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An Introduction to Long-Term Care*

Hoover Financial AdvisorsSeptember 17, 2015

Insurance

Due to increasing life expectancy and health care costs, one of the hottest topics today in financial planning is that of long-term care (LTC) insurance. According to the U.S. Department of Health and Human Services, at least 70 percent of people over age 65 will require some LTC service at some point in their lives.1

Some Background

Surprisingly, the LTC industry is still somewhat in its infancy. The first policies appeared on the market in 1974, a measly 41 years ago. The changing landscape of consumer needs, cost, and policy structure have created a wave of evolution in products offered by various companies.

Designed to cover long-term services and support, LTC insurance provides skilled and custodial (non-medical) care in a variety of settings such as your home or a communal facility. LTC policies reimburse policy holders a pre-determined daily amount for services to assist them with a variety of ordinary activities. Known as Activities of Daily Living (ADLs), these items include bathing, dressing, eating, transferring (walking), toileting, and continence. A range of options and benefits are available, allowing you to select for the desired services when needed.

Generally speaking, the cost of a LTC policy is determined based on five factors:

  1. Age & Health – How old you are when the policy is first purchased and your related health status.
  2. Daily Reimbursement – The maximum amount that a policy will reimburse for care per day.
  3. Length of Reimbursement – A maximum number of days (years) that a policy will reimburse for.
  4. Total Reimbursement – The lifetime maximum amount a given policy will reimburse the insured. This is typically determined as the amount per day (#2) multiplied by the number of days (#3).
  5. Options – Any additional options (also known as “riders”) you select to cover supplementary services or items. A common rider would be for inflation protection.

One necessary step in obtaining LTC insurance is going through the process of underwriting. Most policies require this step, which essentially confirms your medical health and history. The underwriting process determines whether or not you can obtain insurance and, if so, how much the policy will cost. Each insurer will generally have a list of pre-existing conditions that automatically disqualify an individual from obtaining LTC insurance.

The Options

There are four basic options available for the coverage of LTC needs (excluding annuities with LTC benefits). These choices are as follows:

Option #1: Traditional LTC Insurance

A traditional LTC policy will cover costs associated with care once an individual needs help with two or three ADLs. Depending on the type of policy, coverage can vary for different types of facilities or care. Joint policies are sometimes available, providing coverage for multiple individuals in one policy. This type of coverage generally provides the highest amount of per dollar leverage.

Option #2: Hybrid/Linked Policy

The “hybrid” or “linked” policy combines universal life insurance with a LTC rider benefit. An attractive feature of such a policy is that you or your family will ultimately benefit from it in some way, either through a death benefit claim or payment of LTC expenses. If LTC claims are paid from the policy, the death benefit is typically reduced dollar-for-dollar. Policy holders are normally given several options on how their premiums may be paid. In the event that the entire LTC benefit is used in the policy, there is generally a 5-10% residual death benefit.

Option #3: Life Insurance Policy with LTC Rider

LTC benefits may also be available via an “add on” option (known as a rider) with a permanent life insurance policy. Similar to a hybrid policy, death benefits are reduced proportionally if care benefits are paid. Note that underwriting may need to be done twice: once for the life insurance and once for the LTC.

Option #4: Self-Insure

Self-insuring any potential LTC costs means you would be responsible for payment of any claims from current assets. In this case, you are making a bet on your health, the longevity of your assets, and the type of care that may be available when you need it most. It should be noted that delaying the purchase of any type of policy increases the risk of insurability you may face, as well as increased premiums.

The Bottom Line

Generally speaking, LTC insurance can help mitigate the impact of illness both in terms of its emotional impact on loved ones and the financial exposure such an event could present. In the event of a lengthy illness, LTC expenses could drain a significant portion of your resources and/or devastate the most carefully crafted retirement plan. We typically counsel clients to start thinking about their LTC needs around age 55. At this time health issues are less likely to be an obstacle and premiums may be less since they are linked to age.

As you review your personal situation, you may find a need to consider LTC insurance in the future to protect your assets. Some of our clients prefer the “peace of mind” that comes with owning this type of coverage, while others have personal experience influencing their decision. Although LTC insurance may not be a good fit for every individual, it is hard to argue against everyone needing a plan to address the costs of long-term care. We would be happy to facilitate a more in-depth discussion and formulate strategies for your specific situation.

* Note: Please keep in mind that comments regarding long-term care insurance are subject to change and could be influenced by future issues such as estate or income tax legislation on the federal, state, and local levels; health deterioration or chronic illness; and product changes developed and implemented in the industry.

Sources

1 Finefrock, Christopher J., Suzanne M. Gradisher, and Caleb M. Nitz. “Long-Term Care Insurance: Comparisons for Determining the Best Options for Clients.” Journal of Financial Planning 28.2 (2015): 36-43. Print.