Unknown? Unknown? How could a life insurance policy have unknown benefits? It’s true. Many of these policies have long-term care benefits that are unknown until the time of claim. The most common example of policies like this is indexed universal life insurance policies with a “chronic illness” rider.

I confess. I bought a life insurance policy with a chronic illness rider. I figured I'd buy one for myself because I’d heard so many good things about them from all the different insurance companies selling them. So, I applied for one and was approved with the preferred rates.

But then I read it.
And I was shocked.

I bought a policy with a $250,000 death benefit. I thought that meant that when I needed long-term care, I would receive $250,000 in long-term care benefits, payable at $5,000 per month for 50 months.

I was wrong.
The long-term care benefits were UNKNOWN.
The long-term care benefits would be determined at the time of claim.

The insurance company considered the “chronic illness benefit” a prepayment of the death benefit. When the “chronic illness” claim is made, the death benefit is re-calculated to its “present value” before calculating the monthly benefit amount.

For example, if the death benefit is $250,000 and I file a “chronic illness” claim while having an 8-year life expectancy, the death benefit would be decreased from $250,000 to about $170,000.

 ($170,000 today equals about $250,000 eight years from now, assuming current interest rates of 5% per year.)

Since the death benefit would be decreased to only $170,000, my monthly “long-term care” benefit would be only $3,400. I would also permanently forfeit the $80,000 “shrinkage”.

But it gets even worse. The policy would also reduce the $170,000 death benefit by the present value of the future premiums, resulting in an even smaller death benefit and smaller monthly benefit.

For example, if the present value of the 8 years of future premiums were $30,000, the $170,000 death benefit would be reduced to $140,000, and the monthly benefit would be only $2,800.

I applied for a $250,000 lifetime benefit with a $5,000 monthly benefit. After reading the policy, I learned I might only get a $140,000 lifetime benefit with a $2,800 monthly benefit.

It might have been an OK life insurance policy, but it was a horrible way to plan for long-term care. That’s why I canceled my life insurance policy with a chronic illness rider. Sadly, most of the hybrids sold today are just like this one: universal life insurance with a chronic illness rider.

Permanent life insurance is any life insurance intended to remain in force for as long as you live. Permanent life insurance is A LOT more expensive than long-term care insurance. Why? Because everyone will die. The chance of needing long-term care is lower than the chance of dying.

There are a lot of permanent life insurance policies for sale today where the entire death benefit can be used for long-term care expenses. That might be a good life insurance policy, but that’s probably not a good way to plan for long-term care.

I used to participate in a few “insurance agent forums” online. We ask each other questions, debate different things, and share ideas. Several years ago, one of the agents posted that a couple, both age 59, had recently asked him for some long-term care insurance quotes. He gave them a quote for long-term care insurance, and he also gave them a quote for permanent life insurance. He said they could each get a million dollars of life insurance for the same price as a long-term care insurance policy, so they bought life insurance instead of long-term care insurance.

I challenged him. I posted, “That is impossible! There’s no way they can get a million dollars worth of life insurance for the same price as a long-term care insurance policy.” I asked him to “show his work” and post the quotes to prove his statement.

He did. As I suspected, he was NOT comparing apples-to-apples. The life insurance policies he quoted them did not have any inflation protection. The long-term care insurance quotes he gave them included a 5% compound inflation protection rider.

 The long-term care insurance policies he quoted for them started with $864,000 in benefits. The 5% compound inflation protection rider would double the benefits to over $1.7 million within 15 years and again to over $3.4 million within another 15 years.

If he’d done a fair comparison and quoted the long-term care insurance policies with NO inflation protection, this couple could have purchased $1,000,000 of long-term care insurance benefits for each spouse for about one-third the cost of the life insurance policies.

That’s why I stated above, “Permanent life insurance is A LOT more expensive than long-term care insurance.”

If $1,000,000 of permanent life insurance will pay no more than $1,000,000 of long-term care benefits, the life insurance policy is giving you NO leverage. You’re buying expensive permanent life insurance to pay for your future long-term care expenses.

If you want $1,000,000 of long-term care benefits, wouldn’t it be better if you only needed to buy $100,000 of permanent life insurance and still be able to get $1,000,000 of long-term care benefits? Or more? Keep reading, and I’ll show you how!

For long-term care planning, the best LTC / life insurance hybrids are the ones that will pay long-term care benefits that are 3x, 4x, 5x, or even up to 10x the death benefit.

Since life insurance is more expensive than long-term care insurance, if you’re interested in a LTC / life insurance hybrid, you are better off buying one with a death benefit as low as possible and LTCi benefits as high as possible.