insurance

3 ways to buy long-term care insurance

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Highlights
  • A stand-alone long-term care insurance policy can be expensive.
  • The drawbacks to LTC annuities are the rider fees and low interest rates.
  • Combination life insurance products with LTC riders can be costly.

When shopping for long-term care insurance, three options present themselves: a stand-alone long-term care, or LTC, policy, a fixed annuity with LTC benefits and a life insurance policy with an LTC rider.

Which option is right for you?

"Each has its pros and cons," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an industry trade group.

Here's a condensed look at the main considerations surrounding each form of long-term care insurance coverage.

Long-term care policy

According to the nonprofit Insured Retirement Institute, there are four risks to a stand-alone LTC policy: They can be expensive, they acquire no cash value, the premiums may increase, and the underwriting can be time-consuming.

Jim Sullivan, a CPA and personal financial specialist based in Naperville, Ill., confirms that the cost and "premium creep" are top concerns for his clients.

"Affordability is a big issue. If you buy a policy and after a couple of years you just can't afford it anymore, the likelihood is that you're going to drop it, and then all that money is wasted," he says. "Most of my clients have opted for the simpler form of life insurance with a long-term care rider."

Slome says the traditional LTC policy's biggest sales obstacle has led to the proliferation of hybrid life and annuity products with which it now competes.

"People have this misconception that if they buy long-term care and don't use it, they've wasted their money," he says. "We don't look at any other form of insurance that way. That's what makes the sales pitch for hybrid products attractive."

Slome says that if viewed in the same light as home or auto insurance, an LTC policy "is a much more affordable way to cover the larger risk because you're paying small amounts every year." In his view, that means you're keeping more of your money invested for retirement, the returns on which will help offset your LTC premiums along the way.

Sullivan agrees: "If you're looking for pure long-term care protection, dollar for dollar you can't really beat a good long-term care policy," he says. "I would rather see a client get a smaller policy they are comfortable with and can afford than a policy with a risk that they're going to drop it."

Fixed annuity with LTC benefits

Fixed annuities, those CD-like investment vehicles that can provide an income stream for life, are a tough sell in the current low interest rate environment. However, if you're a risk-averse shopper who can't pull the trigger on a use-it-or-lose-it long-term care policy, an LTC annuity may be worth exploring.

"It's generally a lot less expensive than a long-term care policy," says Jean Dorrell, a certified estate planner with Senior Financial Security in Ocala, Fla., who sells fixed annuities. "I honestly think LTC policies by themselves are a bad deal; the rates increase, and you pay into it for 10 years and drop it."

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