Long Term Care University – Question of the Month – 12/15/16
By Aaron Skloff, AIF, CFA, MBA
Q: We read the Long Term Care University article that compares Traditional to Combination Life and Long Term Care Insurance , Combination Life and Long Term Care Insurance With and Without Inflation Protection, and Combination Life and LTC Insurance With and Without Inflation Protection Part 2. We prefer the Combination policy (or Hybrid). Are there other inflation protection designs for a Combination policy with Lifetime benefits?
The Problem – The Cost of an Extended Period of Long Term Care
According to the U.S. Department of Health and Human Services, 7 in 10 people over the age 65 will require long term care. Although the average length of long term care is approximately three years, 20% will need care for longer than five years. One of the largest long term care insurance companies reported that 50% of all claims dollars it has paid are due to dementia, including Alzheimer’s disease. According to the Alzheimer’s Association, 1 in 9 people age 65 and older and about 1 in 3 people age 85 and older have Alzheimer’s disease. The duration of Alzheimer’s disease is generally four to eight years after a diagnosis, but can last as long as 20 years. Applying the historical 4% compound growth rate of long term care services, the cost of care will double every 18 years.
The Solution – Combination Life and Long Term Care Insurance With or Without Inflation Protection
When evaluating Combination policies, it is important to understand what your monthly and total long term care (LTC) benefits are when you purchase the policy, and what they will be when you are likely to need care. It also important to understand your life insurance benefits.
Numbers Speak Louder than Words
Let’s look at a husband and wife that are each 55 years of age. They are comparing Combination policies with lifetime benefits. The first policy has no inflation protection, while the second policy has 3% compound inflation protection on the continuation benefit.
Combination Policy Without Inflation Protection
If they make a combined one-time premium payment of $100,000 they immediately gain a combined tax free $12,280 per month LTC benefit ($6,140 per month per person) available for an unlimited number of months for LTC costs; literally a lifetime worth of LTC. They also gain a combined tax free $153,488 death benefit when the second person dies, if the policy’s LTC benefits are unused. Please see the chart below. The pros of this policy are a high initial monthly LTC benefit and a lifetime of total LTC benefits that can never run out; along with a fixed death benefit. The cons are the monthly LTC benefit does not grow.
Combination Policy Without Inflation Protection on Base Benefits and 3% Compound Inflation Protection on Continuation Benefits
If they make a combined one-time premium payment of $100,000 they immediately gain a combined tax free $7,340 per month LTC benefit ($3,670 per month per person) available for 25 months. This is called the base benefit. They also gain a combined tax free $70,488 death benefit when the second person dies, if the policy’s LTC benefits are unused. Please see the chart below.
They also gain a second benefit that pays for LTC from the 26th month through the rest of their lives. This is called the continuation benefit. With 3% compound inflation protection, their continuation benefits will grow every year. In 25 years when they are likely to need LTC at the age of 80, they will have a tax free $14,920 per month LTC benefit ($7,460 per month per person) available for an unlimited number of months for LTC costs; literally a lifetime worth of LTC. Compared to the policy without inflation protection, this policy has lower benefits in the first 25 months ($7,340 vs. $12,280) and higher benefits starting in the 26th month ($14,920 vs. $12,280 in year 25). Please see the chart below. The pros of these policies are a lower initial monthly base and continuation LTC benefits, with an unlimited amount of growth on the continuation benefit. The cons are a lower monthly benefit if LTC is needed in earlier years and a lower death benefit.
Action Step – Purchase a Combination Life and Long Term Care Policy that Best Suits Your Needs
As prices vary between companies, review multiple quotes before purchasing a policy that best suits your needs.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA) charter holder, Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.