Tuesday, March 13, 2012
LTC Benefits? Beware this Hybrid Product (Agents are Selling the Heck Out of It!)
I’ve met with three different people in the past month who were contemplating or, in one case, had already purchased a unique new “product” offered by insurance companies. The product is actually a combination of two products; an annuity and an insurance policy. They pair these two together and then “include” a Long Term Care (LTC) benefit from the combination.
The LTC benefit is what customers think they are buying. It is certainly what agents are selling.
But the LTC is really just an acceleration of the death benefit that they’ll have to pay (upon death) anyway. So, they sell the future value of the annuity plus the death benefit, and then show that you can withdraw from this future amount in monthly LTC benefits. But, of course, those benefits are deducted from the eventual death benefit. They are giving your own money, and claiming it’s an LTC benefit!
If you separate the two, the annuity amount will likely grow better and quicker as an investment account or IRA and a term life policy will be much cheaper than whole life insurance. But insurance illustrations never show the opportunity cost of 1) lower annuity returns, and 2) the inferior investment component of the life insurance policy. The agent doubles up his commissions (whole life policy and annuity) and the insurance company makes ongoing fees from both parts (and possibly adds a fee for the accelerated death benefit). And then it pays a quasi-LTC benefit from your own money! It’s a ridiculous product, but they are selling the heck out of them today.
My recommendation? Beware this sales gimmick. If you genuinely need LTC insurance, buy that product directly from a reputable source. If you need life insurance, buy a term life policy to cover your beneficiaries. Annuities? Find a better place to invest your money.