The Best of Both Worlds? `Linked’ policies tie life insurance to long-term care protection; A look at the pros and cons
By Glenn Ruffenach • 20 December 2004 • The Wall Street Journal
BUYING LONG-TERM care insurance is like going on a diet. You know it’s probably a good idea. But taking the actual step — whether it’s counting calories or paying hefty premiums each year for a policy you might not need for decades — is disagreeable at best.
Now, financial planners and some insurers are seeing increased interest among clients in a product that makes buying long-term care insurance, if not painless, a bit more palatable.
Called “linked” policies (or sometimes “combination” or “hybrid” policies), these tools are actually two products in one: a life-insurance policy linked to, or combined with, long-term care benefits. If the buyer at some point needs care — at home, or in an assisted-living center or a nursing home — the policy provides monthly payments. If the buyer never requires long-term care, the policy pays a death benefit.
That twist — the knowledge that your money will get you something, whether it’s help with long-term care bills or a lump sum for your heirs — is primarily what sets linked policies apart from traditional coverage. Many consumers are reluctant to buy conventional long-term care insurance, reasoning — right or wrong — that if they never need care, years of premiums will have gone to waste.
A linked policy offers “a tangible benefit while you’re still alive,” says Joseph N. Cheek, a physician in Dallas who has purchased the coverage. “That gives you a level of comfort.”
Of course, linked policies aren’t for everyone. Most are purchased by means of a single — and sizable — premium: at least $50,000 in many cases. Such coverage also tends to have fewer options than traditional long-term care insurance. While that simplicity appeals to some, it might also make it tougher to tailor a linked policy to your individual needs.
If you’re thinking about the possible need for long-term care and how to pay for it — and you should be — here’s a look at how linked policies work, their advantages and disadvantages.
The Mechanics
A linked policy starts with life insurance, typically whole life or universal life. A rider is then attached to the policy that guarantees, for instance, two to six years of long-term care benefits. The rider does this by promising to “accelerate” the policy’s death benefit. In other words, if you need long-term care, the linked policy will begin paying out, or accelerating, the money your estate would have received at your death.
Additional riders, if desired, can create a lifetime stream of long-term care benefits, or add inflation protection for those payouts. The more riders, the more expensive the policy.
Clark Randall, a certified financial planner with Lincoln Financial Advisors in Dallas, gives the example of a 65-year-old man buying a linked policy for a one-time premium of approximately $111,000. If the client needs long-term care, the policy guarantees benefits of about $4,000 a month for life, as well as 5% annual inflation protection. If the client wishes to walk away, the original premium is returned, possibly with interest. If the client dies without tapping the long-term care coverage, his estate gets a guaranteed death benefit of about $144,000.
“It’s a pretty neat alternative” to a traditional policy, says Mr. Randall, who has had several clients buy linked policies. “The worst thing that happens: you need long-term care, and you’re protected. The best thing that happens: you don’t need long-term care, and you’re still protected. Live, die, or quit — you’re still OK.”
Where does the money for the premium come from? Linked policies appeal mainly to people in their 50s and older — individuals who, ideally, have considered the possible need for long-term care and set aside money to help pay for it. Often, though, these contingency funds are “sitting in a CD or savings account and earning 1.5% or less,” says Bruce Moon, director of financial services products for Golden Rule Insurance Co. in Lawrenceville, Ill.
Thus, the thinking: Take that lump sum and use it to purchase a linked policy.
“It becomes a wealth-planning tool,” Mr. Moon says. “Yes, you’re allocating money to long-term care, but if you never use it, all the money passes to your heirs.”
The Advantages
In one sense, the biggest advantage of any long-term care policy — linked or traditional — is that buyers gain a measure of protection for their lifestyles and nest eggs. Even though most Americans will never see the inside of a nursing home, chances are good that many older adults will need some form of extended care, most likely in their homes. According to a recent study by MetLife Inc., the average cost of home care in the U.S. is already $18 an hour.
Linked policies actually have been available for more than a decade. For most of that time the product hasn’t played a big role on the long-term care stage. A study published in June by America’s Health Insurance Plans, a trade association, found that such coverage accounted for only 3% of the 9.2 million long-term care policies sold in the U.S. through 2002.
More recently, though, changes — and some turmoil — in the long-term care insurance business have worked in linked policies’ favor. Carl Friedrich, a consulting actuary in Chicago with Milliman USA, a benefits consulting firm, notes that several insurers, wary of their exposure to long-term care bills, have simply stopped selling traditional coverage. At the same time, errors by some insurers — in calculating where they could set fees and still have sufficient reserves to pay claims — have translated into sizable rate increases for policyholders.
