some cases doubling premium costs to existing customers in the process.
What is the new plan?
The plight of insurance carriers that offer long-term care policies highlights the importance of preparing for this expense. If your clients already have a long-term care policy in effect but are facing significantly increased premiums, they may be able to maintain current premium levels by reducing inflation protection benefits on the policy. This is exactly the reason many of your clients purchased the policy in the first place—to protect against the rapidly rising costs of care.
However, a type of deferred annuity product known as a long-term care annuity may provide a more appropriate solution. These hybrid annuities contain long-term care riders that allow the client to choose the amount of long-term care coverage desired. Some products offer the choice to include inflation protection benefits.
The value of the annuity grows in the same manner as a traditional annuity product, but when the funds are withdrawn to cover the cost of long-term care, they are taken tax-free. There is a downside, as these annuities require a relatively substantial initial investment, usually $50,000 to $100,000. Nevertheless, the peace of mind your client is able to purchase for this price may make the investment worthwhile to many.
Conclusion
Long-term care insurance may not be the full solution in today’s market, but it does not have to be entirely abandoned as a planning tool. Your clients need to understand that, while long-term care insurance may still be a smart choice, it should be considered a method of easing the burden of the cost of long-term care—not as a way to cover the costs entirely. Investing in an annuity product may be the smartest way to prepare for tomorrow’s rising costs.
