19 Dec Should I cancel life insurance for long-term care coverage?

Q. I’ve had a whole life policy for eight years and it’s fine, but I think I want a new one that has a long-term care rider. How can I decide if I should cancel the first policy? I only need so much insurance, really.
— Considering

A. Long-term care planning is a very hot topic today, partly driven by the fact that the conventional long-term care insurance market is imploding.

Many of the biggest insurance companies have either suspended the sale of their long-term care insurance products, pulled out of the market entirely or limited their benefits to be much leaner, mostly a result of poor claim experience, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

“That means there are less choices when developing a strategy to protect your dignity, independence, financial security and choices should you need ongoing assistance with the basic activities of daily living,” Gaelick said.

He said the best option is to purchase private insurance, which would allow you to have the resources to provide the care you need.

With the conventional long-term care insurance market so limited, a so-called hybrid policy could be a solution.

“The newest products combine whole life insurance with a long-term care insurance ‘rider,’ allowing the policy owner to use that policy’s benefits to pay for care in the event the insured becomes benefit eligible,” Gaelick said. “Never need the care, your policy builds cash value, which could eventually exceed your outlay and will ultimately provide a death benefit.”

Let’s get to your specific case.

Gaelick said most whole life insurance carriers will only allow including the long-term care rider upon initial application, meaning you cannot add the rider to an existing policy.

Some carriers may allow an insured to add the rider to a term policy being converted to whole life with some conditions.

It’s more likely you will need a new policy to add this coverage, but you should start by asking your carrier.

If the answer is no, would it make sense to cancel this policy and get a new policy that includes a rider?

“As an insurance consultant, I would typically say no, knowing you’ve had your whole life policy for eight years meaning you locked in the cost of insurance at a younger age, your health status at that time and have had eight years of growth,” he said.

But assuming you’re still insurable, Gaelick said, you should request proposals to illustrate the transfer the current whole life cash value to a new whole life policy that includes rider.

“This can be accomplished via a 1035 Exchange,” he said. “This way that extra initial deposit will buy ‘paid up additions’ and make the new base policy required death benefit amount lower, in essence lowering your premium.”

And a warning: Life insurance and a long-term care rider are underwritten differently, so don’t cancel anything until you can determine if you’d qualify for both, Gaelick said.

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This story was originally published Dec. 19, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.