Buyer Beware: Traps to Avoid as Companies Rush Hybrid Long Term Care to Market

As companies race hybrid LTC or “linked-benefit” plans to market, many are left scratching their heads wondering which products are best for themselves or their clients.  If a warning light is going off in your mind, heed the warning.

There are five main traps to avoid while searching for the best hybrid-long term care solutions, though more will likely follow.  This is due largely to the inexperience most insurance companies have with this specialized underwriting as well as struggles to know how to price this new model initially.

With traditional long term care insurance groaning under the pressure of low interest rates and plagued by their own inaccurate assumptions, many carriers are looking to link long term care benefits to more predictable life insurance or annuities. However, creating new products brings on the inevitable learning curve and many are attempting to limit their exposure with traps you will want to be aware of before marching ahead. Here are the top 5 to avoid:

1. Large, First-Year Premium Charges. You may be taking a 10% hit against your cash value in the first year in order to line someone else’s pockets. While most companies with a long history in the hybrid market offer a money-back guarantee, these newer products take 10% off the top of your investment.  As an example, you invest $100,000, but your cash value is only $90,000, day one. It is also important to know that these versions often carry large overrides, so your agent’s company may be pushing them aggressively.  In general, an override may pay an additional 2 or 3 points to the agent’s company or marketing organization.  However, some of these products give the agent a 10% commission and pay another 6% in override to the company doing the marketing. Both are well above industry standards and explain why 10% is deducted directly from your account. Look for low or NO premium expense charges in the first year other than annual cost of the insurance. Premium expense charges are laid out in illustrations for your protection.
2. Limited Access for LTC. Some offer as little as 50% access to the death benefit for facility care which is basically the same as the cash you have invested.  This version makes it similar to an annuity that waives penalty charges when you withdraw cash for long term care in a nursing home only.  However, it does not provide you with additional money beyond your investment to pay for long term care, which is likely the reason you are buying the product.
3. Extremely Limited Access for Home Care. Still others reduce access for home care even further, one as low as 20% of the total death benefit at this writing.  That means you can access less than your own cash investment making the benefit meaningless.  Still others don’t provide access for home health care at all, a feature typically seen in annuities touting long term care access.  You should know that home care accounts for nearly 80% of most long term care claims, so this is a substantial mislead for most consumers. An important question to ask yourself is whether you would prefer to receive care in your own home or in a nursing home.  I have known more than one client paying for their own home nurse because they do not want move  into a nursing home just to get their money back on their long term care policy. To be safe, look for 100% access for ALL types of extended care, including in your own home, so you will more likely benefit from the plan you purchased .
4. Long Term Care Riders Based on Non-Guaranteed Death Benefits. Guarantees of the benefits paying out at time of claim (either for long term care or as a death benefit) depend solely on the underlying product.  Indexed and non-guaranteed universal life products can be a deal-killer if you need the long term care benefits to be there in the future or you are planning for the money to pass down to your family if you don’t need care. Better: Guaranteed universal life and whole life product designs are both available and do guarantee the death benefit and hence your long term care monthly payments.  Look for products that guarantee death benefits, regardless of what happens with interest rates, to guarantee the long term care benefits you are being shown will actually come true.  Also, extended riders offering a lifetime of long term care payments are generally not guaranteed pricing, meaning they can charge you more for the same benefits later.  However, there are some companies that guarantee the cost of the riders will not go up in the future.  This is essential to knowing you will be able to afford the plan throughout your life.
5. Long Waiting Periods to Access Long Term Care Benefits. Again, most companies with experience offer a standard of 7-day, 60-day or 90 days before they begin paying.  Think of it as your deductible.  Because Medicare often pays in the first 100 days, these standard waiting periods work for most people.  However, some new plans are putting 2-year and even 5 year waiting periods in before they will pay a dollar out for long term care, unbeknownst to most consumers. This is a big, red flag that the carrier you are looking at has not sold this type of product long enough to be confident in their own pricing.  The most important question is whether you can afford your own care for so long before your insurance pays.  Some of my clients are paying over $84,000 per year in St. Louis for care presently, so ask yourself if this is a reasonable risk to take.

Overall, hybrid-LTC is the best answer out there for most consumers regarding long term care planning as it is the only way to guarantee rates will stay the same for life.  Be sure you are working with a reputable company and one that has experience not in long term care, but in what is termed “linked-benefit”, “asset-based” or “hybrid” LTC before making your choice.  As always, we are here to help.