Long term care insurance has always been considered one of the most difficult insurance products to understand. Unlike most policies that cover an event (homeowner’s insurance pays for damage incurred by an event like flooding, fire, or storm damage, life insurance pays out in the event of one’s death, etc.), LTC policies mitigate the financial costs of providing extended healthcare. As a result, there is not just one payout upon claim, but rather a series of ongoing payouts stretching over several months or several years, and therein lies the difficulty in understanding the various moving parts that give these programs life.
Of course, just when you think you’ve figured it all out, you learn about a different kind of long term care plan – a so-called â€ślinked-benefitâ€ť plan that links or combines life insurance and long term care insurance together. You don’t really need life insurance, but your financial advisor recommends you look into one of these plans. So what’s the fuss all about and what makes these policies different?
To begin with, the most popular “linked-benefit” (“hybrid or “asset-based”) long term care insurance plans are built on a cash value (universal) life insurance chassis, yet this technically accurate description can prove to be a misnomer. After all, whether your car has an 8-cylinder engine or a 6-cylinder engine and is automatic or standard, it’s still a car that gets you from Point A to Point B. Linked benefit LTC is no different – it might have a different design than a more conventional plan, but it’s still long term care insurance.
The Same, But Different
Conventional LTC plans provide a monthly benefit to pay for qualified long term care expenses. These plans have a deductible (or waiting period) before coverage begins and plans have the option of including inflation protection. The plan is typically funded with a monthly or annual premium paid over a lifetime (or until a claim is made). The premium is designed to be level (not to rise in price), but this is not guaranteed. Premiums are not refundable. The problem for many is that “if you don’t use it, you lose it.â€ť
Linked-benefit long term care plans also provide a monthly benefit to pay for qualified long term care expenses. These plans also have a deductible or waiting period before coverage begins and plans have the option of including inflation protection. The plan is typically funded with a single premium (paid up front). No additional payments are required, so the premium is guaranteed. Premiums are typically refundable. The advantage is that “if you don’t use it, you don’t lose it”.
Both plans require underwriting and the core benefits work the same; qualified long term care expenses are reimbursed on a monthly basis up to a monthly maximum amount. The practical differences between these two plan designs are two-fold: how they are funded and how they are refunded. And these are two differences that make a real difference.
How Linked-Benefit LTCi Works
A conventional long term care policy is designed with a variety of working components and riders so complicated that no one could compute the final cost without the aid of sophisticated illustration software that calculates an “affordable” monthly payment. Certainly $500 per month is a lot easier to swallow than $150,000 paid over twenty-five years. Never the less, funding flexibility is the number one advantage of a conventional long term care plan.
For all intents and purposes, the most popular linked-benefit LTC plans work just the reverse. You decide how much money you can comfortably set aside for future care and the insurance company provides a long term care benefit they’ll give you for the favor of managing that money. It’s kind of like priceline, right? Just name your price.
Your long term care benefit is easy to calculate because it’s based on only three key factors: a death benefit, a multiple of the death benefit (2-6 times), and a number of benefit years (2-7). The calculation is so easy my eight-year-old niece can do it on her Hello Kitty calculator.
- You make a $100,000 premium deposit.
- You receive a $150,000 death benefit.
- You receive a long term care benefit equal to 4 times the death benefit.
- Your long term care benefit is paid over 6 years.
Your long term care benefit is calculated as follows: $150,000 (death benefit) x 4 (death benefit multiplier) / 6 (years) = $100,000 per year ($8,333 per month) for up to 6 years.
Now thatâ€™s a huge benefit and it’s so simple to calculate, a caveman could do itâ€¦ or at least, my eight year old niece!
How Do They Do It?
These linked-benefit plans look really attractive with a large long term care benefit and a refundable premium. The plans often look so good that the first reaction is that it sounds too good to be true. And if it’s too good to be true, thenâ€¦ you know the rest, but nothing could be farther from the truth.
Stripped of confusing jargon and without illustrating long ledgers of guaranteed vs projected rates of return, and explaining how these affect your policy’s accumulation value, cash value, death benefit, and corresponding surrender over a period of 30-40 years (blah, blah, blah), these plans really just work like this:
You give an insurance company your money and they pay you a fixed return (typically 3.5% or more) while guaranteeing your principal – much like a bank CD. The insurance company then utilizes most of the policy earnings to pay for your long term care insurance.
Your policy earnings also pay a mortality expense for some life insurance too. If you don’t really need or want life insurance, don’t worry – the honest truth is you won’t really have any. There’s generally “just enough” life insurance to protect your premium deposit in case of death and to maintain the corresponding tax benefits life insurance provides.*
There’s really nothing mysterious or magical about linked-benefit LTC, it’s as simple a plan design as you will find. It’s all that and a bag of chips because you don’t only get excellent long term care coverage, you can get your money back too! And that part’s really easy to understand.
Which Plan is Best for You?
If you think one of these plans might be right for you, youâ€™ll be pleased to learn there are several excellent plans provided by some of the nation’s top-rated insurance companies. Which one is right for you will depend on your age, health, marital status, and ability to withstand the hassles of the underwriting process.
*Some policies can be designed with a significant death benefit, but this comes at the expense of the long term care benefit. If you need life insurance for estate or legacy planning purposes, we recommend buying a stand-alone life insurance policy that maximizes a death benefit to meet your financial goals. If your goal is to protect your assets in the case of a costly long term care event, then buy a policy that maximizes your long term care benefit.