If you think planning how to pay for long term care (LTC) isn’t that important, think again. According to the U.S. Department of Health and Human Services, a person age 65 or older today has a 70% chance of needing LTC at some point in their lives. For a couple age 65, the probability rises to 91% that at least one person will need LTC. And those expenses can total hundreds of thousands of dollars. Paying these costs without causing serious financial damage to a family’s finances can be one of the most challenging issues faced by retirement age individuals.
How about Medicare or other types of health insurance? While Medicare can absorb some LTC costs, typically during the first 100 days of care, beyond that the financial responsibility will fall to the individual. As to health insurance, LTC costs are typically not covered by health insurance policies. While Medicaid can also pay LTC costs, one generally has to become financially destitute to qualify for this benefit. That being said there are some elder law attorneys who can sometimes help people qualify for Medicaid while still retaining some of their assets but this is not an easy or inexpensive process and won’t work in many situations.
Excluding the above comments regarding an attorney, there are really only three ways of paying for LTC costs, each of which have some advantages and disadvantages, as explained below.
Self-Insuring. This strategy involves individuals using their savings and/or investments to pay LTC costs, whether in a nursing home, rehab facility, adult living facility or in-home care. The cost for care can range from as little as a $1,000 to $2,000 per month for part time unskilled in-home care to as much as $10,000 per month for skilled care in a facility or skilled nursing care provided in the home. Unfortunately, even families with significant assets can be severely impacted by these additional expenses. For this reason, many people choose to avoid self-insurance and, instead, “transfer” some of that risk to an insurance company just as they might do by purchasing homeowner’s insurance, car insurance, life insurance or income disability insurance.
Traditional LTC Insurance. While traditional LTC insurance can be an appropriate solution for some people, these policies involve some potential shortcomings that any potential purchaser should consider before making a purchase. For example:
- Policies premiums can be significant because the usage rate among policyholders is very high (see statistics in the first paragraph).
- Premiums are not guaranteed and may increase in the future (as they have in the past) but only with approval by the state department of insurance.
- The monthly or daily benefit is normally limited to a pre-established dollar amount and may not be sufficient to meet all LTC costs incurred during someone’s lifetime.
- If an “inflation adjustment” is not included with a policy (typically via an optional rider that can increase the cost of the policy) an LTC benefit amount that might be sufficient today could be insufficient in the future.
- With most traditional policies, if the policyowner dies or terminates their coverage before needing or receiving LTC benefits, there is no way to recoup any of the premium dollars that were paid to the insurer.
“Hybrid” Life Insurance/LTC Insurance. These products were introduced to the market at least a decade ago and have found widespread acceptance by insurance agents, financial planners and consumers. Hybrids are basically permanent life insurance contracts that allow policy owners to access policy death benefits during their lifetime to pay LTC costs if needed. For example, an individual with a policy with a $300,000 death benefit might be able to withdraw 2% per month of that death benefit, or $6,000, to pay for LTC costs. If the insured dies with some death benefit remaining after paying LTC benefits, that remaining death benefit should pass to the beneficiaries on an income tax free basis. Below are some important points one should consider before purchasing a hybrid policy:
- The necessary premium for a hybrid is often higher than for traditional LTC coverage with similar benefits, for the reasons described above (i.e. cash value, death benefit and the ability to have cost recovery if benefits are never needed).
- Generally, LTC costs in a hybrid are established at time of policy issue and cannot be increased in the future (this can vary depending on the type of life policy being issued so be sure to ask).
- Because most hybrid policies accumulate cash values over time, if a policy owner terminates their coverage in the future, the cash surrender values may allow them to recoup a portion of the premiums paid.
- If the owner never uses the LTC benefit, upon their passing the policy death benefit might allow the family to recoup some or all of the premiums paid during the owner’s lifetime.
Last, whether traditional or hybrid, most policies require the insured to satisfy an “elimination period” which is the time you must wait after needing care before receiving policy benefits. This could be 30, 60, 90 or 180 days. The shorter the elimination period, the higher the premium cost and vice versa.
In summary, if you’d like to discuss this topic in more detail or if you’d like to receive quotes for traditional or hybrid coverage, please feel free to give us a call and we’ll be happy to assist you.
As always, thank you for your trust, your confidence and your business.
SWA Investment Committee
Edward Sutton Zack Sutton, EA, CFP® Matt Bertoncini, CFA