The Insurance Buying Guide: LTC Attached to Life Insurance

In recent years, some insurance companies have begun to offer long-term care coverage in the form of a rider attached to a new issue of life insurance or possibly some other policy form, such as a disability income policy. With this marketing approach, there are two sales -- the life sale and the LTC sale -- which should be beneficial to the insurance company, the insured and the agent.

LTC rider benefits are very similar to those found in an LTC policy. The benefit structure includes the following:

• elimination periods in the range of 10 to 100 days;
• benefit periods of three to five years or longer;
• benefits may be triggered by impaired activities of daily living; and
• levels of care include skilled, intermediate, custodial and home health care.

In addition, certain optional benefits may be provided, such as adult day care, cost of living protection, hospice care, etc.

One difference with this "LTC package" is the method of determining LTC benefits. The benefits may be expressed as a specific daily amount -- $50, $100 or $150 per day, for example. They also may be expressed as a factor of the face amount of the life insurance policy. For instance, 2 percent of the face amount of the policy may be paid monthly as an LTC benefit, up to a specified maximum.

For example, John has a $100,000 universal life policy with an LTC rider that provides a monthly LTC benefit of 2 percent of the face amount, up to a maximum of $50,000. If John were admitted to an LTC facility, his benefit would be 2% x $100,000 = $2,000 per month. John would be limited to a 25-month benefit period, since within 25 months, the maximum LTC benefit of $50,000 would be exhausted.

There are basically two approaches to the LTC rider concept. The first of these may be referred to as a generalized or independent approach. Under this approach, the LTC rider is independent from the life policy, in that LTC benefits paid to the insured will not affect the life policy's face amount or cash value.

For example, Sam has a $100,000 life policy with an independent LTC rider and collects $20,000 in LTC benefits. The $100,000 face amount, as well as the policy's cash value, will not be reduced by the amount of the LTC benefits paid.

The integrated approach links the LTC benefits paid to the life policy's face amount and/or cash value. The result is a reduction in these values.

Example: Sam has the $100,000 life policy with an integrated LTC rider and collects $20,000 in LTC benefits. The face amount of Sam's life policy is reduced by the benefits paid, resulting in a reduced death benefit of $80,000.

Critics of this approach argue that the reduction in the policy's death benefit is a disadvantage to the insured. Valuable life insurance benefits are being lost or reduced at a time when they may be needed most. In addition, even if you wanted to purchase additional life insurance to offset this reduction, there's a very good chance that you will be uninsurable, having spent some time in a nursing home.

This combination of life insurance and LTC benefits is marketed as a Living Benefit or Living Needs rider. This approach draws on the life insurance benefits to generate LTC benefits. Thus, the LTC rider is attached to the life policy "at no charge." It's like borrowing from the life insurance to pay LTC benefits.

Generally, the Living Needs Rider provides funds for LTC expenses or for expenses incurred with a terminal illness. Under this rider, you may be advanced life insurance dollars to cover these expenses. There are usually two options associated with this rider.

The first is the LTC Option, which typically provides up to 70 percent to 80 percent of the policy's death benefit to offset nursing home expenses. The second is the Terminal Illness Option, which can provide 90 percent to 95 percent of the death benefit as a pre-death benefit to be used to offset medical expenses.

The conditions under which these benefits are paid are determined by the policy and the insurance company. The rider may link benefits to activities of daily living, or it may require a minimum prior hospitalization due to an accident or sickness.

Typically, the rider also will contain an elimination period. The benefit period is linked to the dollar amount, as opposed to a time element. Benefits will cease when you have used up all of the money available (the percentage of the policy's face amount). In most other respects, the Living Needs Rider functions in much the same way as a basic LTC policy.