Combo Plans Combine Life and Long Term Care Insurance


Henry Montag

Henry Montag

 Several years ago the life insurance industry’s response to a dismal 8% market penetration of long-term care Insurance was to learn why approximately 92 % of the population chose not to take advantage of the insured option of protecting themselves from this looming financial threat.  

What the Insurance Industry found was that people were staying away from this product for several major reasons “What if I pay for the insurance premium all those years and then I die without ever getting the benefit”. In other words it was a “Use it or lose it” proposition.  

Another major  reason people chose not to purchase a long term care insurance contract was “It probably wont happen to me but if it does I’ll just self Insure” The Insurance Industry took aim at the both of those reasons and developed a product that allowed an individual to avoid the “use it or lose it” scenario as well as to provide for a leveraged tax free distribution of up to $113,000 annually  directly from the death benefit, the most efficient way to pay for any long term care expense, assuming of course that a person was unable to do two of the activities of daily living or developed a cognitive impairment such as Alzheimer’s. This translated into making the tax free leveraged dollar from one of the combo or linked plans significantly more valuable than the taxable dollar that one would have to withdraw from one of their taxable investments or annuities in order to pay for any type of a long-term care expense.  

Arrangements were made to attach these provisions to the 2006 Pension Protection Act which first became effective January 2010. One of its goals was to have a life Insurance product pay a person from its death benefit if the insured became ill and couldn’t do two activities of daily living, or had a cognitive impairment. The result has been a very rapid increase in the number of individuals opting to cover themselves with some sort of an insurance product or internal long-term care rider in the event that they became ill and needed assistance.

As one of the early students of LTCI (Long Term Care Insurance) when it first appeared on the marketplace in 1982 I was a critic and later an advocate of the product. So anytime I see an increase in awareness of people seeking to protect themselves from what I’ve referred to as “The greatest threat to an individual’s retirement, an unexpected non -reimbursed long term care medical expense”, I’m delighted. The drafters of this legislation accomplished an act that made both the insurance industry happy as they’re now selling more LTC riders internally embedded in a life contract and the consumer obtained a far more flexible and tax efficient way of protecting themselves in the event of a long term care expense. 

Once the law became effective in Jan of 2010 it took the Insurance Industry until Jan 2011 to create various types of intertwined products that combined life Insurance and long term care Insurance, and annuities which went on to become known as linked or combo products. 

One of the great attractions was that if an Insured never needed to use the long term care benefit then their beneficiaries would receive the entire life Insurance death benefit proceeds on a tax-free basis. It was No longer a “Use it or lose it situation.”  

The result was a proliferation of a new generation of various combination products that now allow an individual to withdraw money from the death benefit of a life insurance contract or an annuity to pay for a long-term care cost. When considering the various choices and options available to you be advised that some companies require you to pay an up front additional cost for the rider that allows for this exchange to take place, while others do not charge such a fee but instead charge a stated interest rate if and when you use the money for the time the money is withdrawn. Point is that individuals now have a preponderance of choices available to them to pay for a long-term care expense. 

The question becomes which is best for your particular situation, a traditional long-term care contract, or one of the new Combination plans. My suggestion is to examine the pros and cons with an experienced independent professional knowledgeable with the various options based on your particular situation, needs, budget, and preferences. Regardless of your choice it’s extremely important that you review your existing life insurance portfolio to make certain you’re not paying more that you should based on current pricing. 

That the contract does not expire prematurely and that you’re aware that there may be benefits for you in taking advantage of the new tax advantaged ways of getting money from your annuity or life insurance contract to pay for a long term care expense.


Henry Montag CFP,CLTC
Financial Forums Inc.
516 640-1315
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