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Why is Long Term Care insurance so complicated?

July 28, 2017

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How much does Long Term Care insurance cost?

May 26, 2017

Of course, the answer is disappointing.  The answer is that it depends.  What does it depend on?

 

There are a few variables that can greatly affect the cost of a Long Term Care insurance (LTCi) policy.  

 

1. Your age when buying the policy.  

One of the biggest factors is your age.  If you are buying a traditional policy, you will pay premiums until you begin using the benefits.  Therefore, your premiums will be smaller the younger you are when you buy the policy.  You may pay the same amount over time, but your monthly or annual premiums will be smaller.  On the other extreme, if you purchase a Single Premium Hybrid policy, your lump sum payment (guaranteed to be a one time payment) will be less if you purchase the policy when young because the insurance company has the time to invest the money you pay over a longer period of time.  

2. How much you want to receive in benefits. 

The amount of your benefit is another huge factor in the price of a policy.  Some people who are very risk averse want to try to cover all of the possible expenses that they might incur.  This is no longer affordable for many people.  A more appropriate strategy that most people are adopting when purchasing a Long Term Care insurance policy is to try to balance what they want to cover and what they can afford to arrive at a percentage of the total costs that might be incurred.  Using round numbers, if a person thinks that a $10,000 per month nursing home is what he or she might want, then the buyer might choose to look at a $3,000 per month policy in order to pay a portion of the anticipated costs. 

 

3. The elimination period.

The elimination period is a fancy way of saying the time period between when you cannot perform the Activities of Daily Living (ADLs) required to receive benefits and when you actually begin receiving benefits.  For example, if you've saved enough to live a year and pay for your long term care needs by yourself, then your policy will be less expensive.  Insurance companies know that the longer you pay for your own care, then less likely it is for them to put out large amounts of money.  Therefore, your premiums will be lower.  If you choose to only pay for a month or two of care on  your own, then your premiums will be more expensive. 

 

4. Do you want a return of your premium if you do not use the benefits?   

A return of premium on any type of insurance will cost you extra, but with Long Term Care, this is a major concern by many because there is a reasonable chance that the policy will not be used.  No one wants to put out the substantial premiums for Long Term Care insurance without some fall back.  In my opinion, a hybrid policy is the best way to do this.  The policy uses an annuity or life insurance base in order to provide for Long Term Care benefits as well as cash value that converts to an annuity or a life insurance policy when the benefits are not used.  OneAmerica has a policy that has a lifetime rider that does not require a large additional premium.  That policy provides the Long Term Care benefits for your whole life as well as provided life insurance should you not use the Long Term Care benefits.  It can be a little more expensive, but it can also be less expensive depending on  your assumptions about premium increases on traditional policies as well as when you might begin using the benefits (and therefore stop paying premiums on the traditional policy).

 

5. The carrier your choose.   

Not all insurance companies charge the same thing. For this reason, it's important that you compare at least a few carriers and a few different policies.  That may or may not mean checking out multiple agents before making a decision.  There are some major players in the industry right now, so it's possible you'd want to get up to four quotes on traditional policies and three or four quotes on hybrid policies.  I always recommend that my clients look at both types of policies at least in the beginning so they can make an educated choice.  

 

6. How long you want to receive benefits for.

Now, perhaps the biggest factor is how long you want to receive benefits for.  If you want a year of Long Term Care coverage, that's going to be a lot less expensive than if you want five or eight years or lifetime coverage.  The range of risk tolerance is huge.  Some people would rather go without insurance and try to save for themselves.  Some want the comfort of a lifetime policy.  If you can afford a lifetime policy, I often recommend it because the additional cost is not much.  Others say it's a waste of money because the likelihood of an extended use of Long Term Care benefits is unlikely.  I take a different approach.  If I can afford the extra coverage without digging into my retirement much, then why not give myself the peace of mind of knowing that I will almost never have to worry about Long Term Care depleting my assets.  Others will choose to look at a more likely case that they will only have to pay a few years in a nursing home or even home care, so they will purchase the least number of years they can afford. 

 

What to do if you can't afford what you want?

I often suggest that people first choose a dollar amount that they are comfortable with for benefit amount, let's say $5,000 to start with.  Then we'll choose the longest elimination period they believe they can cover themselves.  Then we'll choose the shortest duration of benefits.  Let's say one year.  Then we'll get quotes from a variety of carriers and compare them as best we can.  We'll see if that policy is affordable and make modifications from there.  If it's still too expensive, but the client wants coverage, we will reduce the benefit amount.  If it's more affordable than the client thought it would be, then we might decrease the elimination period or increase the number of years covered based on the client preferences.  Unfortunately, much of this is an intuitive process.  That's because despite the odds of various possibilities, your situation almost certainly will not match the averages.  So, you have to feel comfortable with what risk you want to take and then design the policy to meet that comfort level.  It's probably obvious at this point that everyone would like to cover every possibility.  That is almost out of the question for most people.  If they can afford to purchase that type of policy, then they probably don't need a policy at all.  This means that we will have to talk through your desires and your fears and then try to match the policy to your comfort while also looking at the averages.

 

So how do I know what Long Term Care insurance costs?

Unfortunately, if you don't get quotes from a reputable agent, you won't know.  I could give all sorts of ball park ranges for a number of types of policies, but that wouldn't help you very much.  The only way to know if you can afford a policy is to talk to an agent.  Most agents should be able to get you quotes either within an hour or so or worst case overnight.  If you plan to have over $500,000 in net assets when you retire and would like to make sure that you don't spend it all on Long Term Care needs, you should talk with an agent.  A good agent will be low pressure, honest and explain the policies to you.  My philosophy on Long Term Care insurance is that it's such an important purchase that people ought to think about it and not be pushed into a policy without substantial thought.  That way you will be satisfied when you finally see what the policy costs and have input into which of your concerns needs to be taken care of by the policy.  

 

 

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