I Don’t Qualify for Long- Term Care Insurance. Now What?

Funding a long-term care plan with a traditional long-term care insurance policy isn’t an option for those who either cannot meet tough underwriting standards or already need long-term care.

Here are some alternatives: Paying for an uninsured spouse There is a way for couples to pay, through the policy of a covered spouse or domestic partner, for the care of a spouse or domestic partner who is too sick to qualify for long-term care coverage. The spouse who is able to qualify can use an indemnity or cash-benefit policy to help pay for the sick spouse’s care. Here’s how it works:  The spouse who can qualify (often the wife) purchases an indemnity or cash-benefit long-term care policy for herself. The daily benefit should be selected on the basis of the couple’s financial circumstances and the cost of care in their community.  If the policyholder needs long-term care services, her policy begins to pay. The indemnity benefits allow her to get the entire daily benefit after she shows she has received at least one compensable service.

 The portion of the daily benefit remaining after payment for the policyholder’s own care can be spent on needs not covered by the policy, including care for the spouse who is unable to qualify for his own policy.  An indemnity policy is the more economical way to achieve this. A cash-benefit policy would work as well, but would cost more.

Long-term care annuity An annuity is a contract between an insurance company and a client, called an annuitant. This contract states that the money he pays to the insurer will be repaid sometime in the future. A person whose health problems disqualify him from traditional long-term insurance may be able to qualify for a long-term care annuity. This type of annuity allows the individual to purchase a long-term care insurance policy that usually has a benefit pool equal to the annuity purchased. The underwriting is greatly simplified because the annuity owner is required to use the annuity first to pay any long-term care expenses. The insurer starts paying benefits when the annuity is exhausted.

Example:  Robert commits $100,000 to a deferred annuity. The carrier agrees to pay him an annual return of 4%. Robert also agrees not to draw any funds for a period of several years (usually 3 to 6 years).  Robert now has the right to purchase a long-term care insurance coverage with a benefit pool of $100,000, for an annual fee. The medical underwriting (medical criteria for qualification) is greatly simplified because the insurer is not liable until Robert exhausts his annuity paying for long-term care expenses.  If Robert needs care, he first uses the funds in the annuity, including the accumulated interest. Let’s assume that, by this time, interest has increased the annuity to $125,000.

 When that amount is depleted, Robert has access to the long-term care insurance policy’s $100,000 benefit pool, which has increased to the amount to which the annuity had grown before Robert’s first claim, $125,000.  One insurer sells an unlimited long-term care benefit for an additional premium. It can be a smart idea. Because of the simplified underwriting, a long- term care annuity is a great option for someone who has already been diagnosed with an illness that would disqualify him from purchasing traditional long-term care insurance.

Medically underwritten single-premium immediate annuity (SPIA) This is an annuity that promises to pay the annuitant a sum of money for the rest of his life. The payout of a traditional annuity is based on the annuitant’s age, not health. For example, if an annuitant is 65 when he purchases the annuity, the payout calculation will be based on the life expectancy of an average 65-year-old. The calculation does not factor in the annuitant’s health, even if he suffers from an illness, such as cancer, that can reduce life expectancy. A medically underwritten single-premium immediate annuity (SPIA), on the contrary, is based only on the severity of the annuitant’s illness, and not average life expectancy at his age. The sicker the annuitant, the less money he has to invest to obtain a guaranteed monthly income for life.

Traditional annuity Medically underwritten SPIA Age and sexMale, 80 HealthModerate Alzheimer’sNoYes Desired monthly income $3,000 Income durationLifetime Lump-sum premium$255,000$118,000 Savings$137,890 Example: An 80-year-old man with moderate Alzheimer’s disease needs $3,000 a month to cover long-term care costs. As the table demonstrates, it is possible to buy lifetime care through a medically underwritten SPIA for almost half of the cost of a traditional, age-based annuity.

The disadvantage of this strategy is that repayment on an annuity ceases when the annuitant dies. If he dies sooner than the insurer expects, the insurer retains the portion of the premium that has not been repaid. Some insurance companies offer the option of a refund of some of that principal when the annuity holder dies. The beneficiary would receive a reduced amount of the principal in monthly payments.