Stand-Alone & Combo LTCI

Differing Long-Term Care Products

Long-Term Care Insurance (LTCI) planning solutions include two types of products. These products are either:

1) Stand-Alone LTCI policies: These policies are mostly or entirely focused on financing a potential Long-Term Care event; or

2) Hybrid LTCI policies: These policies are designed to address multiple needs.* Hybrid products are most often designed to address some mix of both Long-Term Care planning needs and life insurance planning needs. Some place more focus on the Long-Term Care benefits and the life insurance death benefit is much smaller. Others are much more focused on life insurance, with the Long-Term Care portion as just an afterthought.

There are two subtypes of Hybrid Long-Term Care Insurance products. In this article, we will coin the terms and subsequently refer to these two Hybrid sub-types as: (1) “Combo LTCI”; and (2) Accelerated Death Benefit products (“ADB Only”). The former ("Combo LTCI") are more focused on Long-Term Care benefits, while the later ("ADB Only") are more focused on Life Insurance death benefits

In this article, we will first attempt to clarify each of these products (and their sub-types), their functions, and their basis for pricing, as there is a lot of confusion about these policies amongst consumers, the media, and even financial advisors. Of all of these LTCI types, we will dedicate most of our focus to exploring the differences between Stand-Alone LTCI and "Combo LTCI" and the financial planning rationales for each. Finally, we will discuss their pros and cons, as well as their appropriate application in the financial planning process.

*Note: The insurance industry may also refer to "Hybrids" by other names: “Asset-Based”, “Linked-Benefit”, “Combination”, etc.

The Mortality to Morbidity Continuum

Life Insurance products are priced based on mortality risk (the odds of premature death and the financial consequences of that death for others). Long-Term Care Insurance is priced based on morbidity risk* (in LTCI, morbidity is the risk of becoming either physically or cognitively frail and then needing care assistance). Their subsequent pricing is based on the likelihood of occurrence. Mortality is 100% likely, as we will all die eventually. Morbidity is different, as some will need care due to what is most commonly age-related frailty while others will not. Very simple logic will conclude that the cost of insuring a risk that is 100% likely to occur is more expensive than the cost of insuring a risk that is NOT 100% likely to occur. Thus, “Permanent” (not "Term") Life Insurance is more expensive than Long-Term Care Insurance.

The insurance products we will discuss in this article fall on a continuum between mortality and morbidity. At one end of the spectrum exists Life Insurance and at the other end Long-Term Care Insurance. In the middle, there are two insurance vehicles that the financial services industry refers to as Hybrid products. However, we will delineate two distinctly different types of Hybrids that are very different in both benefits and pricing.

The first of these two Hybrid solutions will again be referred to as an "ADB Only" solution, It is a Life Insurance policy with an added Accelerated Death Benefit (ADB) rider.* This added benefit can accelerate the death benefit payment for a LongTerm Care need. The death benefit of the Life Insurance and the ADB rider are of equal value. The insurance company is simply adjusting its mortality assumption for a slightly earlier payout potential. As a result, it is closer to the Life Insurance (mortality) end of the continuum than the LTCI end (morbidity) end of the continuum. Conclusively, it is more of a Life Insurance product (and priced as such), though it has a Long-Term Care payout potential. Long-Term Care ADB rider is the “after-thought” to the primary Life Insurance planning need. If life insurance planning is your focus and you want to add the potential for an LTC payout, the "ADB Only" product can be an appropriate planning tool.

*Note: Technically, Stand-Alone LTCI policies can add a benefit paid at death in the form of a Return of Premium rider, but it is optional to add. These are not referred to as Hybrid or Combo as they are optional.

