Co-authored by Leah Schmid, CPA, CFP®, Associate Advisor at Wipfli Financial Advisors
Many of us are familiar with the adage, “Health is wealth.” This proverb holds more meaning and truth as we age. We’ve all heard stories of acquaintances or family members who faced a health problem that created a mountain of medical bills. Unfortunately, this issue is far too common, and our nation’s seniors are particularly vulnerable to it — according to Morningstar®, 52.3% of people turning age 65 will have a long-term care need at some point during their lives.1
Financing Expenses With Long-Term Care Insurance
One way to manage medical costs is to invest in a long-term care insurance policy. This type of coverage is designed to help you pay for the expenses associated with in-home care or a lengthy stay in a nursing home. While there are different types of coverage options available, in general, these plans are designed to cover your costs through the policy premiums you pay, protecting other assets you may have earmarked for your children or grandchildren. The drawback of this type of policy is that the coverage is limited to long-term care — therefore, if you never experience a long-term care event, the premiums paid into the policy will never come back to you or your family as a benefit.
Understanding the Long-Term Care Insurance Landscape
The combination of higher-than-expected claims on long-term care policies and depressed bond yields forced some smaller insurance companies out of the long-term care insurance space (note that bonds are the investment vehicles primarily used by insurers for the reserves they hold to pay long-term care insurance claims). The providers that remain in the space are moving toward offering what are commonly called “asset-based” or “combination” long-term care products, which can have significant advantages for policyholders. Most of these new combination products have a life insurance component and a long-term care component, allowing more flexibility in how policyholders receive benefits.
The new breed of combination products alleviates many of the issues we’ve seen in traditional long-term care policies. A combined life and long-term care policy uses one “benefit pool,” funded by premium dollars, to provide both life and long-term care coverage. If you experience a long-term care event, the policy pays a benefit to offset the cost of your care. After covering these costs, any residual value left in the policy is subsequently paid out by the insurer to your beneficiaries at your passing. If you never experience a long-term care event, the entire benefit pool of the policy is paid out by the insurer to your beneficiaries at your passing. This eliminates the possibility of never receiving a benefit for your premium dollars. Better still, the benefit you receive is income-tax free, whether it’s paid out as a long-term care benefit or death benefit.
Should You Consider a Combination Policy?
Combination policies are a great option if you’re looking for long-term care coverage, but they are particularly useful if you have an existing cash value life insurance policy that is no longer a good fit. As we near retirement, most of us have a reduced need for standalone life insurance coverage. It may make sense for you to exchange that policy for one that better fits your current and future needs. You can customize a combination policy to maximize long-term care coverage and provide a supplemental life insurance benefit, or vice versa.
Permanent life insurance policies, like whole life or universal life policies, can be exchanged for combination policies without negative tax consequences. In addition, the accumulated cash value that you exchange for the new combination life insurance/long-term care insurance policy could allow you to avoid additional premium payments altogether. The cash value in your existing policy may be sufficient to fully fund your new policy. You may also be able to get a higher benefit by making the switch.
In our experience, cash value life insurance policyholders who remain in reasonably good health may find that they can receive a larger total benefit in a new policy than the one they had in their old policy. This is largely due to overall improvements in life insurance pricing over time — a reflection of the fact that life expectancy has improved considerably over the past several decades.
Earlier this year, we helped a client exchange an existing standalone life insurance policy for a new combination life/long-term care policy. The client received twice the death benefit in the new policy and was able to fund it with the cash value in their existing policy. The client no longer makes annual premium payments and received coverage that will protect them if they experience a long-term care event.
As with any type of life insurance, benefits and costs are dependent on several factors, including your general health. If you’d like to learn more about your options, reach out to one of our financial advisors — you just might benefit from the combination!
Contact a Wipfli Financial advisor to start the conversation!