Planning for Long-Term Care
According to the U.S. Department of Health and Human Services, approximately 70% of individuals turning age 65 are expected to need some type of long-term care services. Many will need services for up to two years. However, approximately 14% will require care for more than five years.
Traditional Long-Term Care Insurance
Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid. Medicare may provide limited short-term benefits, if certain requirements are met. Individuals who require long-term care are generally not sick in the traditional sense but are unable to perform two of the six activities of daily living (ADLs): dressing, bathing, eating, toileting, continence, and transferring (mobility). In addition to the ADL qualifications, long-term care benefits can become payable solely due to a cognitive impairment. With traditional policies, you elect benefits at the outset including:
- Monthly benefit of $3,000 to $12,000, often referred to as a daily benefit rate
- Benefit period of two years to six years
- Waiting period of 30 to 90 days before benefits begin
- Optional inflation protection of 3% to 5% compounding
The premiums that you pay are priced by the insurance company and depend on your age, health, gender, marital status, and coverage benefits selected. Once approved for coverage, the policy cannot be cancelled if you continue to pay premiums. But, keep in mind that premium rates are not guaranteed to stay the same over your lifetime. Many policyholders saw rate hikes over the last several years after insurance companies received approval from state insurance departments to increase premiums. This allowed the insurance companies to cover the increasing number of claims and remain solvent. The ever-increasing claims incidence, uncertain cost of paying future claims, and low interest rates that insurance companies can earn on premium reserves and investments have led to the mass exodus of companies from this market. The more than 100 insurers selling policies in the late 1990s have dwindled to less than a dozen currently selling policies.
Alternatives to Traditional Long-Term Care Insurance
#1. Hybrid Long-Term Care Policies
Numerous insurance companies are now issuing life insurance policies that include a long-term care rider. These policies make a portion of the death benefit available in the event of a long-term care need by providing both life insurance and long-term care benefits. These plans give some assurance that the premiums and potentially more than premiums paid will be returned to your beneficiary as a life insurance benefit, if benefits are not needed for long-term care.
#2. Single Premium Deferred Annuities
For a single lump-sum payment, these plans provide a stream of future income that can be used for long-term care needs. If not needed for long-term care, the payment is returned as a death benefit to a named beneficiary. These plans may provide modest returns on the single payment and may have penalties if cash is withdrawn early.
#3. Cash Value Life Insurance
Existing traditional life insurance policies can potentially be exchanged for a hybrid long-term care policy if your health permits you to qualify. Or, you may simply retain your existing cash value life insurance, even if you no longer have a need for the death benefit and consider the cash value a resource to draw from in the event of a long-term care need.
Opportunity Costs to Consider
Assuming that you never qualify to collect traditional long-term care insurance benefits, you will have spent dollars that could have been invested to fund other financial goals. Hybrid policies with long-term care riders often provide smaller death benefits and lower cash values than policies without these riders.
Self-Funding for Long-Term Care
Utilizing your own accumulated resources can be an attractive alternative to purchasing insurance. Self-funding provides flexibility and liquidity compared to traditional policies. Many people requiring long-term care services may sell their existing residence and move to a long-term-care residence – in effect, trading some of their existing living expenses for the new expenses, although these new expenses will likely be higher.
Additionally, your existing monthly income from sources including Social Security and pension income may be sufficient to cover your long-term care expenses. Or, you may need to include Required Minimum Distributions from IRAs and income withdrawals from other non-retirement investment accounts. Long-term care expenses may range from $36,000 to more than $100,000 per year, depending on the level of care needed. Hence, you must be prepared to potentially deplete substantial resources.
In developing your plan for funding long-term care, consider using long-term care alternative products as a hedge. Using a combination of strategies may help you address the risks of a long-term care event and provide probable success of achieving your personal and financial objectives.