A nursing home is the last place most people would want to leave their parents, but sometimes that’s exactly what they have to do.
Ann Marie Bailey, a financial advisor with Langley Federal Credit Union in Yorktown, Va., knows that from experience, having recently watched the children of two elderly clients struggle with making that gut-wrenching decision.
The children’s mother, Laura Puck, 85, insisted that she stay in her home, even after a series of minor strokes left her unable to take care of herself. After her husband passed away in May, she grew even more adamant, clinging to the home she long shared with the love of her life.
“They met in the third grade,” says Bailey of the elderly couple. “They were each other’s worlds.”
Sadly, there was little the children could do for their grief-stricken mother. Their parents’ long-term care policies covered only nursing home care, so they had no choice but to put her in a home to collect long-term care benefits. Regrettably, neither of the two had the resources or the ability to care for her on their own. (The mother’s name was changed to protect her privacy.)
Adding to the sting of the situation was the fact that the parents, who had been paying monthly premiums for more than 20 years, had never collected a penny in long-term care benefits prior to the children’s decision to place their mother in a home.
If only the products that are available now were available to the Pucks when they first signed on for coverage decades ago. The shortcomings of traditional long-term care insurance policies, such as those that the Pucks had in place, have led to the development of a new generation of products to help consumers protect against the care expenses that come with old age. Over the past five to six years, new hybrid products that work long-term care provisions into life insurance policies and annuities have emerged on the market, giving people more options, particularly those too old to otherwise qualify for straight long-term care insurance.
“What’s great about these hybrid products is that it’s a simpler approach than traditional long-term care insurance,” says Rob Comfort, executive vice president of institution services business consulting at LPL Financial. “With these hybrid products, you can typically use those dollars for many different purposes, including in-home and rehabilitation care.”
The new products are more flexible and address many of the drawbacks that have made consumers wary of long-term care insurance. The biggest gripe with traditional long-term care policies is that buyers could pay thousands of dollars in annual premiums and never receive any benefits if they died before they needed long-term care. The new products address this issue by offering a death benefit in the event that the insured dies before using all of the long-term care benefits.
“If you drop dead from a heart attack, you would never even get the benefit of the policy,” Bernie Krooks, an elder-law attorney and founding partner of New York law firm Littman Krooks, says of long-term care insurance.
Buyers of traditional long-term care policies have also complained of unrelenting premium hikes, causing many to abandon—or think about abandoning—policies at a point in their lives when they are most vulnerable to long-term care expenses.
A young working woman may have purchased a policy for $3,000 a year to cover $200 a day for nursing home care, but with premium increases she could still have found herself in trouble later on, explains Krooks. She could easily have wound up paying $8,000 a year or faced a reduction in the daily benefit just when she needed the coverage.
For older people, traditional long-term care insurance, if available at all, is also very pricey, given the risks the insurance company assumes. To be sure, an LTC insurance policyholder may end up making lifetime payments without ever collecting benefits, but the insurer is on the hook for the policyholder’s expenses as soon as the policyholder makes that first small payment. (Purchasers of the new products, in contrast, typically hand over a lump sum upfront.)
All this has made many people unwilling to buy long-term care insurance. With the new products, the industry is aiming to make up for the shortcomings of LTC insurance and hopefully recover from its huge black eye.
But acceptance of the new products is unlikely to come easily and not just because of the negative perceptions surrounding LTC insurance. People don’t generally picture themselves decades down the road walking around with a cane, much less in a wheelchair, and therefore avoid making plans for their decline. Many simply refuse to believe that they’ll live long enough to need a wheelchair or a cane.
The statistics, however, say otherwise. Today, healthy 65-year-olds have at least a 40% chance of living into their 90s, according to AgeLab, a research program within MIT’s School of Engineering that works with business, government and NGOs to improve the quality of life of older people. And six in 10 men and eight in 10 women will need chronic care, per AgeLab’s stats.
Meanwhile, LTC costs—whether at home, in an assisted living facility or in a nursing home— have been rising steadily. According to Genworth’s 2015 Cost of Care Study, a private room in a nursing home facility costs a median of $250 a day, or $91,250 a year, up 4.17% from 2014. In big metropolitan areas, the cost is much higher, with nursing homes in New York going for $182,500 per year.
The cost of adult daycare has also risen sharply. Adult daycare providers charge a median of $69 a day, or $25,185 a year, a steep 5.94% increase from 2014, according to the Genworth study. (See more details in our story, Costs of Long-Term Care.)
“A middle-class person who gets sick and needs these types of services can become bankrupt very quickly,” says Krooks.
With the emergence of a new class of hybrid insurance and annuity products, the hope is that consumers will overcome their reluctance and start thinking about—and planning for—their twilight years. The new product innovations just might help the medicine go down a little easier.
Advisors, at least, are paying attention to the products. Interest is “off the charts,” reports Lauren Mitchell, vice president of product management for LPL Financial, adding that educational events on long-term care planning draw strong crowds of advisors.
In spite of this, use of the products remains tepid, with advisors still in a learning and fact-finding phase. The advisors primarily using the products are those who have already incorporated life insurance into their businesses, Mitchell says. “I still think we’ve got a long way to go before they really catch on.”
