Long-Term Care insurance is an increasingly important planning consideration. Over the last couple decades medical advancements have extended life expectancy and changed many serious health problems from terminal to disabling, which means that more and more of us are going to live longer but have an increased risk of possibly needing non-rehabilitative care.
While we do not sell insurance, because we are a “Fee Only” firm, we do help our full-service clients to determine the appropriate amount of insurance and where they should purchase their protection. Firms that we refer to (that sell loaded products) must donate 50% of the commission due to a charity of our choice.
Why Long-Term Care Insurance (LTCi) is important:
As we mentioned above, the increased risk that we may need Long-Term Care (non-rehabilitative medical/custodial care), the fact that it is expensive, combined with the reality that our current benefits system was not designed to pay for this makes this a potentially critical planning pitfall. Medicare is not going to pay for our long-term care, neither is our health insurance or medical supplement plan. So where will the money come from? Generally, it will come from one of three places:
Spend Down: Most people are not aware that this is the default choice they are making by doing nothing. Many think that by paying Medicare/Medicaid taxes that this is a covered expense but they are only partially correct, because only Medicaid pays for LTC expenses and only after the individual has spent themselves into a mild poverty.
Medicaid: Medicaid was never designed to work as a LTC solution because until the last decade or two it was not a huge expense for us as a society. Fortunately, our life expectancies and quality of that life have continued to increase. Unfortunately, as a society, we have not set aside resources to be able to pay for the inevitable care that is going to result from this longevity. Medicaid is the default system that pays for care once a citizen becomes destitute and thus becomes the LTC payer once an individual has spent down the majority of their resources.
*Note: You may not want to depend on Medicaid because many of the best facilities will not accept Medicaid or only reserve <20% capacity for Medicaid, which is almost always at capacity and you or your loved one may not receive the quality of care/comfort that you/they desire.
Long-Term Care Insurance: The last option is to insure/pool your risk with others to reduce the potential long-term impact of LTC. While this option is unpalatable to many individuals because they cannot get over the prospect that they may never receive benefits, it is hard to deny the math of current costs versus future liabilities and the certainty that this can bring to one’s financial planning.
Who needs Long-Term Care Insurance?
This is not an easy question to answer and there may be many other variables to consider, however, we tend to use the general guideline that clients with more than $150,000 and less than $2,000,000 in assets, that want to leave a legacy and do not want to be dependent on the government or family, should seriously consider insuring some/all of their long-term care risk.
Who else can benefit from Long-Term Care Insurance?
Beyond individuals that “need” LTCi, there are also others that could benefit from insuring their LTC risk:
- Households with assets exceeding $2,000,000 – Even though one could potentially self-insure this risk with the assets mentioned above, a careful study of the probabilities to potential liabilities still leads many to consider LTCi a good investment. Furthermore, many people would like to be able to accurately quantify what they will be able to leave to children, grandchildren, and charities. LTCi can take their biggest potential liability off the table, enabling much more accurate estate planning.
- Children who want insure against the LTC risk of their parents – There have been instances where LTC facilities and the government have gone after children to pay the LTC bills/liabilities of parents. Many affluent children would rather they just insure this risk at a known cost now to limit liability and make sure there are plenty of dollars to take care of their parents to their own standards.
How does Long-Term Care Insurance work?
Let’s break this down piecemeal:
- Triggering Benefits – Generally, on most policies, you must be unable to perform two of the six activities of daily living (ADL) or be cognitively impaired to trigger LTCi benefits.
- ADLs include – Bathing, Continence, Dressing, Eating, Toileting, and Transferring.
- Daily/Monthly Benefit – This is the amount that the insured will receive per day/month. Usually, monthly is better because it is not breaking it down into how many days per month are being reimbursed and is more claim friendly.
- Benefit Period – This is the duration that policies will pay the daily or monthly benefit. This can range from anywhere between 1 year to lifetime, although, lifetime benefits are generally not offered anymore. The most common benefit period elected is ~3-5 years.
- Total/Pooled Benefit Amount – This is the amount of one’s total benefit, which is just the daily/monthly benefit times the benefit period. For example, a 5 year policy with a $6,000/mo. benefit would have a pooled insurance amount of $360,000. In the last example, if the insured was only spending $3,000/mo. then the policy would actually last ten years; the insured is entitled to the full benefit.
- Elimination Period – The amount of time that must elapse from triggering benefits until they actually start to pay (some people refer to this as their deductible). This is usually 90 days, but could be anywhere between 0-365days. Shorter is better but also more expensive.
- Cost of Living Adjustment (COLA) – Once benefits are triggered this rider increases the policy benefits each year to attempt to offset inflation. This is usually 2-6%/yr depending on the options selected in the policy. This is one of the most important parts of a LTCi policy and makes the future benefit much larger than the benefit at purchase. If inflation protect is left out of a policy or underestimated it can be a serious flaw in policy design and/or an individual’s financial plan.
- Waiver of Premium – Most policies include this waiver which suspends premium payments while the insured is receiving benefits.
Types of Long-Term Care Insurance:
There are lots of different insurers and policies but the most important differentiator are the types listed below:
- Pure LTCi – These policies are the best pure LTC risk insuring instruments as they are term policies that only insure the LTC risk. This means they generally have the strongest protection but if you don’t use them then you lose the mosey paid in premium. Most people whose main priority is to strongly insure their LTC risk should buy this type of policy.
- Reimbursement – This means that the insured pays the bills and then remits the invoices to the insurer for reimbursement. Most LTCi policies are reimbursement policies. because they have to be to be tax qualified, which means that premiums can be tax deductible and benefits tax free.
- Cash – These policies just pay cash for the insured to use however they like once they trigger benefits. There are not a lot of these around because they are not tax qualified but they do resonate with wealthier clients that will sacrifice efficiency for freedom.
- Hybrid LTCi Policies– There are lots of these policies around today and the basic gist is that they combine traditional LI or annuity policies with some sort LTCi protection. There are too many variations/permutations of these to go through them all but we will highlight the broad categories:
- Life Insurance with LTCi rider – These policies combine a traditional life insurance death benefit with the ability to spend a portion/multiple of the death benefit for LTC. These can be attached to Whole Life, Universal Life, or Variable Universal Life policies. There lots of different variations so one must be diligent and comparison shop to make sure you’re getting a good deal that will actually meet your planning objectives.*
- Annuity with LTCi rider – These annuities have become more popular after the Pension Protection Act of 2006 allowed people to rollover annuity money into qualifying annuities (or even traditional LTCi policies) that allow them to withdraw funds tax free to apply towards qualifying LTC expenses. This can be very appealing for those that have appreciated annuities with large tax liabilities and/or to those that are medically ineligible for traditional LTCi policies.*
*Unfortunately, many of these policies will lack adequate inflation protection and we are not currently aware of any that qualify for the States’ Partnership programs (getting additional Medicaid spend down protection for buying a LTCi policy).
How we help our Clients:
Evaluate the Need: Through our financial planning process we will help you to identify your need or opportunity (at the Gold client level or through the purchase of a financial plan).
Recommend the Amount and Type: Through our analysis above we will help you determine how much LTCi you should purchase and what your options are for attaining coverage.
Help to shop with client(s): Through our experience and industry contacts we will help you to identify which carrier will serve you best. Remember, we are the probably going to be the only person that is a fiduciary to you throughout this process so this is a very important/valuable service that we provide.