More Tips on Long-Term Care Insurance

"What if I never need long-term care?"

That's one of the biggest buyer objections to purchasing long-term care insurance, or LTCI, and it was a big topic of conversation among Morningstar readers after my last column on buying tips for long-term care insurance.

It's an understandable concern because LTCI is costly. Policy premiums can easily top $4,000 annually; it's important to stick with these policies once they are purchased. Yet insurers have been pushing through double-digit rate hikes on existing policyholders in recent years.

Several readers suggested an alternative: purchasing a life insurance policy that incorporates an LTC benefit. If you don't need it, your heirs collect on the life insurance policy, and rates can be locked in.

These hybrid policies are getting traction in the market. New policy sales rose 19% in 2012, according to LIMRA, the industry research and consulting group, and premium revenue from new policies rose 10%. By contrast, sales of new individual LTCI-only policies were flat last year, though revenue from new policies rose 5%.

Here's a closer look at hybrid life insurance/LTCI policies--and responses to other questions and comments raised by readers last month on timing an LTCI purchase, self-insurance, and how to find the right insurance broker.

Using Life Insurance as an Alternative to LTCI
There actually are two ways to use life insurance to protect against long-term care risk. The first is to buy a life insurance policy with a chronic illness rider. This is an accelerated death-benefit rider that can pay out 2% of a death benefit monthly to pay for care. That means the policy must be very large in order to pay out a significant benefit. In most states, these policies aren't formally classified as LTC policies.

The second option is a combination life/LTCI policy, such as Lincoln National's MoneyGuard Reserve Plus. This is a universal life insurance policy with an optional LTC benefit rider. Policy premiums can be paid upfront or in installments during a 10-year period, and the premium rates are locked in at the time of purchase. There's also a refund feature available to buyers who change their minds, after all premiums have been paid.

"The biggest driver of a combination policy is the need people have to protect their assets in the event of a catastrophic long-term care need but not tie up their funds in an illiquid investment," says Steve Schoonveld, assistant vice president, head of linked benefit product solutions at Lincoln National.

Schoonveld provides this example. A 60-year-old healthy, nonsmoking woman could purchase a $100,000 single-premium MoneyGuard policy that provides two years of convalescent care and an additional two years of extended benefits with a 3% per year compound inflation option (extended benefits are an optionally priced multiplier of the face amount at either two or four years). The maximum long-term care benefit is initially $56,000 in the first of the four years. In 25 years at age 85, the maximum long-term care benefit will be $117,300 in the first of the four years. If she doesn't need care, a $112,000 death benefit goes to her heirs. The policy also has a return-of-premium option, in case the buyer changes her mind.

By comparison, the average annual premium for a traditional LTCI policy covering a 55-year-old couple is $2,580 this year, according to the American Association for Long Term Care Insurance, or AALTCI. That buys an initial benefit of $164,000 (each) with 3% compound inflation. And the premiums continue so long as you hold the policy.

MoneyGuard is an individual policy; couples frequently each purchase a policy where the presence of a death benefit can help enhance the long-term care funding options for the surviving spouse, Schoonveld says. Pure LTCI also is sold as an individual policy, though couples can obtain discounts when they apply together.

Schoonveld notes that combination policies usually are designed to meet a limited amount of LTC need--typically two years. That's enough to cover most claims, and it's the direction that the overall LTC market has been moving in recent years.

Morningstar reader FamilyGuy commented that combination policies can be attractive if you plan to self-insure your LTC risk. "We have a $100,000 life insurance policy, with a $100,000 rider that will pay health benefits of up to $2,000 a month for four years or longer. The money can be used for assisted living, nursing home, or in-home care. It will cost about $40,000 paid out monthly over 10 years--$333 a month, for 10 years--for $100,000 of life insurance or LTC for a 63-year-old healthy female. It's expensive but was a good option for us, and it reduces the out-of-pocket expense if you plan to self-insure."

Buying Too Young?
Another reader wondered if he and his wife bought LTCI at too young an age. Both age 38, they purchased a policy through the workplace carrying an $80 monthly premium and a $10,000 maximum monthly benefit (each), with no inflation protection.

Most people won't need LTC protection until they're past age 65. Statistics show that about 40% of people with long-term care needs are younger than that age--but that's mostly people with birth defects or mental health issues--not situations where an unexpected care need arises, notes Jesse Slome, executive director of AALTCI. "People tend to draw from that statistic the idea that they won't be able to health qualify for LTC if they wait until their 60s, but that's not the case," Slome says.

"I always tell people that the sweet spot for buying LTCI is between your mid-50s and mid-60s."

What Does It Mean to Self-Insure?
One reader--userjm--challenged our use of the term "self-insure" in the context of LTCI. "Deciding you will pay out of your own assets is not insurance."

Technical definitions aside, some very affluent people do intend to cover their LTC risk out of personal funds. Actuarial consulting firm Milliman estimates that in order to have a 95% chance of having sufficient resources to self-fund an LTC need, you should be able to set aside $500,000-$750,000 in retirement assets. "Self-insuring typically means you have $2 million," Slome says.

But he cautions that there are downsides, even for people who can afford to go this route.

"Many people who get to that level of wealth did it by living a frugal lifestyle," he says. "What I've seen is that when they need care down road and see the costs, they will forgo it if they can because it's their money, not the insurance company's.

"Self-insurance works if you are of the mind-set that, 'We have $2 million, and we will allocate that amount and agree to spend it all if we need to,'" he adds. "The reason to buy insurance is someone else pays the bills."

Finding a Qualified Broker
A reader wrote about problems purchasing LTCI from insurance agents who made costly mistakes, underscoring the need to find an insurance broker who specializes in LTCI and understands the market.

"It pays to talk to an insurance broker who specializes in LTCI and knows the different options," Slome says. That also means finding a broker who represents multiple companies. "A good specialist today has appointments with five or six insurance companies," he adds.

Slome notes that you want a broker whose business is at least half LTCI. "Insurance companies often say 80% of their sales come from people who sell four or fewer policies per year," he says. "That person is not an LTCI specialist."

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.