Life Insurance

Life Insurance/Long Term Care Combination Policies

Recognizing that some consumers, despite their understanding of the Long Term Care risk, are put off by the use-it-or-lose-it nature of Long Term Care coverage, a few insurers have innovated and developed new products that combine life insurance and Long Term Care benefits. This product construct is ideal for consumers who have built up substantial net worth and are receptive to protecting their financial assets with an insurance solution.

Combination policies usually link universal life insurance and Long Term Care benefits into one policy with a pool of benefit dollars that can be used to pay for covered long term care expenses, provide a death benefit for beneficiaries, or both. Since the underlying contract is universal life insurance, policy values grow income tax-deferred at current interest rates. And with some policies, even if the entire face amount is used up for covered Long Term Care expenses, a residual death benefit is still available to the beneficiary upon passing of the insured.

So how do these policies work? Typically, a specified amount of insurance on the date the policy is issued is set based on the initial single premium amount and the insured's age, gender, health status and actual benefits selected. Minimum and maximum allowable specified amounts are based on the length of the accelerated benefit period, which is a period of time such as 24, 36 or 48 months. The accelerated benefit period, together with the specified amount of insurance, determine the monthly maximum benefit available to pay for covered Long Term Care expenses.

Combination policies may contain an extension of benefits rider, which provides an additional benefit amount for covered Long Term Care expenses by retaining the initial accelerated monthly maximum for an extended period of time, which can be 24 or 48 months, or even longer. The cost of the extension of benefits rider is reflected in the initial single premium.

Consumers who are considering replacing an individual Long Term Care Insurance policy with a combination policy should carefully evaluate their existing coverage, which may provide longer or more comprehensive benefits. A combination policy is not suitable for anyone with limited assets who can't afford the initial single premium; or is currently receiving or expecting to receive Medicaid benefits; or whose only source of income is Social Security or Supplemental Security Income.

Combination policies are suitable for financially independent mature adults who currently self-insure the Long Term Care risk but are concerned about the potential cost as they want to be able to pass assets to their heirs. Suitability standards call for having invested assets of at least $300,000 excluding the primary home and any qualified retirement plan assets. Suitable premium sources may include savings accounts, money market accounts, CDs, existing cash value life insurance, assets earmarked for financial emergencies (such as for Long Term Care expenses), and IRA, 401(k) and other qualified plans, provided the consumer understands the tax implications. Unsuitable premium sources would include assets used to provide income for living expenses and savings vehicles that have substantial early liquidation penalties.

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• Life Insurance/Long Term Care Combination Policies