The benefits of life combination policies

The financial risks associated with long-term care are very real: the Employee Benefit Research Institute (EBRI) in the US found 45% of retirees and 57% of workers weren’t confident that they could pay for their long-term care. LIMRA had several findings in a 2016 poll, which revealed 44% of retirees being concerned about long-term care expenses.

But in spite of this, the long-term-care insurance market is on the decline. LIMRA has found that since 2012, traditional long-term care insurance (LTCI) policy sales have plunged 60%, according to WealthManagement.com. That’s due in part to the difficulty insurers have faced in pricing risk accurately or profitably, which has led to repeated premium rate hikes on existing policies.

“The companies in the market have determined that there is a lot of risk there,” said Karen Terry, assistant managing director of insurance product research at LIMRA.

To be fair, a study by the Society of Actuaries has concluded that LTCI policies priced today are “significantly less likely to need future premium rate increase than any earlier product generation” as carriers face reduced industry competition and have a better grasp of risk. Still, it doesn’t address a problem from the side of clients, who worry that their premiums will go to waste if they never need to tap the benefits.

“Maybe the subject matter is so unpleasant that it elicits a different emotional response than other types of insurance, but it is a very real phenomenon,” said Dan Moisand, a planner with US-based firm Moisand Fitzgerald Tamayo.

To address that concern, consumers may opt for life combination policies, also referred to as combination life and long-term care insurance policies. Aside from paying a death benefit, such policies have locked premium rates, which remove considerations of big rate hikes from the buying decision.

There are three varieties of combination life-long-term care products, according to WealthManagement.com:

• A linked benefit product where the death benefit is accelerated for any long-term care needs, and an option to extend the amount payable (generally two or three times higher than the death benefit) is also offered;
• A life insurance policy that includes only long-term care death benefit acceleration; and
• Life insurance with a chronic illness rider, which can be exercised by the policyholder when diagnosed with a chronic or terminal illness.

Changes in policy design have made it easier for people to get such products without a very large amount up front — by spreading payments over several years, for example — but the coverage doesn’t come cheap. As Moisand explains, the insurance carrier would first cover expenses from the cash value in a policy before tapping other sources. After that, the death benefit provided would be a fixed amount, minus any long-term claim paid out.

“That makes it like a policy with a giant deductible,” he said. “You wind up with a mediocre LTCI benefit, and a really poor life insurance benefit.”