Retirement: Long-Term Strategies

Retirement: Long-Term Strategies

Win-win health insurance

Combining long-term health insurance with life insurance to maximize benefits

By Humberto Cruz
June 4, 2001: 6:29 a.m. ET

NEW YORK (Tribune Media) - We say one thing and do another: 86 percent of Americans, according to a survey by the National Council on the Aging, say long-term care is a major problem. But just 4 percent of those at risk are covered by long-term care insurance, according to industry estimates.

The reasons are many. Long-term care is expensive – a comprehensive policy with an inflation rider for a healthy 55-year-old can cost upwards of $2,300 a year.

Policies can be difficult to understand and often vary widely in benefits, features and price. There's no consensus as to when you should consider buying a policy – as soon as you hit 50 or earlier, some argue, while others say not until you're at least 65, particularly if you are healthy.

Many people also believe, mistakenly, that Medicare or their regular health insurance policy will cover the costs of long-term care.

But perhaps the greatest reason is that many people don't want to spend money for something they think – or wish – won't happen to them.

Because of this concern, a number of relatively new policies combine long-term care with life insurance. The idea is that, if you never have need for long-term care, your premium wasn't "wasted."

I will discuss the basic features of these new products so you can understand them better. I'm not recommending for or against them, only making you aware of them so you can be a better consumer.

As the National Association of Insurance Commissioners suggests, you should contact several companies and agents before buying any kind of policy. Be sure to compare benefits, coverage limits and, of course, costs. Check the financial strength of your insurance company. And never let anyone pressure or scare you into making a quick decision.

That disclaimer aside, let's look at some of the pros and cons.

Premium dollars don't go to waste

"Most people don't buy long-term care insurance because, if not used, the premium is lost," said Placido "Pete" Blanco, a certified financial planner in Coral Gables, Fla., who helped design a combination life insurance/long term care policy available from National Life Insurance Company.

Elaine Marvin, a certified financial planner with Golden Rule Insurance Company of Lawrenceville, Ill., agrees.

"It is more of a win-win solution because, if you don't need long-term care, you didn't just spend premium dollars," she said.

While the details vary among policies, this is how they basically work: For a lump sum premium or a series of annual payments, you buy a policy that guarantees a certain death benefit, which is free of income taxes to your heirs. And while you are alive, you can tap into the death benefit, also tax free, if you go into a nursing home or need home health care.

Here is an illustration Marvin prepared at my request: For a lump sum premium of $84,983, my wife, Georgina, 56, and I, 55, could buy a second-to-die policy offering $265,834 in combined death/long-term care benefits.

Each month, we could withdraw up to $5,317, or 2 percent of the death benefit, for long-term care until the money was all used. Of course, each withdrawal would also reduce and eventually exhaust the death benefit. If the money were not needed for long-term care, the policy's cash value would grow tax-deferred.

Based on a guaranteed 4 percent interest rate, the policy's cash surrender value would be $175,165 after 20 years. If the policy paid out more than the guaranteed 4 percent – historically it has since it was introduced in 1988 – both the cash surrender value and the combined death/long-term care benefit would grow.

At any time you think you no longer need the policy, you can cash it in for its surrender value. At that time, you would owe taxes on any increase in value above your premium payments.

Large premium may be deterrent

"What is attractive is that eventually you are going to collect, or your heirs collect at your death," said Mari Adam, a certified financial planner in Boca Raton, Fla., who is not affiliated with any company selling the policies.

Another advantage is that, unlike regular long-term care insurance policies, your premiums can never increase.

"Intuitively, it is a great product," Adam said. "The problem is finding the right client who is a good match for this policy."

The right client would be somebody who can afford the typically large premiums and won't need the money for something else, Adam said. Also, a policy buyer should be willing to accept relatively modest returns, although the policy's net interest rate has consistently exceeded the average after-tax yield of one-year certificates of deposit for taxpayers in the 28 percent tax bracket.