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Dear Fix My Portfolio,
I keep getting these emails from my company about a new benefit they are offering that is a combination of life insurance and long-term-care insurance. I really want to get long-term-care insurance, but I don’t know if this is a good deal or not. There’s a deadline on this offer, which makes it seem weird to me. It’s not even our open enrollment period. Why do I have to decide so fast about something so important? I didn’t feel like I could ask somebody at my own company for objective advice, but I don’t know who to ask otherwise. What should I do?
N.C. employee
Dear N.C. employee,
You’re not the only one asking this question right now. The number of U.S. companies offering a voluntary benefit that combines life insurance with long-term-care insurance has skyrocketed in the past few years. While there’s no official tally of the offers out there, “our activity has gone up 35% this year alone,” says Dan Schmid, vice president of sales for Trustmark Voluntary Benefits, an insurance company that offers hybrid policies.
A variety of market forces have led the insurance industry to this point, which sounds arcane, but it matters for your decision tree. To decide whether this is a good deal, you have to consider whether a better offer might come along.
Better offers were certainly available years ago, when many employers offered group policies for stand-alone long-term care with generous benefits, and you could also more readily get coverage as an individual. But the market for this kind of policy imploded because costs were too great for the insurance companies, especially in a low-interest-rate environment.
In the past few years, the COVID-19 pandemic shifted people’s thinking about future healthcare costs, and legislation is pending across the country — and is already in force in Washington state — to mandate that companies provide this coverage in order to alleviate the burden on Medicare and Medicaid. On top of all that, the economy has changed, and now interest rates are high, along with inflation, which is changing the pricing dynamic.
To meet demand, insurance companies came up with today’s hybrid offerings. For the employer-sponsored plans, you can typically get coverage up to certain limits without passing any health checks — what’s known as guaranteed-issue in the business. Your spouse or other dependents who qualify will most likely have to go through underwriting, though.
You pay the premiums out of your paycheck, and you can take the policy with you after you leave the job, so it can stay in force for your lifetime. You build up value as you go. If you should have a long-term-care need, the policy will pay out a monthly amount for a specific time period, like three or five years. Whatever is left at your death goes to your heirs.
Policies range in price and vary by the age of the enrolled person, but a typical one would cost about $3,700 per year for a woman in her early 50s, with premiums rising over the life of the plan or if you choose to add to the death benefit over time. That would get you up to a $400,000 long-term care benefit, paid at $8,000 a month for 50 months, and a $200,000 death benefit.
Here’s the big catch: There’s typically no inflation adjustment for the benefit amount. The amount needed for long-term care today is likely to be $400,000 for the typical married couple, notes retirement expert Wade Pfau, who calculated a case study for the upcoming edition of his Retirement Planning Guidebook.
That $8,000 monthly benefit would seem to meet that need now, but what about in 30 years, when that 50-something woman is in her 80s? The benefit dollar amount stays the same, but inflation could turn her need into $725,000 with inflation of just 2%. And to be honest, even today, $8,000 is unlikely to fully cover a month in an assisted-living facility, which runs more like $12,000.
“Inflation is a big deal, so you just have to take that into consideration,” says Howard Sharfman, senior managing director at NFP Insurance Solutions, a brokerage.
That means if you think your eventual need would be $20,000 a month, you should purchase enough coverage to get there. But to get that bigger policy — which also would likely come with a six-month exclusion for pre-existing conditions — you will exceed the guaranteed-issue threshold and would have to pass the medical tests. And in any case, you probably wouldn’t even find a policy that offers that level of benefit.
Should you take what you can get?
The hard-sell pitch for hybrid long-term-care policies is literally this: Something is better than nothing. And the decision is on a deadline because companies have found that motivates people to act.
It could very well be true that something is better than nothing.
“For some people, it’s going to be outstanding, because they’ll put in money and never need the benefit and their heirs will get a death benefit,” says Jesse Slome, director of the American Association for Long-Term Care Insurance. “For a more significant number of people who buy it and need long-term care, the benefit will be sufficient. They’ll make do and manage with that.”
The alternative is self-funding, which makes sense mathematically but perhaps not behaviorally. Take the pricing example of the 50-year-old paying $3,700 a year for 30 years, not counting premium increases. If you took that amount and invested it yearly, you’d have $153,000 after 20 years at 7% returns. That’s nearly the policy life insurance benefit. Add another 10 years to that — presuming you wouldn’t need long-term care until you hit 80 — and you’d have a nest egg of nearly $350,000.
“If you invested that amount in a diversified portfolio, you could probably expect to get a higher return than through an insurance product,” Pfau says.
The truth, however, is that people may not do that, and so the death benefit in a hybrid policy acts as a kind of forced savings and investment plan, where you get back what you put in, plus a little interest.
“There can be some psychological benefits to having some coverage,” Pfau notes.
Will something better come along?
It’s not hard to imagine that the industry might find other ways of delivering a long-term-care benefit to consumers who desperately need it, without bankrupting the companies that provide the insurance.
Already some companies are experimenting with different kinds of hybrid offerings — like John Hancock, which also bundles wellness programs into its policies.
And people are beginning to think differently about why you get long-term-care insurance — it’s less about a return on investment and more about protecting the next generation. “Insurance works best when it’s low probability, low cost. With long-term care, it’s not a low probability. There’s a good shot you’ll use the benefits, which makes it very expensive to get,” says Pfau.
So should you take your company’s offering? At the end of the day, it only matters that you understand the need that’s coming and try to find a way to save for it, whether it’s through an insurance policy or by saving on your own. If you feel too rushed, then wait and see what comes next.
