This quarter’s article by Kyle Merry, Tax Associate, and Joshua Buckingham, CPA, both of TD&T’s Oskaloosa office, provides helpful information on considering long-term care insurance options.  

If you’re like at least 75% of baby boomers, you’re not well-prepared to cover the costs of long-term care for yourself or your spouse.  One fourth of baby boomers claim that they have long-term care insurance, but only about half of those actually do, according to a recent survey.  Unfortunately, about 70% of Americans over age 65 will need nursing home care sometime in their lives, according to the U.S. Department of Health and Human Services.  Even if that 70% includes all of those who currently have coverage, that leaves 58% of people over 65 who will need care and aren’t prepared for it.
Some people count on Medicare or Medicaid to cover this kind of need.  In most cases, the benefits available to the average user from Medicare for long-term care are very limited.  Obtaining Medicaid assistance generally requires that your income does not exceed federal poverty levels.  It will also entail a review of your assets for the past several years to assess how you have managed them.  In short, most Americans with financial means cannot count on these programs for help with long-term care.

Stand-alone Long-term Care Policies

For many years, a stand-alone long-term care policy offered the only way for most people to prepare for nursing home needs.  These policies include several limitations or drawbacks that make them unattractive to most people:
  • Expensive – they have high costs and ongoing premiums that add up to a lot of money.  In addition, premiums tend to increase over time.  Some states now permit price increases on policies initiated 25-30 years ago.
  • No cash value – unlike traditional life insurance, they generate no cash value for the insured.
  • Term limits – Current Policies have term limits and total amount payout limits, generally 2 years and $250,000.
  • Underwriting  — may be time-consuming.
  • Health – you have to be healthy to qualify and most plans have an elimination period of up to 90 days before coverage begins, although this may apply to other plans, too.
  • Red tape – The policies may be difficult to collect on.  The paperwork process is often very tedious and requires individuals to be very persistent and to call several times for progress on a claim.
  • Use it or lose it – you pay the premiums but if you never need the care, you get no financial return on the money you’ve paid in.  In addition, if you cancel the policy because of rising premiums or other budget issues, you get nothing back.

Hybrid Long-term Care Coverage

Today, the financial industry offers some more attractive alternatives to traditional long-term care insurance.  Most of them are built on a life insurance model.  Two common options include:

  • Life Insurance with an Accelerated Death Benefit Rider – This approach permits you to access the funds in your insurance policy’s death benefit before death, allowing you to apply those funds to your long-term care expenses.  Insurance companies often provide this as a free inclusion in their policies.
  • Life Insurance with a Long-term Care (LTC) Rider – This method uses a whole life, universal life or indexed universal life policy as the base, with an LTC rider built in, along with an increased premium.
Hybrid plans offer some distinct advantages:
  • Fixed monthly or annual premiums that will not increase over time.
  • The LTC rider is often a free inclusion in the accelerated benefit option.  Insurance with an LTC rider involves more cost but also provides more potential benefits.
  • If the rider does not come into play, the life insurance policy remains.
  • Generally, these policies are easier to collect on, but still require some paperwork.
  • Limited impact from interest rates – These policies do best in rising interest environments, but can lose value in decreasing interest rate environments.  We are still currently in one of the lowest historical interest rate environments, so these policies should perform very well in the future years and decades.
  • Possible pitfall – make sure the policies you consider have long-term care benefits equal to or greater than the death benefit and not merely a percentage.  Ultimately you could receive less payout for long-term care under some policies.

For similar amounts of money paid as premiums, a hybrid long-term care policy may pay out less than a traditional long-term care policy.  Depending on the rates, hybrid policies may pay one to two years of long-term care costs.  However, you will have no fear of increasing premiums in future years, the policies will be easier to collect on and there will be a remaining death benefit if unused.

How Can You Best Prepare?

As with any financial decision, your choices may not be simple or obvious.  Some of these financial products are quite complicated and may require you to study detailed information to help you select one that provides the right benefits for you.  You should always consult your financial advisor when making this kind of decision.
TD&T can consult with you in your overall financial planning, including preparation for long-term care.  Contact us to set up an appointment.