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Taking Care of Mom and Dad: LTC Riders on Life Insurance Policies

Among the other benefits life insurance policies offer is the LTC rider. As people live longer and need the benefits provided by long-term care insurance, such riders are becoming ever more popular. Insurance companies are responding by creating new kinds of policies that combine life and long-term care coverage, attaching a rider 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 can be beneficial to the insurer, the policy holder and the agent.

This combination of benefits is marketed as a "living benefit" or "living needs" rider. It draws on the life insurance benefits for LTC coverage -- the LTC rider is attached to the life policy "at no charge." It's like borrowing from the life insurance to pay LTC benefits.

One of the big positives of the LTC rider is that the policy holder gets all of the advantages of both the life insurance and LTC policies, especially the life insurance policy's required nonforfeiture provisions that are not required for LTC policies.

Here's how the combined life/LTC insurance product works: Your parents buy cash-value life insurance and satisfy their coverage needs by adding an LTC rider to it. When they need long-term care, they start taking money from the death benefit -- usually on a prearranged schedule. These withdrawals are tax free. When they pass away, their beneficiaries get the insurance's death benefit minus whatever monies they have withdrawn. For example, taking $60,000 from a $100,000 policy leaves $40,000 to be paid to their beneficiaries.

Specific examples of this product include New York Life's Asset Preserver. Your parents put up a single cash premium -- enough to buy a minimum of $24,000 of universal life insurance (specific costs vary, depending on age, sex and health) and then decide how many months they want the LTC benefits to run. They can take payments over as little as two years or as many as four years (after four years, New York Life extends its policy for another 18 months). The payments are guaranteed to last for the promised period.

A 65-year-old woman, investing $50,000 in this type of policy, would get $92,150 in death benefits and pay about $252 a year for the LTC protection. Currently, women account for roughly 70 percent of the LTC rider business.

CNA Insurance's version of this policy is called Viacare. It pays benefits at the fixed rate of 2 percent a month. John Hancock offers Unison -- a variable universal life policy plus an LTC rider. With this policy, your parents invest their policy's cash value in mutual funds. The money available for LTC care will depend on how much your parents put into the policy and how the markets do.

Of the policies sold, the average face value in 2002 was about $450,000. If your parents are 55 and want to assume that their policy will earn 10 percent on its investments, they'd pay $5,839 a year plus $348 for LTC benefits. If they want to assume a 6 percent return, they'd pay $8,237 for the insurance and $360 for the LTC benefits.

LTC rider benefits can be 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; prior hospitalization of at least three days may be required; benefits may be triggered by impaired activities of daily living; levels of care include: skilled, intermediate, custodial and home health care. In addition, certain optional benefits may also be provided such as adult day care, cost of living protection, hospice care, etc.

The LTC rider includes an explanation of how the long-term care benefits interact with other components of the policy, an explanation of the amount of benefits, the length of benefits and the guaranteed lifetime benefits -- if any -- for each covered person, as well as any exclusions, reductions or limitations on long-term care coverage.

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 may also be expressed as a factor of the face amount of the life policy. For example, 2 percent of the face amount of the policy may be paid monthly as an LTC benefit up to a specified maximum.

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

1) LTC option, which may provide up to 70 to 80 percent of the policy's death benefit to offset nursing home expenses.

2) Terminal illness option, which can provide 90 to 95 percent of the death benefit as a pre-death benefit to offset medical expenses.

In the late 1990s and early 2000s, insurance companies began offering policies that combined the investment advantages of annuities and LTC insurance. An annuity, designed to be a retirement vehicle, may be issued with an LTC rider in much the same way that the LTC rider may be attached to a life insurance policy. With this arrangement, the annuity provides necessary funds to help with LTC expenses. This reduces the amount of money in the annuity and, consequently, the monthly retirement income that the annuity produces.

One final use of an LTC rider is in combination with a disability income policy. Disability income insurance is designed to protect a person's most important asset: the ability to earn an income. However, the disability income need normally ends at age 65 or retirement since the policy holder no longer has earned income.

LTC riders are fairly new to the life insurance business, so it's best to do some homework when deciding upon a policy and whether the benefits it provides are in line with the premiums your parents pay.

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