The result, says Mr. Friedrich, has been a search for “some lower-risk alternatives.” Linked policies tend to fit that bill. With such coverage, insurers have a better handle on future costs, given that premiums and benefits are guaranteed. Consumers, meanwhile, are paying a single fee upfront. That means potential increases in premiums become a moot point. Says Mr. Randall in Dallas: “Once you write the first check, you’re done.”
Linked policies tend to be simpler than traditional long-term care insurance. The latter typically offers more bells and whistles. (Do you want benefits paid out on a daily, weekly, or monthly basis? Do you want respite care? Do you want coverage outside the U.S.?) Such options can be helpful, but also can leave consumers overwhelmed.
Some financial planners and insurance brokers also note that long-term care benefits within linked policies have improved in recent years. The enhancements include stronger protection against inflation and more flexibility in the length of coverage. Such improvements, according to some insurers, are translating into increased business. At Lincoln Financial Group, in Philadelphia, sales of that company’s linked policy, called MoneyGuard, jumped 65% last year and are up close to 30% for the first six months of 2004. At Golden Rule, sales of Asset-Care, a linked policy, have climbed 10% to 15% in each of the past five years.
Baby boomers, in particular, “are looking for new financial solutions,” says Westley Thompson, president and chief executive officer of Lincoln Financial Distributors Inc., an arm of Lincoln Financial. “They aren’t going to turn their money over to an insurance company where they don’t have control over it.”
The Disadvantages
Perhaps the biggest criticism of linked policies is that such products provide some long-term care benefits and some life insurance but not enough of either one. “I question whether it’s more of a marketing gimmick,” says David Barkhausen, a fee-only life-insurance adviser in Lake Bluff, Ill. “People tend to buy permanent life insurance and long-term care coverage, if they buy either or both, at different points in their lives and for different reasons. There is no good reason to combine the two, other than to convince consumers that they are getting a `two-fer’ — life as well as long-term care insurance.”
Phyllis Shelton, president of LTC Consultants, a training and consulting company for long-term care insurance in Hendersonville, Tenn., says traditional coverage, even with the many options available, is actually more straightforward than a linked policy. That’s because a person with a conventional policy, in the end, is buying a single benefit — so much money per day or per month for long-term care — rather than mixing apples and oranges: life insurance and long-term care benefits. “Are you going to get the benefit from [a linked policy] that you’re expecting?” Ms. Shelton asks. “I don’t want people to be disappointed 10 or 20 or 30 years from now.”
Amy Pollock, an Atlanta-based agent for insurance broker LTC Financial Partners in Kirkland, Wash., asks: Why not take the $50,000 that one would pay for a linked policy and invest that money? “Assuming the investment throws off $2,500 a year, you could use that to pay the premium on a traditional long-term care insurance policy with twice the coverage” of a linked policy, she says. “And you aren’t tying up your $50,000” with an insurance company.
Of course, one risk with such a strategy is that the policyholder faces possible increases in premiums down the road. But Ms. Pollock counters that “top [insurers], rather than raise rates [on existing policies], will stop selling that product and come up with a new product [with] a higher price tag.” The old policies, of course, remain in force, and existing policyholders don’t get burned.
If you buy a linked policy and begin using long-term care benefits, the death benefit will begin to shrink (again, because that money is being “accelerated” to pay for extended care). “You have to ask if you’re willing to sacrifice a portion — or all — of the death benefit,” says Mr. Friedrich at Milliman. “That’s the big one.” And Vaughn W. Henry, an insurance consultant in Springfield, Ill., notes that the death benefit in a linked policy can create, if not a problem, a “planning point.”
“If you own the policy, it becomes part of your estate when you die,” Mr. Vaughn says. Depending on other holdings, he adds, that could push you over the estate-tax threshold, now at $1.5 million but set to rise over the next several years. “You have to coordinate [a linked policy] with the rest of your estate planning.”
D.R. Smithson, 73, a retired insurance representative in Virginia Beach, Va., says he has seen both sides of the equation — conventional long-term care insurance and linked policies — and several years ago decided to buy a linked product.
“I was a firm believer in traditional policies,” Mr. Smith says. “I call it `renting coverage’ — you pay so much per month or year, and if you need [long-term care benefits], you get it.”
But “if you can fund [a linked policy], this is the way to go. The money is there if needed [for long-term care]. If not, it remains in our estate. I think it’s a win-win situation.”
