Life Insurance + Long Term Care

Introduction#

My employer recently added a new benefit offering that is optional Life Insurance (LI) plus Long Term Care (LTC) insurance. This was intriguing to me, because LTC costs are high, and it might make sense to do this if it significantly reduced future risk. So, I spent some time and dug into it to try to understand it better.

Here is the sales pitch at a high level:

  • You have a death benefit worth whatever the dollar value of the policy is.
  • You can have an LTC benefit of 4% a month in case you need that.
  • This is portable, so not tied to your employment.

With flexible features that promise:

  • If you collect LTC the full death benefit is still available to your beneficiaries.
  • You could triple your benefits by collecting LTC and the full benefit.

But, the details matter.

tl;dr#

  • If you expect to live to the US national average (79) and you're over 50 it might make sense.
  • If you're young it probably makes no sense.
  • The closer you get to living to 92, the less sense it makes.

Given all the odds, I'm not going for it.

Detour#

It took me a little bit longer to write this up because I wanted to do some basic research to see if there was any science behind one of my base assumptions. The assumption is:

  • You can approximate your expected maximum age based on the ages of your parents and grandparents when they died, with a bias towards the gender based side of your family. (i.e. Men should look at their paternal side, and women at their maternal side).

The short answer is, I think it does sort of hold, but as with a lot of science it's not a yes/no answer. If you really want to dig into the details I'd recommend reviewing the references in the paper titled Why is parental lifespan linked to children's chances of reaching a high age? A transgenerational hypothesis.

Now, I have pretty good information on paternal side, but on my maternal side, the data is a bit lacking for various reasons. That being said, I feel pretty comfortable saying I should exceed the average for the US, and there is a reasonable likelyhood I'll need LTC.

Details#

As usual, the details really matter. The first thing that caught my eye was this was labeled as:

  • CompanyName Universal TrademarkedTerm Insurance

In virtually all cases, Univeral/Whole/Permanent/"Anything that is not Term" insurance is a bad idea. It is a very expensive form of investing, and I have it covered in some detail in the Non-Healthcare Insurance section.

But hey, maybe the LTC part of it is still worth it. Let's say I'm 60 now and I plan to live until I'm 85. At 83 things go downhill and I need LTC.

  • I've paid $260/month for 300 months to get $175,000 policy. (Total cost, $78k)
  • I get $7,000 a month from 83 to 85, and then I get the policy for $175k. So, $78k of cost gets me $350k of value.
  • If I don't need LTC, the $78k gets me $150k.

I think we can all agree that would be awesome, unless you were an insurance company, in which case you're probably not in business.

Here are the details that significantly change the math:

  • You can collect 4% of your death benefit up to 25 months (i.e. 4% x 25 months == 100%) if you need LTC.
  • Death benefit reduces to one-third (i.e. 67% decrease) if the policy is older than 15 years or you are over the age of 70.
  • LTC begins to pay after 90 days of service.
  • "The LTC benefit is an acceleration of the death benefit and is not long-term care insurance."

That second one is a real kicker. Suddenly your death benefit is not $175k, it's $58k.

The last one is interesting, because it contradicts what's in their summary infographic handout. So, you'd want to really look at the policy.

But, what do we compare this too? I chose to compare it against just investing the premium into a broad based index fund making 6%. You can obviously change that percentage if you'd like.

In order to make this a bit easier to understand (for me if no one else), I created a Google sheet to allow me to look at the cost/benefit. You'll need to make a copy to change the values, but it might be helpful for you.