Sunday, August 22, 2010

One Policy for Two Jobs?

     As a participant in the Financial Planning Association's Ask the Planner program, I occasionally get requests for information from consumers with financial questions.
     A recent inquiry came from a couple in their early 60s who were trying to determine whether to buy long-term care (LTC) insurance or, alternatively, buy life insurance policies with LTC riders attached to them. In my response, I discussed the trade-offs involved in purchasing a single product to perform two functions.  Here's the question along with the response:


My wife and I are worried about the potential future cost of long-term care. We would like to have long-term care insurance, but it seems so expensive. Our life insurance agent suggested buying life insurance policies with riders that cover long-term care. Is that a good idea? 

It has been my experience that financial products are usually good at doing one thing (i.e., life insurance is good at insuring your life, long-term care insurance is good at insuring against long-term care costs). However, when you purchase one product to handle two very different risks (life and log-term care), it may not cover either one as well as you would like.

I don't know about the specific products you're considering, of course, but this is just a word to the wise. I suspect that a straight long-term care policy would do a much better job of dealing with that issue than would a life insurance rider. And, of course, if you were to purchase the life/LTC combination, there would be a good chance that a nursing home stay would use up all of your life insurance, so that when the insured dies, there could be nothing left to pay out as a death benefit.

Not knowing the specifics of the situation, my advice would be to buy separate policies for life and long-term care. One way you could reduce the LTC premium is by extending the "elimination period," which is the time period during which you would have to pay for your own nursing care before the insurance kicks in and begins to pay.

If one of you has to spend a significant length of time in nursing care, a good LTC policy could cover most, if not all of the costs associated with that stay. Thus it could possibly reduce the need for life insurance.

Obviously, if we knew today which of you would need nursing care, and when, and for how long -- and we also knew when each of you would die -- I would be able to give you much better guidance! That's precisely why they have these products -- because we don't know.

Enjoy the week!

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