Long-term care optional benefits (inflation protection, nonforfeiture, shared care) and hybrid plans

Building on the base policy

A long-term care (LTC) policy starts with a few core choices: the daily or monthly benefit, the elimination period, and the benefit period or lifetime pool. Optional benefits are added on top of that base, usually as riders for an extra premium. Three appear on almost every exam: inflation protection, nonforfeiture benefits, and shared care. A fourth topic, hybrid (combination) plans, changes the product itself by pairing LTC coverage with life insurance or an annuity.

Inflation protection

A claim may begin twenty or thirty years after the policy is bought, and care costs rise every year. Inflation protection increases the benefit amounts over time so the coverage keeps pace.

• Simple inflation raises the benefit each year by a fixed percentage of the original benefit. A $150 daily benefit with 5% simple growth rises by $7.50 every year.
• Compound inflation raises the benefit each year by a percentage of the current benefit, so increases build on earlier increases. Over long periods compound growth produces a much larger benefit, and it costs more. It is generally the better choice for younger buyers.
• Future purchase (guaranteed purchase) options let the insured buy additional benefit at set intervals at then-current rates without new evidence of insurability. Premiums start lower, but each accepted increase raises them, and declining offers can end the right to future offers.

Insurers must offer inflation protection; the applicant may decline it. Federal tax-qualification rules adopt the NAIC model regulation's requirement to offer inflation protection, and allow the applicant's signed rejection to appear on the application or on a separate form.

Nonforfeiture benefits

Without a nonforfeiture benefit, a policyholder who stops paying premiums after many years walks away with nothing. A nonforfeiture provision preserves some value. For a tax-qualified, level-premium contract, the insurer must offer a nonforfeiture provision, and it must provide at least one of these:

1. Reduced paid-up insurance - coverage continues for life at a smaller benefit, with no further premiums.
2. Extended term insurance - the full benefit continues, but only for a limited time.
3. Shortened benefit period - the most common form: coverage continues with the same daily benefit, but the total pool is cut, often to the sum of premiums paid.
4. Other similar offerings approved by the state regulator.

If the buyer declines the nonforfeiture rider, standard rules still provide contingent nonforfeiture: if the insurer later imposes a substantial premium increase, the policyholder may lapse the policy and keep a shortened benefit period, or reduce coverage to keep the premium level.

Shared care and other riders

Shared care links two policies, usually spouses or partners, so each can draw on the other's unused benefit pool, or on a third, shared pool, once their own is exhausted. It protects a couple when one partner needs far more care than the other. Many shared-care designs pass the remaining benefits to the survivor.

Other common optional benefits include return of premium at death or surrender, restoration of benefits after a recovery period, and waiver of premium while benefits are being paid (often built in). A tax-qualified contract can refund premiums at death or on complete surrender, but the refund cannot exceed total premiums paid.

Hybrid (combination) plans

Hybrid plans answer the most common objection to traditional LTC insurance: if care is never needed, the premiums usually produce no benefit, unless the policy includes a return of premium feature.

• Life/LTC hybrids (linked benefit) use a life insurance policy whose death benefit can be accelerated to pay for long-term care. Whatever is not used for care is paid to beneficiaries at death. Many also offer an extension of benefits rider that pays care costs after the death benefit is used up.
• Annuity/LTC hybrids use an annuity whose value funds care, usually with a multiple of the account value available for LTC.

For federal tax purposes, LTC coverage provided by a rider on, or as part of, a life insurance or annuity contract is treated as a separate contract. Charges for that coverage taken from the contract's cash value are not deductible as medical expenses. Under the Pension Protection Act, a cash value life policy or annuity can be exchanged tax-free for a qualified LTC contract or a hybrid.

Exam tip: inflation protection and nonforfeiture must be offered, not purchased. Compound beats simple over time. Shortened benefit period is the classic nonforfeiture option. Shared care pools benefits between two insureds.