Preparing for the Future: Considering Long-Term Care Insurance

Long-term care insurance is often overlooked until later in life, which can be problematic since the offered premiums can increase drastically with age.  Almost 70% of individuals over the age of 65 will need some type of long-term care in their lifetime and, depending on the level of care, the cost can be overwhelming, which is why planning ahead is so important.

What Is Long-Term Care and Why Should I Plan for It?  Typically, individuals are considered as needing long-term care when they can no longer perform two or more of the “activities of daily living” (i.e., dressing, bathing, eating, toileting, continence, and walking) by themselves.  Although it may be uncomfortable to contemplate yourself or a loved one being in that situation, it is important to have a plan in place for future care.  The median costs for long-term care in the U.S. are $7,500 per month for nursing facilities, $3,600 for assisted living facilities, and $3,800 for home care, so if you need care for around 3 years, you could easily be looking at a bill of $200k to $300k.  Self-insuring (i.e. planning to pay for care out of your own income and assets) may be an option, but it also may result in draining retirement assets that you would rather pass on to a spouse, children, or other heirs.  Alternatively, family members may be willing and able to perform caregiving responsibilities, but as anyone with aging family members know, this is a physically and emotionally draining task.

Factors to Consider.  In determining whether to obtain a long-term care policy, you may want to consider the following factors:

Gender.  Due to longer life expectancies among women, women are more likely than men to need long-term care by a non-family member.  Women also tend to need care for a longer period on average (3.7 years versus 2.2 years).

Personal and family health history.  Diseases such as dementia, Alzheimer’s, and Parkinson’s are common catalysts for long-term care needs, along with strokes, cancer, and personal injuries.

Marital Status.  Long-term care policies may be less essential for single people who have equity in their home, since, if they needed to enter a long-term care facility, they could sell their home.  In contrast, married couples might face the cost of needing to maintain two households if one spouse needed significant long-term care.

Types of Policies.  The two main types of long-term care policies are Traditional policies and Combination (sometimes called Hybrid) policies.  With Traditional policies, you pay a yearly premium, which ceases when you begin receiving care.  You elect a monthly benefit amount and benefit period (usually between 2 and 5 years), and the policies are guaranteed renewable. Insurance companies cannot increase premiums based on your specific circumstances, but they can change the premiums (sometimes significantly) in response to rising medical costs for a whole group of insured persons.  These policies have no cash value, but they are the more affordable option when considering LTC insurance.

Combination or Hybrid policies are a combination of long-term care coverage and either life insurance or an annuity.  You generally pay the cost upfront with a one-time lump-sum premium or with fixed payments over a limited number of years.  These policies typically have a lifetime benefit amount and never expire.  The appeal of a Combination policy is a guaranteed return on the premiums paid–from receiving reimbursement for long-term care, from heirs collecting a death benefit, or from some combination of the two.  The policy’s death benefit decreases as long-term care benefits are paid out, so if you were to require extended LTC, there would be no death benefit.  While the guaranteed return on these policies may seem appealing, there are a number of drawbacks.  First, the price tag.  These policies can cost anywhere from $50,000 to $250,000 upfront, which may not be feasible for many individuals.  Most (but not all) policies will have a cash value with a guaranteed modest return, but if interest rates were to rise, the insurance company is not obligated to pay a higher rate.  If you have many years between purchasing the policy and collecting benefits, it is possible that investing that lump sum could lead to an equal or greater payout than the hybrid death benefit.

PFS Perspective.  At PFS, we generally recommend clients investigate long-term care insurance around age 50.  When shopping for a policy, we typically recommend focusing more on the “Chevy,” not “Cadillac” policies.  This may entail choosing a 2-year, not a 5-year benefit period; a longer exclusion period before becoming eligible for benefits; a lower monthly or daily benefit; etc.  If considering a Traditional policy, we highly recommend adding an inflation rider so that your benefit amount increases over time, since 20 to 30 years of inflation could significantly diminish the value of the current policy benefit.  Additionally, consider details of the policy coverage.  For example, if you foresee wanting to stay in your home as long as possible or receiving long-term care from family members, ensure that your policy covers home care as well as care from non-specialized providers or family members.

While premiums for long-term care policies have increased in recent years, they are still cost-effective if you do end up needing care.  Take time to obtain quotes and make an informed decision, and as always, give us a call for advice–we can help!