# Note: There are also Annuity/LTCI Combination products, but the principle is the same – the LTC benefit can either be an Accelerated Annuity Value ("AAV ONLY") or a "Combo Annuity LTCI" where the LTC benefit is multiples of the Annuity Value

The second Hybrid type, which we are referring to as a "Combo LTCI" solution, is closer to the Long-Term Care (morbidity) end of the spectrum. We will call this "Combo LTCI" policy. A "Combo LTCI" policy is typically designed to have a much lower death benefit in exchange for a much larger Long-Term Care benefit. It can create the larger LTC benefit by offering an “Extension of Benefits” (EOB) or “Continuation of Benefits” (COB) rider. (Note: These are interchangeable terms by different insurers.) This extension allows the product to pay out beyond the death benefit value and in multiples (2x, 3x, or more) of the death benefit. It can also offer inflation protection. This allows the monthly LTC benefit to grow at a guaranteed rate annually (often 3% or 5% compounded annually).

Ultimately, if the premium you pay for either a "Combo LTCI" or "ADB Only" policy is the same, the "Combo LTCI" product (with EOB/COB and inflation protection) will produce a much larger LTC benefit that can be utilized for caregiving needs. Consequently, if LTC planning is your focus, the "Combo LTCI" product may be a better planning tool compared to the "ADB Only" solution.

Hybrids and “Market Growth”

It is important to note that the "ADB Only" products accommodate for almost 70% of the expansion of Hybrids trumpeted by industry journals.1 This is insightful, as the coverage of LTC products by the media makes it sound as if the Hybrids are taking over the Long-Term Care planning world. Instead, most of this growth consists of small LTC benefits being added on as an afterthought to life insurance purchases as a relatively inexpensive add-on feature.* This is a particularly helpful distinction as the “market growth” of these ADB riders is often offered up as the “proof” that it is better for the client, and consumers are compelled to believe that what is “growing” is likely the best solution. In reality, quite the opposite is the truth, as these solutions create the lowest LTC leverage for the premium dollar spent. These riders, dollar for dollar, produce the least amount of LTC benefits (since they are mostly funding the death benefit).

The "Combo LTCI" products have about the same overall distribution as Stand-Alone LTCI products. However, the "ADB Only" products represent the greatest distribution of these three. And yet, they offer the least LTC benefits for the premium dollar.

*Note: Consumers should be careful to differentiate between two types of ADB riders: 1) Long-Term Care ADB riders (IRC code section 7702B); and 2) Chronic Illness ADB riders (IRC code section 101G). Chronic Illness riders are NOT considered LTC insurance and are harder to trigger, although growth data of Hybrids does include these riders. It is also worth noting that 85% of ADB riders are Chronic Illness riders and NOT Long-Term Care riders.

Combo is a Response to Stand-Alone

"Combo LTCI" products largely evolved in response to two historical consumer objections to Stand-Alone LTCI products. These two complaints about Stand-Alone LTCI were the result of: 1) rate increases on older products (due to mistakes the industry made in their early pricing assumptions); and 2) a persistent belief by many consumers that this is simply an insurance they will “never need”. “Combo LTCI” is largely a response to both of the objections.

Premium Guarantees

Past rate increases on Stand-Alone Long Term Insurance (LTCI) products have propelled consumers to seek premiums that are guaranteed to be level. The historical evolution of Long-Term Care Insurance is littered with earlier mistakes in accurate pricing assumptions by carriers, which led to prolific increases in rates on early Stand-Alone LTCI products (largely implemented over the last two decades).

Though marketed as “Level-Premium” products with the caveat that “premiums could potentially increase”, consumers largely believed these products would never have a change in premium rates. For obvious reasons, this disappointment led to a swell of media commentary and unhappy policyholders that, in turn, led consumers and advisors to believe that the premiums on these products would always be troubled. This became a rationale for not purchasing them.

