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Federal Employees News Digest : Nov. 5, 2012
November 5, 2012 Vol. 62, No. 17 7 visit us on the Internet at www.FederalDaily.com Atraditional policy reimburses the policyholder for qualifying LTC expenses. The alternative is a combined life insurance and LTC insurance policy. As discussed in last week's column, rising LTC insur- ance premiums and several insurance companies exiting the LTC insurance marketplace in the past two years have resulted in fewer individuals purchas- ing traditional LTC insurance. Many individuals are instead considering the purchase of a "hybrid" insurance policy---a combined life and LTC insur- ance policy. Sales of hybrid products have been increasing as traditional LTC insurance sales have declined. According to LIMRA, an industry-funded research group, sales of hybrid products jumped 56 percent during 2011. One possible reason for the increasing interest in hybrid products is that they overcome one of the biggest obstacles for purchasers of traditional LTC insur- ance---paying premiums for an insurance product they hope they will never use. By combining life insurance with LTC insurance, a policyholder can guarantee a benefit for a spouse, children or other heirs even if the LTC benefits are not used. As with traditional LTC insurance policies, hybrid insurance policies kick in when the policyholder needs help with at least two of the activities of daily living---eating, showering, toileting, dressing and transferring in and out of bed---or has a cognitive impairment such as dementia or Alzheimer's, as diagnosed by a health care professional. The hybrid insurance product may either pay a set amount each month to the policyholder or reimburse the policyholder for LTC expenses. But potential purchasers of hybrid insurance products should be aware that a hybrid insurance policy may not reimburse a policyholder as much for incurred LTC expenses as a traditional LTC insurance policy may pay. When an individual purchases a traditional LTC insurance policy, the policyholder is in fact purchasing a "pot of money" that is used to reimburse the policy- holder for qualifying LTC expenses. For example, if an individual purchases an LTC insurance policy with a five-year benefit period of $200 a day in daily benefits, then the "pot of money" is equal to: Five years x 365 days/year x $200/day, or $373,000. With a hybrid product, the amount of the LTC benefit---called the "living benefit"---is limited to the amount of the death benefit. In most hybrid products, the living benefit is usually less than the pot of money in a traditional LTC insurance policy. In the above example, the death benefit could be $200,000, a little more than 50 percent of the "pot of money." Another potential problem for hybrid products is that they have been available for only a few years. As such, the agents or brokers licensed to sell hybrid products have less experience with policyholders who have attempted to collect benefits. On Sept. 12, 2012, the National Association of Insurance Commissioners revised an actuarial guideline---effective Jan. 1, 2013---to ensure that insurance companies offering hybrid insurance products have appropriate reserves for the life insurance used with LTC riders. Such policies pro- vide term and permanent life and LTC insurance coverage throughout the policyholder's lifetime. By contrast, term life insurance has level premiums for a set period of time, after which premiums will increase if the policyholder wants to continue coverage. Insurance companies have not come out and stated how much premiums on hybrid products will increase due to the Sept. 12 action by the NAIC. According to several analysts and insurance executives, estimates of premium increases range from 5 percent to 20 percent. What this means is that anyone in the market to purchase a hybrid insurance product should do so before Jan. 1, 2013, to avoid paying higher premiums. Those employees who have a significant amount of retire- ment savings---through the Thrift Savings Plan, IRAs, annuities, liquid accounts and brokerage accounts---and whose total value exceeds $1 million, may want to consider forgoing LTC insurance altogether and instead keep their life insurance. The reason: Life insurance proceeds are paid to beneficiaries tax-free, whereas beneficiaries must pay tax on inherited TSP and traditional IRA withdrawals. Also, most life insurance policies have accelerated death benefit riders that allow policyholders to tap into the policy death benefit tax-free in order to pay for any type of expenses in the event the policyholder is expected to die within one or two years. Another advantage associated with hybrid insurance products is that premiums are guaranteed to remain level and not increase. The same cannot be said of LTC insurance policies. Some insur- ance companies selling traditional LTC insurance in recent years have raised premiums for existing LTC insurance policyholders by 40 to 70 percent. Fewer companies are offering LTC insurance and more policyholders are expected to enter nursing homes in the near future. This could result in many traditional LTC insur- ance companies raising their premiums for current and future policyholders. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor With rising LTC insurance costs, employees need to make choices: Part II
Oct. 29, 2012
Nov. 12, 2012