Revisiting Long-Term Care Insurance

Long-term care insurance formTwo months ago, I wrote about whether you should buy long-term care insurance (LTC). My biggest concern with this type of insurance was and continues to be the huge rate increases that consumers generally face down the road.

Companies underpriced LTC insurance when it was first launched and took significant losses as a result. This was demonstrated again last week when Genworth announced it was restructuring its business following a $1.6 billion loss from its long-term care unit. As a result, many policyholders are facing huge rate increases.

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Knowing the risk of future large rate increases makes it pretty difficult for me to recommend LTC insurance. One protection against big rate increases was paying more up front to secure a fully paid policy. However, the most highly rated insurance companies no longer offer this option, according to Jack Lenenberg, owner of LTC Partner, an independent LTC insurance broker.

Is there a viable alternative?

But Lenenberg says you can still mitigate the uncertainty of rate increases by paying more up front in what is known as a hybrid policy. One of these polices I looked at is basically a life insurance contract with an LTC insurance rider, or extra benefit, attached. You buy as little life insurance as the company allows and whatever amount you deem necessary on long-term care insurance. These policies are offered by companies such as Lincoln Financial Group and Pacific Life.

I asked Lenenberg to get me quotes on both a traditional and a hybrid LTC policy. He tried to make the policies as comparable as possible for me, a 57-year-old man, including features such as a $180-a-day benefit with a 3 percent compounded annual increase and six years of payments.

Traditional long-term care from Mass Mutual had a premium of $2,559 annually. Lenenberg says Mass Mutual has not raised rates on this product for a while. By comparison, the Lincoln MoneyGuard II hybrid product came with an annual premium of $10,000 for 10 years. This means that, after a decade, the policy is fully paid.

The Lincoln hybrid policy also offered a couple of additional benefits: I could get $80,000 of the $100,000 premium returned if I canceled the policy while alive, and my heirs could get about $127,414 back as a death benefit if I didn’t need LTC.

My analysis

The Lincoln hybrid product may cost almost four times the annual price of the traditional, but I’m all paid up after 10 years and I am then protected from rate increases. The hybrid also offers the ability to get 80 percent of my cash back or leave a legacy for my heirs. Still, the traditional premium could be tax-deductible if I spend relatively large sums on health care (over 10 percent of AGI, or adjusted gross income).

Though it’s pretty hard to compare the two, I did an economic analysis using the opportunity cost of capital and making some major assumptions too complex to go into here. The calculations revealed that I would be paying the equivalent of $3,870 a year (even beyond the 10-year premiums) for the Lincoln hybrid vs. $2,559 for the traditional. The extra $1,311 per year for the hybrid provides protection from what I suspect would be big rate increases over the next two to three decades before I might need long-term care.

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My take is that it would be worth the extra costs up front to protect against future rate increases. It would also feel good to have a fully paid-up policy that protects against future catastrophes, such as letting the traditional LTC policy lapse by not paying the premium when billed.

Lenenberg says buying an LTC insurance policy is an emotional decision, and I agree. The economic analysis was the easy part since it required only a little math. Adding emotions to the equation, and thinking of how good it might feel to have my long-term care covered with a paid-up policy, actually made me reconsider my previous decision. In the end, however, the best decision for me is to self-insure.

Photo: Hailshadow/iStock

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