Contrary to these past experiences, Stand-Alone LTCI products are now far more stable than they have ever been. This is due to the accumulation of actuarial data and subsequent pricing assumptions.1 The good news seldom heard is that these past unexpected rate increases are not only unlikely to be repeated in the future, but that there is a significant chance that the newer Stand-Alone policies could even potentially have rate reductions (via dividend return). (See Article: How LTCI is Priced)

The consumer demand for guaranteed premiums fueled the expansion of "Combo LTCI". These products were offered with the promise of premium guarantees, satisfying an insatiable consumer desire to avoid future rate increases. On this front they delivered. That said, the previous significant challenges consumers faced with rate increases on past Stand-Alone products are highly unlikely to repeat in the future.1

“Get Your Money Back if You Don’t Need it”

The second and most attractive feature of a Hybrid LTCI policy is that it has the potential to “give your money back if you don’t need it” (a frequent mantra of marketers of this solution). If the premium input and the death benefit are not equal (i.e. the death benefit may be less than the premium paid in) you at least "get a benefit either way". This benefit was sweet in the ears of consumers who frequently maintained the belief that they would never use the LTC benefit.

Part of the challenge of the “get your money back if you don’t need it” proposition is that the only way you don’t need it is if you’re not “here” anymore. It is, after all, a death benefit.* In addition, there are legitimate planning questions about how well priced this death benefit is. If the client does need additional Life Insurance in their plan, the next logical planning step would be to determine the best suited Life Insurance solution to meet that need, and if bundling it with LTCI either benefits or complicates that planning goal.

Clients who would not have been in the market to purchase additional life insurance have purchased these Hybrid products in mass for the appealing function “to get their money back” because they believe they may not need the Long-Term Care benefit. Typically, clients have a difficult time perceiving the need to plan for Long-Term Care when they have not had a life experience with a parent or loved one who needed care late in life. Ultimately, when risk perception is lower, due to the lack of this life experience, a product that "gives you your money back if you don't need it" is an enticing proposition.

*Note: The death benefit in a “Combo LTCI” product (or the return of premium feature on a Stand-Alone LTCI product) is reduced in a dollar-for-dollar match with the Long-Term Care insurance payout. It is not a "both/and" proposition (you don't get both the death benefit and the Long-Term Care), but rather an "either/or" proposition (you only get one or the other).

The Role of Life Insurance for Near Retirees

Previously we introduced the question, “Is more life insurance needed in the financial plan?" Many clients have a sun-setting need for life insurance as their income earning years come to a close and they enter a stage of financial freedom (freedom from debt and retirement security through well-funded retirement accounts and pensions). There are certainly other functions of life insurance, but for many at this stage of life the questions start to shift from, “What are the consequences if I die early?” to, “What are the consequences of living a long life?” Both have the potential to pose significant emotional and financial challenges for families (particularly for partners).

When we pose the question directly to many clients, “Do you need more life insurance?” a large percentage of them will quickly reply, “No”. And yet, they expressed interest in purchasing more through a Hybrid or “Combo LTCI” policy. It is only when they hear themselves say “no” that it dawns on them that this might not be the best fit for or the most efficient solution for their planning needs.

A Finite Premium Tolerance

In all my years in LTC planning, I have never encountered a client with an unlimited tolerance for insurance premiums. This means that a dollar spent here is not able to be spent there. Simply stated, your dollar is either used for mortality or morbidity (frailty) and not both. As fiducaries, we must ask ourselves the question “If my client will only part with X in premium, how then do we use X to its maximum planning impact?” Unless the client's planning goals are clearly defined, and they are fully aware of how these premium dollars are either spent or not spent toward those ends, it is difficult to discern the most effective solution for their objectives.