One product that is gaining traction blends life insurance with a long-term care rider that allows the insured to receive LTC benefits up to a maximum monthly amount for a specified period of time, typically three to six years. These policies also offer a death benefit to beneficiaries if the insured dies without taking advantage of the long-term care benefits. They typically cover a wide range of care arrangements, including at-home care, adult daycare, assisted living facilities and, in some cases, even nursing homes outside the United States.
The drawback to these hybrid products is that the death benefit is significantly less than it otherwise would be under a pure life insurance policy, but observers say this is understandable given that the insurance company agrees to pay for long-term care if and when the policyholder needs it.
“I’m a fan of these products,” says Krooks. “We feel that the client is better off buying something, instead of rolling the dice and hoping they’re not one of the 50% who’s going to need this and then end up becoming bankrupt.”
In 2014, some 94,000 life insurance policies with long-term care riders were sold, up 4% from 2013, according to LIMRA. These so-called “life combination” policies have gained significant ground on traditional LTC insurance policies. Last year, 131,000 LTC insurance policies were purchased.
Still, the new products are far from closing the gap with the older products. At the end of 2014, only 500,000 life combination policies were in force, compared with more than an estimated 4.8 million traditional LTC policies, according to LIMRA.
Other products are also making inroads in the LTC insurance market. One that is gaining attention combines the features of a fixed annuity with a mechanism through which annuity holders can withdraw money for qualified long-term care expenses. A person buying this product might, for example, invest $100,000. The investor would earn interest at a guaranteed minimum rate, while having the ability to withdraw funds for long-term care expenses up to a specified monthly amount over a predefined period—say two to five years. Under this arrangement, the investor would typically be able to withdraw the funds for long-term care expenses at any time. If, however, they needed part or all of their initial $100,000 back before a predetermined time, they would be subject to hefty surrender charges.
“The beauty of these products is that they have this ability to multiply and give the client up to two and three times the initial investment to pay for long-term care expenses,” says LPL Financial’s Mitchell. “At the same time, if they don’t ever actually need to use that money for long-term care expenses, they still have their initial investment and whatever that’s earning at the fixed rate of return.”
In addition, these hybrid annuity products typically offer a death benefit. If the investor never needs long-term care, the accumulated value of the annuity contract passes to the investor’s beneficiaries. Another advantage is that LTC benefit payments are income tax-free.
There are some drawbacks, however. Because of the surrender charges, investors who put money into these hybrid annuities should be certain that they won’t need the money for a while. “Annuity-based policies usually come with seven, nine, or 10-plus years of surrender charges and therefore introduce a big potential negative element if a client needed to pull some or all of the funding,” says Mike McDonald, a financial advisor with Bremer Bank in South St. Paul, Minn. (Raymond James is the third-party marketer for Bremer Bank.)
Still, for some people, particularly those too old to qualify for traditional LTC insurance, these new annuity products can serve a useful purpose. Bailey of Langley Federal Credit Union used this product to help a 79-year-old client who had no long-term care protection. The woman was looking for peace of mind as she never wanted to be a burden to her daughter, who had a child in college and issues of her own, Bailey explains.
Bailey transferred $220,000 of the $490,000 the client had invested in fixed annuities into a hybrid annuity with long-term care benefits. “We didn’t want to put all of it into a long-term care product,” Bailey says. (Cetera is the third-party marketer for Langley Federal Credit Union.)
The policy covers adult daycare and in-home health care, a big plus for the client who wanted to be cared for at home. Even though the policy has been in place for three years, the client luckily hasn’t had to use it. “But she is getting up there in years and it is a concern,” Bailey notes.
Unfortunately, for some people, even the newer LTC products won’t cover them. Such was the case for a client that Gina O’Callaghan, a financial advisor at Ventura County Credit Union in Thousand Oaks, Calif., has served for almost two decades.
The client, 80, was diagnosed with a debilitating disease in her 30s and was never insurable for long-term care. Over the years, O’Callaghan has seen her deteriorate from using a cane, to using a walker, to later using a wheelchair.
The client recently declined further, needing more than the part-time care she was receiving at home, which significantly increased her expenses. She now pays $8,000 a month for 24-hour care at home, up 60% from when she was just receiving part-time care.
Realizing that her expenses would increase as her disease progressed, O’Callaghan put together a plan that would allow her client to stay at home as she wished. The client was of modest means, having retired as a teacher.
O’Callaghan placed her money into two buckets. The bulk of it went into a managed account, where the funds are readily available. “We have a very large chunk of her money sitting in something that is still growing based on what her goals are and her needs are, but is also liquid, in case her income needs change,” says O’Callaghan.
The rest of her money went into variable annuities with income riders that guarantee growth to the income base regardless of how the market performs. The riders also provide a steady stream of income, once tapped, O’Callaghan says. (CUSO Financial Services is the third-party marketer for Ventura County Credit Union.)
O’Callaghan recently “turned on” all the income from these annuities, providing the client with an income stream she is unlikely to outlive, even if she lives to 98. “I feel like we’re going to be okay,” O’Callaghan says.
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