Interference with an Estate Plan: Devastating Effects of a Long-Term Care Event

I often describe estate planning as a way for clients to leave what they want, to whom they want, in the way they want. Clients generally prefer to create plans that maximize what’s left to their family, while minimizing taxes and other potential expenses. Common “other potential expenses” that derail an estate plan are those associated with a long-term care event. 70% of Americans over the age of 65 will require some form of long-term care during their lifetime. The national annual average cost of a home health aide exceeds $50,000, and the national average annual cost of a private room in a nursing home exceeds $100,000. Under either scenario, a long-term care event significantly increases the risk that a client’s estate planning objectives will not be met.

The insurance industry created long-term care insurance to help shift the risk of a long-term care event to insurance companies, thus allowing clients to better meet their estate planning objectives. Unfortunately, the design of these products was flawed as insurers have seen claims exceed those originally anticipated. As a result, insurers suffered significant financial losses on their long-term care blocks of business and, in turn, the vast majority of carriers have ceased offering traditional long-term care products. For policies that are in force, the non-guaranteed premiums have significantly increased to better align with life insurance  carriers’ claims experience. These rate increases have forced policy owners to pay enormously increased premiums for the same coverage, keep their premium payments static for lower benefits, or cancel their coverage altogether.

In a move away from traditional long-term care products, which come with substantial risks for both insurance companies and consumers, insurers have instead turned to hybrid/combination plans. These innovative insurance products combine life insurance and long-term care insurance benefits into one policy. Consumers end up with a life insurance policy that will pay accelerated benefits to cover long-term care costs and provide a death benefit (or the portion of the death benefit that has not been accelerated) to the named beneficiaries upon death. Whether the client needs to use the long-term care benefits or not, benefits will be paid one way or another under these hybrid policies. The premium payments are also guaranteed, thus protecting clients from future unexpected cost increases. Further, many of these policies come with a return of premium feature, allowing clients to surrender the policy and receive most or all of their premiums back. 

Shifting the risk of a long-term care event through use of a hybrid life/long-term care policy is an easy way to preserve clients’ estate planning goals. Repositioning near-idle assets like CD’s or money market funds to a hybrid policy can be very appealing. Clients can move funds from an asset providing very little return to an asset that provides a pool of money for long-term care expenses, pays unused policy benefits to named beneficiaries in the form of a death benefit, or gives the client the option of surrendering and receiving all or most of their money back. Existing cash value life insurance could also allow for redeployment of the cash value into a hybrid product to better meet a client’s current planning needs.

Many clients may have previously opted not to insure for a possible long-term care event due to the shortcomings of traditional long-term care insurance. They may also believe they won’t have a long-term care event. However, given the progressive evolution of insurance products, it’s a risk all clients should consider insuring. Clients may believe their homes will never be destroyed, but they probably never considered leaving homeowners insurance on the table. Likewise, even if they don’t believe a long-term care event will destroy their estate plan, they shouldn’t consider leaving long-term care insurance options on the table.