5 Factors to Consider

When Choosing Between Stand-Alone and “Combo LTCI”

Partnership Programs:

Partnership programs provide additional asset protection (from Medicaid Spenddown) for those who purchase Stand-Alone (but not Hybrid) Long-Term Care coverage (these Stand-Alone policies must include state-required inflation protection). (See Article: Partnerships with Medicaid)

Shared Care:

Couples often find it appealing when benefits can be shared through a Shared Care rider. This option is available on one Combo Life/LTCI product and MOST Stand-Alone LTCI products. A Shared Care rider allows a couple to use each other’s benefits if one of them exhausts their own benefits. It also allows any unused benefits to be used by the surviving spouse when one partner dies without using all of their benefits. (See Article: Shared Care)

Underwriting considerations:

Most advisors have believed that “Combo LTCI” is “easier” to underwrite and get approved for. This is a common misconception and not necessarily the case. When we underwrite for mortality and morbidity, underwriting can actually become stricter. Thus, true “Combo LTCI” can be more challenging from an underwriting perspective. Undoubtedly, the "ADB Only" solutions can be easy to underwrite for LTCI coverage as less is at risk for morbidity, and more for mortality. That said, there are some carriers in both the "Combo LTCI" and market that are more liberal in underwriting. Ultimately, this persistent belief may be more derived from underwriting differences amongst carriers versus the product genre (”Combo LTCI” or Stand-Alone LTCI.*

Premium Guarantees:

As noted earlier, premium guarantees can only be found on “Combo LTCI” products. This guarantee can be very attractive to those who have heightened concern over the future rate stability of Stand-Alone LTCI. It is, however, worth noting that the risk of rates increasing on Stand-Alone products is presently very low. That said, low risk and no risk are not the same thing. (See Article: How LTCI is Priced)

Death Benefits:

Death benefits are utilized by carriers as a way to create a product offering where you get something whether or not you use the LTC benefits. Fiduciaries should also evaluate just investing the money that would have otherwise been spent on the death benefit (especially if there is not a targeting planning purpose for the death benefit). Both paths should be evaluated, along with whether there is a need for an additional death benefit in the financial plan.

*NOTE: If we look at Chronic Illness ADB (Accelerated Death Benefit) riders (IRC code section 101G), these can be more liberal in underwriting. That said, advisors and buyers should beware as these are NOT Long-Term Care insurance.

It’s Not About Winning

Be wary of “two-for-one magical thinking”. It doesn’t exist. You will always pay for what you buy. The simple lesson here is that not only do you pay for both things, but if you have a defined budget and purchase both, you are going to get less of one. The insurance industry has trumpeted the “use it or lose it” mantra (about Stand-Alone LTCI) as a reason for purchasing both products in combination. The wise consumer focuses on their needs, not on the likelihood of use.

The ultimate question is not “What are you most likely to need”, but rather “What protects your family the best at the most efficient cost?"

An LTCI policy is not a lottery ticket we want to get to use. Long-Term Care insurance is utilized to manage the financial and familial CONSEQUENCES of a care need. It has the behavioral benefit of “pushing” the family to get help they need. Unfortunately, caregivers typically only seek help when they are already exhausted. The unique benefit of LTCI is that the family actually wants to use it. They have been “paying for the policy thing for decades”. The goal is to mitigate physical, emotional and financial consequences to those we love most.

We are not necessarily attempting to fill the planning goal with something we are always certain to need. To the contrary, those risks that present planning challenges that are NOT certain are the ones insurance often is best at managing. When it is not certain, it can be managed at a lower cost.

About David

David Wolf is the president and owner of Wolf & Associates , a Long-Term Care planning firm in Spokane, WA.?Wolf & Associates has specialized solely in Long-Term Care Planning since 1988.?David’s expertise in Long-Term Care Insurance planning with business owners and executives has gained him national recognition in his field.??He has been quoted by the Wall Street Journal, Forbes, Money Magazine, and others.?His depth of knowledge in the Long-Term Care Insurance industry has made him a recognized leader and speaker.??David’s practice niche is working with financial advisors to assist their clients in planning for aging, potential frailty, and protecting the ones that they love.

1 LIMRA Seffcient costtudy: https://www.limra.com/en/newsroom/news-releases/2018/individual-lifeinsurance-combination-product-premium-grows-18-percent-in-2017/ (accessed 1.16.23)