Robert Cavanaugh

How to Supplement an Existing Long Term Care Policy Without Paying Premiums

Many seniors have long term care policies that pay only for a couple of years. Here is how to extend the coverage for life without premiums coming out of pocket.

Quite a few people may find themselves in this situation…

They had the foresight to buy a long term care policy 5-10 years ago. My first comment is: good for them. When you sit down and take a look at the premium for long term care at various ages, you quickly see that the younger you buy it the better. This seems obvious, but I am here to tell you that the premium differences are extreme. Take a look at the premium at age 45, for example, and compare it to age 65, the age where most people even start thinking about long term care.

However, (using Arizona as an example) 5-6 years ago nursing home expenses were about $120 a day. This works out to around $43,000 a year. Today, the average is $70,000 a year.

Upon becoming aware of this fact, many people want to take the steps necessary to get their coverage more in line with current costs. When they start looking around, they discover two things…

Because they are older, the premium is substantially greater. A lot of times, it is so high that it’s not even affordable.

Looking at similar coverage at an older age and seeing a higher premium makes sense, but there is another historical factor as well. Over the last five years, long term care premiums have increased about 40%. A lot of this had to do with initial insurance company pricing. The actuaries began their mathematical assumptions using statistics for the general population. In many ways, this was a stab in the dark. But they had to start somewhere. As time went on, they discovered that claims were much higher than their original projections. After an insurance company has enough business on the books for it to be statistically relevant, they start using actual experience.

So the people who want to bump their coverage up are generally looking at off-the-chart premiums-- both because they are older and the insurance companies have modified their pricing.

But depending on the situation, there may be a solution…

Many people have CDs and annuities.  In most cases, the CD is considered “rainy day” or “emergency” money. The annuities are “non-qualified deferred annuities”. Most of the time, they are just sitting there, like the CD, but with a longer holding period in mind. Over 90% of people die holding the annuity “as is”; they are never converted to some kind of an income.

There are a few insurance companies that will allow you to transfer a CD or an annuity into a special combination annuity/long term care product.

It functions like an annuity in that it grows tax-deferred at an annually-set interest rate. However, if the person ever has long term care needs of any type (adult day care, respite care, hospice care, assisted living or a full blown nursing home) withdrawals can be made from the annuity. Generally funds can be withdrawn over a three year period. Keep this three year time frame in your mind—it will become very relevant in a minute.

So far, this doesn’t sound too much different than just withdrawing funds from an existing CD or annuity. But there is one key reason to make the exchange to an annuity/long term care plan. Some insurance companies will allow you to add a rider which provides lifetime coverage. This is a huge benefit for a couple of reasons…

First, most people have a 3 year or 5 year long term care plan. When the three or five years are up, that’s it. Second, medical advances are prolonging life. Is one kidney on the blink? No problem, a medical team will just insert a new one. Third, the biggest issue is not about general health, but just the opposite. A person could be blessed with good health, develop Alzheimer’s, live for many, many years and exhaust their entire estate on health care.

Now, let’s get back to the three years. The person has an (inadequate) long term care policy which is good for three years. They move their CD or annuity to this combination annuity/long term care plan which is good for three years as well.

Here is the key point. If they added the lifetime rider which kicks in after three years, they are good for the duration.

Last, let’s cover the “without paying premiums” part…

By moving a CD or annuity into this combination plan, the person has created another three year long term care plan. No outlay required here.

Adding the lifetime rider has a cost. But since it doesn’t start for three years, it’s like having a 3 year “waiting period” on a traditional long term care plan, as opposed to the typical 60, 90, 180 day wait. So the premium is quite low.

Second, the premium can be paid by withdrawing from the annuity itself. Today, a person would have to pay tax on the withdrawal (assuming there was a gain in the annuity), but after 12/31/09 withdrawals such as this will be tax free. This is a new provision in the Pension Protection Act of 2006.

If you find yourself underinsured and concerned, take a look at your situation and see if this approach may solve your problem.

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