Insurers meld LTC into life insurance

NEW YORK — More insurers are offering riders that include long-term-care coverage in life insurance policies.
The Hartford (Conn.) Financial Services Group Inc. in May made LTC coverage an option on its variable universal life policy. The rider allows clients to accelerate their death benefit up to the full policy limit for daily living needs, said Maureen Mohyde, the insurer’s director of gerontology.
AXA Financial Inc. in New York — which offers a rider adding LTC coverage to its variable universal life policy — later this month will make the rider available on universal life policies, said Robert Auer, vice president of life product marketing. “About 15% of clients who buy our VUL policy are adding the LTC rider,” he said.

John Hancock Life Insurance Co. in Boston and Nationwide Financial Services Inc. in Columbus, Ohio, also have death benefit acceleration riders that can be used to pay LTC costs.
So far, combination policies are not selling very well, said Patrick Bradley, senior vice president of sales for broker LTCI Partners LLC in Libertyville, Ill. “The life LTC policies usually require a sizable lump sum of cash in order to get even a marginal LTC benefit,” he said. “Many advisers that I talk with find individual policies more valuable to their clients.”
But investor psychology may work in the combined policies’ favor.
Clients don’t like the “use it or lose it” aspect of separate LTC coverage — requiring them to pay premiums they perceive to be high — with no possibility of receiving benefits unless they face the grim prospect of a long-term illness, noted Jesse Slome, executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif.
By adding long-term care to life insurance that has an investment component, clients feel they are getting a return for their money — and the satisfaction of knowing policy benefits eventually will be paid to their beneficiaries. That also can be accomplished via a LTC policy’s return-of-premium rider, but it costs 20% to 30% extra, Mr. Slome said.
Piggybacking long-term care onto life insurance also makes it easier for advisers to sell the coverage without having to learn all of its nuances. Advisers only have to explain to clients that part of the life insurance limit can be used to pay LTC expenses, without going into complex policy details.
For instance, The Hartford rider pays up to $260 a day for LTC expenses — corresponding to the tax-free daily limit allowed by the Internal Revenue Service, Ms. Mohyde said. The client has to show that an “activity of daily living” — such as bathing, dressing and eating — has been impaired or has to be certified by a physician as “chronically ill.”
There are no policy “gotchas” — a fear of many elderly clients who have trouble understanding the coverage, Ms. Mohyde said.

Cheaper alternative
LTC riders cost considerably less than separate LTC policies, because the client is paying to receive “inevitable” benefits early; policy limits eventually will have to be paid anyway by the insurer to beneficiaries at the time of death.
Death benefits are decreased by the amount used up for LTC expenses.
A 55-year-old buying a rider that would pay six years of LTC expenses would pay an additional premium of about $350, compared with about $1,500 for a separate LTC policy providing similar coverage, Mr. Auer noted.
However, he was quick to point out that a separate LTC policy can be more appropriate for clients who might need extensive care for 20 years or more and that AXA advisers are trained to recognize whether the rider or a separate policy — which AXA doesn’t offer — would be better for the client.
The premium for LTC riders attached to life insurance policies is about 20% of what a separate policy would cost, according to Ms. Mohyde.
A 45-year-old male would pay $218 for a rider providing benefits similar to a policy that costs $1,104, according to statistics provided by The Hartford.
Some insurers — including Prudential Financial Inc. in Newark, N.J. — have considered and rejected adding long-term care to life insurance policies.
More complication?
“You are taking a complicated product and adding it to another complicated product,” said Andy Mako, senior vice president of long-term care.
Another disadvantage is that if the life insurance policy lapses, so does the rider. A better approach, according to Mr. Mako — and the one which Prudential is taking — is to develop a simplified LTC product that will be easier for financial advisers to master and explain to clients.