The importance of life insurance in long-term care planning

Have you ever had a client say, “I will use my assets if a potential long-term care need arises” or “I don’t have a plan if my parents need care”? These statements should be recognized as a need for further discussion and education around the importance of long-term care planning.

It’s up to you as an advisor to educate clients on the need for long-term care planning. 

Clients who do not have long-term care coverage risk using their personal resources, exposing their families to financial burden and even impacting the wealth of future generations. Most importantly, putting LTC planning in place allows for options and choices regarding care that clients most prefer — including care in their home. 

I have invested my time and resources into understanding LTC because I have seen the negative impact firsthand. As an immigrant from Serbia, my natural market is first-generation immigrants starting their lives over in the U.S. This group in particular experiences a crisis when it comes to long-term care. This generation of immigrants has risked everything to start a life in the U.S.; however, by investing in their present, they may have failed to invest in their future. 

Immigrant families face a great challenge to care for their older generation because they have not saved and planned enough for their retirement and long-term care. This is the reason I encourage all of you to invest time with your clients to talk about LTC when they are in the “accumulation” phase of their financial planning, because as the population ages, this financial crisis continues to cycle through generations.

There is too much at risk when a client does not plan for their long-term care because the enormous cost of care continues to rise.

How will they pay for care?

If an individual has a long-term care claim during their retirement but does not have a long-term care plan, how will they fund the rest of their life?

First, they will dip into their personal resources. Many people end up leveraging their bank accounts and annuities, then their pension, 401(k) and individual retirement accounts. 

What happens if that individual does not have all these assets? What if they run out of money? Where will they go if they cannot pay for a nursing home? They could be put into a critical financial state leading to debt, bankruptcy and financial burden on their family. This is the fastest way to deplete all of your assets, leave nothing behind and even take resources away from the family, causing a break in potential generational wealth.

People who are healthy and in their working years tend to ignore the need to invest and plan for long-term care because it’s not top of mind and does not benefit them in the present. This is a dangerous pretense, because our population is aging and creating a greater need for long-term care.

The good news is that the path to financial stability is simple and protects against the risk of long-term care needs. Funding for long-term care expenses can come from a variety of sources such as traditional long-term care insurance policies or personal resources (pensions, 401(k)s, IRAs, annuities and bank accounts). 

How life insurance can provide funding

Newer ways of funding long-term care include hybrid life insurance policies and life insurance policies with an LTC rider.

Traditional LTCi is designed to help fund long-term care costs and is a reliable way to supplement other sources of funding care. However, there are fewer LTCi choices in the marketplace and individual policies can be costly while the premiums are not guaranteed. This path is typically used with an additional source of funds. The return on the dollars spent for these premiums cannot be recouped unless the policyholder absolutely needs care and is able to trigger the policy’s benefits. This is the “use it or lose it” nature of the product. 

A hybrid life insurance policy has become a more popular way to fund long-term care. Hybrid life insurance links a life insurance policy with a long-term care policy. This is a great example of combining two resources to complement one another. 

Hybrid life is more focused on long-term care benefits than on life insurance benefits. If someone owns a substantial amount of permanent life insurance but they don’t have any LTC benefits, a hybrid life policy can be a valuable solution to pay for care.

On the other hand, individuals who only own a term insurance policy might be better off buying a permanent life insurance policy with an LTC rider.

In some instances, a hybrid life insurance policy can provide a larger pool of money in longer claim situations. However, a permanent life insurance policy with an LTC rider can provide a higher monthly payout, which puts more money in the claimant’s hands sooner. Looking at the average long-term claim period, permanent life insurance with an LTC rider can be an advantage for claims that only last two to three years.

A permanent life insurance policy with an LTC rider is often the best solution for clients who only own term insurance. An LTC rider can be added to either a universal life or whole life policy. This type of policy could help provide your client with the ultimate financial confidence. This product provides more flexibility because it not only has a strong LTC benefit, but it also has a potential for cash value and death benefit.

For example, not only will most permanent life policies with LTC riders waive premiums when a policyholder is on claim, but if your client loses their job a few years after purchasing their life insurance policy, they can take a policy loan to pay for the premium, if the policy has sufficient cash value. This option is not available with a hybrid life policy. 

The hybrid life policy has a smaller death benefit that will basically return premiums to the policyholder’s beneficiaries if the policyholder does not use their LTC benefits. If they don’t use your policy for LTC benefits, or only a small amount of LTC benefits are used, the permanent life insurance policy with LTC rider will pay beneficiaries a significant death benefit much higher than just a return of premiums. 

An LTC rider on a permanent life policy provides a guaranteed death benefit and tax advantages, but very few understand the benefits of this rider. Life insurance policies with an LTC rider can help clients address multiple protection needs with one product. 

When someone applies for a permanent life policy, they can choose to add the LTC rider for a small additional premium. At that time, they can specify the portion of the face amount that’s available for acceleration (basic LTC pool). Keep in mind that each LTC payment your client receives will reduce the death benefit by the same amount. 

The rider can provide an indemnity-type benefit or reimbursement. The indemnity type means your client is not required to submit bills and receipts each month in order to receive monthly benefit payments. With the reimbursement type, your client will need to continually submit receipts to get reimbursed for care received.

How an LTC rider works

Let’s assume your client purchases a whole life policy with an LTC rider with an initial death benefit of $500,000. Most LTC riders allow for acceleration of at least 95% of the death benefit toward LTC, which would equate to a $475,000 pool of LTC benefit to accelerate over the life of the policy. 

Some whole life insurance policies can have an increasing pool of LTC benefits based on the dividends increasing the death benefit over time. For the monthly benefit, the policyholder chooses either a 2% or 4% monthly benefit of the total pool of LTC benefit. So, a 4% monthly benefit on a $475,000 LTC pool translates to a $19,000 monthly benefit. Whatever amount is not used toward LTC benefit would pay out in death benefit. 

Now that you understand the ways to build the best LTC policy structure for your clients, you must take action. Advisors face a significant challenge as their clients continue to get older and live longer.

The need for long-term care planning is a critical and often overlooked aspect of financial planning. 

Many individuals, especially those in the accumulation phase, face a significant risk by not addressing LTC needs. This oversight can have severe consequences for their financial well-being, their families and even generational wealth. 

However, there are innovative solutions that offer a unique combination of benefits. Long-term care planning should be a fundamental part of a client’s financial strategy. By exploring the options available and educating clients about the risks they face without proper LTC planning, financial advisors can play a crucial role in securing their clients’ financial future and safeguarding generational wealth.

Milorad Markovic is director of life and disability insurance brokerage with Hunken Ewing Financial Group in Chicago. Contact him at [email protected].