Types of Long Term Care Insurance Policies

Unlike 10-15 years ago, today many types of long term care insurance coverage are available to the consumer. The following provides a brief summary of some of the different insurance vehicles that offer long term care insurance coverage.

Individual (Or Group) Comprehensive Long Term Care Policies

These represent the majority of the long term care policies sold today. These policies are designed to cover virtually all long term care services and are usually purchased with monthly, quarterly, semiannual or annual premiums paid for the life of the insured. With some insurance companies abbreviated payment schedules are available with policies fully paid up after 20 years, 10 years or one year, depending on the terms of the policy. This type of long term care insurance policy is similar to the typical individual or group health insurance policy and tries to cover as many care alternatives as possible.

Rider to A Cash Value Life Insurance Policy

This type of policy actually includes two separate coverages in one policy, with the premium split to pay for both life and long term care insurance coverage. The long term care rider differs from the “accelerated death benefit,” a popular feature of many life insurance policies. An accelerated death benefit pays part of the life insurance death benefit for terminal illness or for doctor-certified terminal long term care while the insured is living. Since long term care typically cannot be certified as care for a terminal patient, the accelerated death benefit does not apply to most long term care situations.

Either/Or Feature In A Life Insurance Policy

If you purchase a life insurance policy with an either/or feature, it works like this: If the insured dies, a death benefit is paid, just like a regular life insurance policy, but if the insured needs long term care before death, specified benefits are paid instead of life insurance. If all benefits are paid before death, the policy expires. Any benefits specified for long term care that are not used prior to death are provided as a reduced death benefit. What you are buying is a policy with the potential to cover both contingencies – long term care and death — although the amount of the death benefit will be determined by the amount of any long term care benefit used. This type of policy can be purchased with periodic premiums over the life of the insured or with a single premium of $50,000 or more.

An advantage of this type of policy is that the insured is guaranteed a benefit. A disadvantage is that many people who purchase long term care insurance don’t need life insurance. Because the policy covers both the mortality risk of death and the morbidity risk of long term care, premiums are much higher than an equivalent stand-alone long term care policy. Another disadvantage is that the underwriting standards for life insurance are stricter than standards for long term care insurance. Many who qualify for long term care insurance would be denied for life insurance.

Integrated Into A Single Premium Deferred Annuity

This usually requires a single, lump sum payment of $50,000 or more. Part of the earnings on the annuity is used to fund the long term care morbidity risk, which reduces the actual earnings credited to the annuity. Thus an annuity that would normally earn 6% might only yield 4% when combined with long term care insurance. One advantage of this approach, though, is that long term care premiums are paid with tax deferred earnings and since they are expensed inside the annuity premiums, the premiums become tax free. A second apparent advantage is the perception that no money is spent on a long term care policy if the long term care benefit is never used. In fact the annuity lump sum even grows larger. Of course, money is actually spent because part of the annuity earnings is used to cover the long term care premium. Therefore, the lump sum grows larger but not as fast as it would if some of its earnings were not being used to pay the long term care premium. A significant disadvantage is that the money is tied up in the annuity. Removing money will kill the long term care coverage, perhaps just before you need it. At death, proceeds would go to a named beneficiary. Few people have $50,000 that they are willing to tie up for an extended period of time. In most cases, it is better to fund a stand-alone long term care policy with the earnings from a separate investment account.

Combined With A Disability Income Policy

Prior to age 65, this kind of policy can only be used for disability income benefits but premiums paid after age 65 provide long term care coverage. Premiums for this type of policy will be higher than a stand-alone disability income policy since a portion of every premium must be set aside in reserve for future long term care claims.

Case Studies: Exploring Long Term Care Insurance

Case Study 1: Individual (Or Group) Comprehensive Long Term Care Policies

Mr. Smith, a 55-year-old individual, decided to purchase a comprehensive long term care policy. The policy covered a wide range of long term care services, including nursing home care, assisted living, and in-home care. Mr. Smith opted for a policy with a monthly premium payment. This type of policy provided him with peace of mind, knowing that he would be financially protected in case he needed long term care services in the future.

Case Study 2: Rider to A Cash Value Life Insurance Policy

Mrs. Johnson, a 45-year-old individual, wanted to ensure both her life and long term care insurance needs were met. She opted for a life insurance policy with a long term care rider. The premium for this policy was split to cover both coverages. The long term care rider provided her with the flexibility to access a portion of the death benefit for qualified long term care expenses if needed. This allowed Mrs. Johnson to have dual coverage and the assurance that she would be protected in different scenarios.

Case Study 3: Either/Or Feature In A Life Insurance Policy

Mr. and Mrs. Anderson, a married couple in their 60s, decided to purchase a life insurance policy with an either/or feature. They wanted coverage for both long term care and death benefits. The policy worked in a way that if one of them required long term care before passing away, the specified long term care benefits would be paid instead of the life insurance benefit.

If all long term care benefits were exhausted, the policy would expire, but if not, a reduced death benefit would be provided. This type of policy offered them a flexible approach to address their insurance needs.

Case Study 4: Integrated Into A Single Premium Deferred Annuity

Ms. Thompson, a 50-year-old individual, chose to integrate her long term care coverage into a single premium deferred annuity. She made a lump sum payment of $50,000 or more, and part of the annuity’s earnings went towards funding the long term care coverage. While this approach allowed her to benefit from tax-deferred earnings and the potential growth of the annuity, it also meant tying up a significant amount of money for an extended period. Ms. Thompson carefully considered her financial situation and risk tolerance before opting for this type of policy.

Case Study 5: Combined With A Disability Income Policy

Mr. Ramirez, a 40-year-old individual, purchased a disability income policy that would also provide long term care coverage after he turned 65. While the disability income policy primarily offered income benefits in case of disability before age 65, it transitioned to long term care coverage afterward.

Mr. Ramirez understood that the premiums for this type of policy would be higher than a standalone disability income policy due to the added long term care coverage. This allowed him to plan for potential future needs while receiving income protection in the present.