Buyer Beware! The Risk of Using Life Insurance with Long-Term Care or Chronic Illness Riders for Long-Term Care Planning....
As the demographics trend in our country points to the growth of a "graying" population, Long-Term Care (LTC) Planning becomes a more vital component to financially prepare clients facing the prospect of challenging or failing health. There are many ways to mitigate that risk, and one of the most popular is to include a Chronic Illness (CI) or Long-Term Care (LTC) rider with a life insurance policy.
While offering protection against the financial burden of extended care and providing estate/legacy planning is an achievable goal, advisors who merely add a CI or LTC rider to a life insurance policy may not be creating the effective LTC plan intended for clients. If you plan on maximizing a CI/LTC Rider strategy, your recommendation should include significant or fully guaranteed premiums and death benefits, as explained below….
Preserve The Integrity & Peace of Mind of Life Insurance
Traditionally, life insurance policies offer a death benefit to provide financial support to beneficiaries after the insured passes away, and there is a "target" premium to safely maintain or fully guarantee the death benefit into the future. Consumers often purchase (are sold) life insurance policies that overpromise, underperform, or both. Implementing a solution without a significant premium or death benefit guarantee can jeopardize the policy and its LTC Planning intent, so the policies advisors recommended today should include built-in guard rails or a proven system for periodic in-force analysis to ensure policy performance.
From a pure LTC Planning perspective, LTC benefits must be available when needed, so regardless of whether it's a fixed, variable, or indexed life insurance solution, it must have a premium and benefit structure that ensures peace of mind for the policyholder and their family.
The Irony of Non-Guaranteed Premiums
One of the primary objections to traditional LTC insurance (LTCi) is the non-guaranteed premium because, regardless of how emphatically carriers tout it, "rate stability" is not a rate guarantee. The irony is that far too many advisors are selling life insurance with policy designs that create as much or more risk for premium instability. It's illogical to substitute a non-guaranteed LTCi premium for another non-guaranteed life insurance premium, and that flawed logic is magnified when a variable or indexed life insurance option is recommended.
Balancing Death Benefit Needs and LTC Planning Goals
When life insurance death benefit has a specific purpose, striking a balance between that stated purpose and addressing a client's LTC Planning need can be challenging. The convenience of adding a CI/LTC rider to that policy without excluding the needed death benefit can create long-term estate or legacy planning chaos.
For example, Mr. Jones is leaving his business to his son Johnny, and his daughter Jenny is supposed to receive a $500,000 life insurance death benefit for estate equalization, so what happens when that death benefit is accelerated to provide liquidity to pay for Dad's dementia-related care? Jenny won't see the convenience of the CI/LTC rider when she comes to the advisor looking for the $500,000 she was promised……
Safeguarding Against Rising LTC Costs
LTC costs are increasing as fast or faster than medical expenses overall, and that is often factored into LTC Planning with inflation protection features. However, creating a quasi-inflation-protected benefit with a (projected) increasing life insurance death benefit and a CI/LTC rider is not a substitute for a guaranteed inflation protection feature. There has to be a pause when considering a strategy that means a (1) significant funding obligation from the client and then (2) a reliance on policy or market performance to (3) potentially generate an increasing death benefit….assuming (4) a policy is selected that actually provides CI/LTC benefits based on the current death benefit versus the death benefit at issue.
The rising cost of LTC is a significant concern, and there are numerous inflation-protected LTC solutions you can recommend with a better cost/benefit profile than a CI/LTC rider on a life insurance policy with a projected increasing death benefit.
Premium and benefit guarantees are essential in a Long-Term Care plan to provide the desired financial security for your client and their families or beneficiaries. Life insurance is an exceptional tool; however, to be considered a prudent LTC Planning strategy for your clients, the fundamental purpose of life insurance and effectively deploying it with a Chronic Illness or LTC rider must be understood.