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Why is Long Term Care insurance so complicated?

July 28, 2017

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Have You Explored All of Your Long Term Care Financing Options?

March 16, 2017

 

With the rise in premiums of traditional Long Term Care Insurance, many consumers are choosing other methods to finance their potential Long Term Care needs or simply ignoring the issue and hoping all comes together later.  While some are still making plans, for example simply trying to save for themselves, other who simply hope things will work out may want to know that there are other possible options for preparing for potential Long Term Care needs. 

Of course, we all know the potential need for care later in life.  Those of us who are healthy presume that will come much later in life, so late that Long Term Care insurance may not be relevant.  However, making that conclusion without looking at all of the options is a bit risky as for many people it may mean relying on Medicaid and/or depleting all of their savings.

One option is to purchase a traditional Long Term Care policy, but to purchase less insurance.  There was a time that people bought policies to cover the maximum amount of time they might be in care.  Given the increasing premiums of traditional policies without any guarantee that they won’t rise again, consumers are right to be skeptical.  Buying eighteen months or two years of benefits rather than five years or more of benefits may make sense for many people.  Another approach is to simply purchase a lower dollar value of benefits.  Instead of purchasing a policy to pay for one hundred percent of the cost of a nursing home, for example, consumers are looking to purchase half or less of that benefit and plan to pay the remainder through retirement savings.

Another option is an asset based policy that might combine the strategy of reducing either the dollar value of coverage or the amount of time covered or both.  These policies are normally paid in a lump sum or over a limited amount of time, such as five or ten years.  Often a person paying in a single payment simply transfers the total premium from an existing account.  Often this is funded from a 401K account.  The advantage of this type of policy is a guaranteed return of premium and a small life benefit if the Long-Term Care benefits are not used.  In addition, premiums are guaranteed and cannot rise.

For those who don’t want a true Long Term Care policy, there are annuities and life insurance policies that have Long Term Care riders attached.  Because of the number of these policies, it’s difficult to give all the possibilities.  However, one example is an annuity that provides double the promised monthly payout for up to five years if the owner has Long Term Care expenses.  Often these annuities also have other benefits such as a bonus in the death benefit if the annuity is not exhausted at the death of the annuity owner. 

Of course, saving for yourself is another option.  The advantage of such a strategy is that you control the amount saved and also the withdrawal of any cash should you not need care or should that care be extended or if care substantially changes between the time you would buy a policy and the time you need care.  The downside is that it’s difficult to save enough, especially if you end up needing care even five years younger than you anticipate. 

As with all decisions about finance there is risk involved.  In the case of a traditional policy, you either use the policy or you lose all your premiums.  If you use the policy, then you probably could not have saved enough yourself to pay the same level of expense. 

In the case of an asset based policy, if you don’t use the benefits, you lose the opportunity cost of the premium paid (depending on the structure you choose) as the life insurance value is normally very low. 

The good news about an annuity or a whole life insurance policy is that if you are in a relatively high income tax bracket and you structure the policy right, the tax benefits can make these options equivalent to the portion of your retirement portfolio that is in a corporate bond fund.  While not a true Long Term Care policy, the riders may provide enough additional benefit so that you and your family have enough protection to get you through a hard time. 

Saving for yourself depends on your discipline to save and your ability to predict when you’ll need care and how much.  Doing this well is very difficult and will require the use of a financial planner.  Even then, deciding on where to invest money that is specifically intended for Long Term Care needs is tricky given that higher return investments also carry the risk that they can lose value just when you need the cash.

None of these strategies are no-brainers.  All of them require a great deal of thought and comparison.  Given the potential impact of Long Term Care expenses on a retired person’s financial well-being, I recommend that you look at all of these options before making a final decision.

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