Combine Long-Term Care With Life Insurance? Do the Numbers First

December 9, 2016

THE market for long-term care insurance, which covers the costs of some in-home health care, has had a rough month. One provider announced that it would not sell any more policies; another is headed toward insolvency, with billions of dollars in liabilities needing to be assumed by someone else.

Yet in the face of this bad news, consumers are being sold newly created long-term care products that are less expensive than the older products that guaranteed monthly payments — and that brought two insurers to a reckoning.

The main new ones are hybrid policies that offer both long-term care and life insurance. There are also life insurance policies that allow people to tap into the benefit to pay for care. Both are less expensive than traditional policies, whose sticker price has often shocked consumers.

But are these newer policies any good? Like most types of insurance, they are only as good as the consumer’s understanding of them — and that may not be as deep as it should be.

Long-term care insurance “has always been perceived as expensive for the era when someone is getting it,” said Dave Murray, a managing partner of Capitol Retirement Strategies, who has been selling it since 1998. “It’s definitely a confusing insurance.”

He said a person between the ages of 45 and 65 would pay $1,000 to $4,000 a year in premiums. While that may seem steep, Mr. Murray said, at least it might buy someone several hundred thousand dollars in care.

For most consumers, the hardest part is getting comfortable paying for insurance that will kick in when they need help doing things they take for granted today: bathing, dressing, eating. Even though, Mr. Murray said, three in four people who live to age 65 are likely to need some form of care, consumers are hesitant to buy it.

“I got cold feet at the last minute,” said Tom Jenkins, a certified public accountant in the Washington, D.C., area who is the sole income earner for his family. “It is a big decision. It is expensive.”

Mr. Jenkins, who is in his early 50s, said he had eventually purchased it after doing more research on various products and on the insurance companies themselves.

“My wife and I have always been able to project ourselves down the road a little bit,” he said. “Here’s where we are now, but what happens down the road if we get sick or develop some sort of terminal illness that lasts for a long time?”

In the end, they wanted to ensure that home care for one didn’t drain the savings needed by the other, and that their children wouldn’t have to care for them.

Linda Aikey, 62, of Burke, Va., who was married for 26 years before her husband died, said she and her brothers had worked together to care for their mother, who had heart problems in her late 80s. But she has no children and is worried about who will care for her.

“My mom was in great health until the last years of her life,” Ms. Aikey said. “So I figured there was probably a bigger chance that I’d need it than I wouldn’t. I figured when I got to that age I wouldn’t be able to afford it.”

Both Mr. Jenkins and Ms. Aikey had fairly understandable reasons for buying long-term care insurance. They sensed or feared a need and wanted a way to pay for their care themselves without relying on others.

But for many people, even those who may have similar concerns, it is difficult to get past the price — and the hope that they might not need it.

The recent announcements by the two insurance companies might add to that concern. John Hancock, one of the largest providers of this insurance, announced that it would stop selling new long-term care policies this month. And two subsidiaries of Penn Treaty American Corporation, with billions of dollars in obligations, are set to be liquidated next year.

Both announcements play into the consumer fear that an insurer won’t be able to pay claims decades down the road. Such concerns are generally unfounded, given how highly regulated the insurance industry is.

John Hancock is still obligated to honor, and pay out, the 1.2 million long-term care policies it has already sold. And with Penn Treaty, other insurance companies are required to pay most of the claims.

“You are seeing an evolution in traditional products, and at the same time you’re seeing a significant growth in linked benefit products,” said Jesse Slome, executive director of the American Association for Long-Term Care Insurance, a trade group for agents.

Mr. Slome continued, “Today, consumers are buying a life insurance policy where basically you are buying a diminished or lower death benefit in exchange for the ability to get your money back should you need long-term care.”

As with all insurance, the devil is in the details.

Sales of traditional policies have dropped considerably since their heyday in the early 2000s. But experts say that is largely because insurance carriers aren’t promoting a product that works extremely well for consumers but makes little money for insurers and is tricky to manage as companies project over decades.

Those original long-term care policies defied insurers’ expectations. People did not drop them the way they did life insurance, while others developed long-term illnesses that threw off the actuarial calculations.

Mr. Murray said people who had these generous policies — as he does, with its unlimited payments and 5 percent annual adjustment for inflation — should hold on to them.

But people looking for these traditional policies today are going to face higher premiums as well as caps on how much money they’ll receive and for how long they’ll receive it. Most top companies cap the payout period at five years and the annual inflation adjustment at 3 percent, Mr. Murray said.

Mr. Jenkins said he had bought a traditional policy for himself and his wife. It includes a 3 percent annual increase for inflation, and while the care payments are capped at three years each, the policy allows one spouse to share unused years with the other.

These days, the policies that many companies and brokers are pushing tend to be some combination of long-term care and life insurance. They seem simple to understand: There’s a death benefit, but if you need long-term care you can draw down against that benefit to a limit.

The numbers sound good, too. A $300,000 hybrid policy might pay out a maximum of $200,000 for care. But that’s it. The average man is looking at three to four years of care, which would use up that cap in a year or so.

“Insurance companies love selling life insurance,” Mr. Slome said. “Is the consumer getting a good or a bad deal? Time will tell.”

Jeff Merwin, the director of brokerage at Capitol Metro Financial Services, said traditional policies might still offer the best return in terms of premiums paid and benefits received, at least for those who can afford them.

“There is the potential that both the husband and wife might die and never need it, but that’s unlikely,” Mr. Merwin said. “If they do need it, they’ll get their money back much more quickly than any other product.”

It was this argument that persuaded Jim Toney, 67, of Alexandria, Va., to buy long-term care insurance. He had no such family fears pushing him to do so, but he liked what he got for his premium dollars.

“It was pretty simple that if I pay $20,000 over some time frame and then end up in a facility, in about three months I’d recoup all the money I paid,” he said.

And then he went about applying a series of rational calculations to how much he and his wife, who is younger, would need.

“When I look at the life span on my family’s side, it was not beyond 78 or 80, so I sized mine to a couple of years, no inflation, $6,000 a month,” he said. “My wife has a longer life span. We felt when I’m gone, she may live substantially longer than I will. So she has more coverage for a longer period of time.”

Casting such a cold eye on life and death would serve many well in calculating their needs for long-term or any insurance.

Combine Long-Term Care With Life Insurance? Do the Numbers First