Life Insurance with Long Term Care Riders

Over the last several years, the life insurance industry has been pushing Life Insurance that doubles as Long Term Care insurance. Several years ago, a local life insurance agent, who is also a client, had me review one of these policies and it was very good. Since then, I have looked at a couple of others and they too looked good. However, there is a caveat….

Before I explain the caveat, I should give you some of my background. I have been a licensed life insurance agent since 1979. I began my career in the life insurance industry with my father as my mentor/trainer. I successfully completed the CLU (Chartered Life Underwriter) program in 1982 and the ChFC (Chartered Financial Consultant) program in 1985. I surrendered my contract with AXA/Equitable around 1994 or so after I started Plan Ahead Inc. I have always had the ability to analyze proposals for life insurance, better than most in my opinion, and have consulted with clients about their insurance programs ever since even though I do not sell life insurance.

Now the caveat… insurance agents have for decades induced their clients to cancel existing insurance and do a “1035 exchange” into new insurance policies, many times with the same insurance company. They will typically say the new policies are better for various reasons. I just reviewed one of those proposals a client sent me. I even had communications with the agent making the presentation, and he told me the new policy is using more current mortality tables so the new policy is better. I told him, as I say to all clients that bring something like this to me, “why would the insurance company pay you a new commission to get your client to cancel an existing policy that has been on their books for decades and buy a new policy?” Think about that….the agent made a large commission (as a percentage of premium you paid) and the insurance company has a surrender charge on that policy (to recoup their acquisition costs) for at least 10 years. Now, your policy is beyond the surrender charge period and they are trying to get you to switch to a new policy with new commissions and acquisition costs and a new surrender charge period. The only reason that makes sense to me is that the insurance company is reducing their risks at your expense if you switch policies.

In the 1980’s the insurance companies came out with “Universal Life”. Agents talked their clients into cancelling their old Whole Life policies to buy the new Universal Life policies because they were “better” than the old whole life policies. My father and I did not jump on that bandwagon because we realized that this was a way for the insurance companies to shift a lot of the risks from them to the policy holders. I’m not saying Universal Life is bad. I own one of them. However, it is generally but not always, bad to cancel an existing policy to buy a new policy. You are losing more times than not. Now, insurance companies are at it again with the new life insurance policies with long term care riders

The moral of this story is do NOT surrender an existing policy without thoroughly understanding the costs of the new policy as compared to the older policy. The agent that sent me the recent proposals started in the business one month before me and with the same company. He has his CLU, ChFC and CFP designations. He’s a good guy, and I believe he is doing what he thinks is right for the client. The problem is he apparently does not know how to completely analyze the cost of one policy over the other. You may have the best agent in the world, and he may think he is doing right by his recommendation, but BEWARE if your agent tells you to surrender your old policy to take out a new policy. There are times where your situation warrants changing your insurance, but you need to be sure you understand all the facts.