Why is Long Term Care insurance so complicated?
I hear this a lot from people who want to know about Long Term Care insurance. “Why are you asking me so many questions? Why are there so many choices?” The answer is that there are a number of factors and because this is insurance, it is designed to cover risks that you can’t or don’t want to afford to take yourself.
For example, if we just look at averages, using round numbers, the average person will need some sort of Long Term Care assistance around age 85. Of course, no one is average, so the chances of actually needing care that qualifies for benefits under a policy exactly at age 85 is rare.
DEFINING WHAT QUALIFIES
In order to qualify for benefits, you either have to have dementia or not be able to perform two of six listed Activities of Daily Living. The typical six are: continence, toileting, eating, bathing, transferring (walking and getting in and out of a chair to some place else) and dressing.
The age at which you need assistance that qualifies will vary greatly on your current health as well as any catastrophic events that might occur between now and age 85. For example, a friend of mine’s father was diagnosed with dementia at age 78. If you end up in this case, then your Long Term Care insurance policy was a bargain.
HOW LONG WILL I NEED CARE?
Again using round numbers, the average person needs care about 3 years. This might be at home. It could be in assisted living, and it’s possible that the last six month to two years of your life could be in a nursing home. So, it’s not simply at what age will you go into care, but guessing how long you will need care. If you need care for a year and you don’t need it until age 90, then you can probably afford to pay for that yourself or use Medicaid, if that is an option for you. There are downsides to choosing to use Medicaid such as having to spend all of your resources before Medicaid kicks in or the fact that there may not be a Medicaid facility near your home.
On the other hand, if you need care for three to five years or more, then it’s much more difficult for most people, even those with relatively substantial retirement savings, to afford. While it’s rare, I’ve had a few friends whose parents have needed care for up to a decade. In those cases, the family chose to care for the parent, but it takes a toll both financially and in terms of stress. In those cases, the family normally believes that they will only be caring for the parent for a few years at most, then they aren’t sure what to do after year two or three. The family may feel guilty about putting the parent into a facility after all that time or money may be completely exhausted and the family doesn’t want to use Medicaid.
WHAT CAN I AFFORD TO PAY FOR BY MYSELF?
Most policies allow you to choose a period of time that you can pay for yourself before the policy benefits kick in. This is called a At first, this may seem like a downside, but accepting a longer period that you will pay for by yourself leads to much lower policy premiums in a traditional policy. It can lead to other benefits, such as a great life insurance value, on hybrid policies. This means more money back to your beneficiaries if you do not use the benefits. Remember that insurance is designed to pay for those risks you cannot afford to pay for on your own. Therefore, the more you can pay for by yourself without harming the retirement living of your spouse or significant other, the lower your rates can be or the less insurance you need to buy.
Another factor in deciding what you can pay for on your own is how much you’ll need monthly. Another obvious way to reduce the cost of your policy is to reduce the amount per month that you want the policy to pay. The more you believe you can pay out of pocket, the less insurance you need.
WHAT KIND OF POLICY DO I NEED?
Whether you purchase a traditional or hybrid policy or even an annuity with a Long Term Care rider is up to you.
The good news about traditional policies is that they all function about the same way. There are some differences, so you’ll want to be sure to have your agent explain those to you, but the inputs to get good quotes are:
Monthly Benefit Needed
Length of time you want covered
Waiting period for benefits
Inflation protection rate
This decision isn’t easy, but after thinking about what you can afford on your own, you might think something like this. “I’ve saved for retirement pretty well and do not want Long Term Care needs to wipe that out for my spouse. If one of us goes into care, we can probably fund about a year on our own before really needing help. We definitely can’t afford a longer than average stay in a nursing home, but we could probably afford to pay half of it. Therefore, we’ll purchase a policy with a one year waiting period and paying 5 years of benefits at $5,000 per month. You agent then will get you quotes and you can modify from there. Remember that any premiums quotes are not guaranteed for the life of your policy and you will pay as long as the policy is in force until used. Your premiums are not refundable if you do not use it, so this is a disadvantage if you think you might not need care or might need below average care.
A hybrid policy combines the best of a traditional policy and a whole life insurance policy. Many people do not like whole life insurance policies, but this policy is designed to protect against Long Term Care needs. The life insurance is protection in case you do not use the Long Term Care benefits, so this policy provides you with your money back if benefits are not used. These policies are much more complex than traditional policies because they can vary pretty widely in their construction by insurance carrier. Because those details are too difficult to discuss here, I’ll paint with a broad brush to show how complex this decision is.
The factors to look at are:
Monthly Benefit Needed
Length of time you want covered
Length of time covered by the base whole life policy and by an optional rider
Waiting period for benefits
Inflation protection rate
Preference for life insurance or LTC benefits
Some of the decisions, as you can see are the same as for traditional policies. Often the waiting period options are more restricted on a hybrid policy, but there are ways to get around those. In addition, the policy may be more or less heavily weighted toward insurance or toward LTC benefits for the same policy. By modifying the inflation protection factor, you can also make the policy more weighted toward protecting the risk of going into care at a younger age compared to protecting against going into care at an older age.
The beauty of the hybrid products is that you can modify the in many ways that allow a fair amount of customization. However, this does make the buying process much more complex. This means that those who are interested in these solutions should be ready for a longer process and be willing to ask questions of your agent to make sure the policy is structured exactly the way you want it.
In the current market only State Life offers a lifetime rider. A rider on these types of policies does not include any cash value or insurance payout. The rider is like traditional Long Term Care insurance in that it has no cash value. The rider also can be paid as a one time premium or over the life of the policy. This second option makes this type of policy more affordable. For example, a buyer can purchase the base policy in a single premium or over ten years, but then purchase the rider over the life of the policy. On the other hand, a buyer can also purchase both portions of the policy in a single premium.
Because of the amount of detail involved in constructing and buying such a policy, it’s important to look at multiple policy illustrations to get a feel for what is right for you.
ANNUITIES WITH LONG TERM CARE RIDERS
Some people don’t like annuities and there is some bad information out there. I’ve read some people’s comments that they would die before selling an annuity. However, I know very bright knowledgeable people who swear by them. About a year ago, Barron’s had an article on why more people should consider an annuity.
An annuity by itself, might be the right choice for someone as part of their retirement portfolio. An annuity provides a lifetime of income no matter how long you live, even if your money has run out. The return is not likely as high as a market rate, but as the conservative portion of a portfolio, it can do a good job and protects against the risk of living too long.
Coupled with a Long Term Care rider, the annuity also has some protection for Long Term Care needs. It isn’t a true Long Term Care insurance policy, but if you have Long Term Care expenses, the annuity’s rider will pay out additional money. Often the pay out is double the normal contracted pay out. So, if your annuity normally pays out $20,000 per year, then it would pay $40,000 per year, normally the doubled pay out is for a five year period. Then the annuity returns to its normal pay out.
This option can be very good for someone who already is interested in an annuity and doesn’t want to buy a separate Long Term Care policy. For that person, this option could be the cheapest option by far. Alternatively, this option could be used in conjunction with a smaller Long Term Care insurance policy.
HOW MUCH INSURANCE SHOULD I BUY?
This goes back to the issue of how much you can afford to pay out of pocket and how much you want to cover with insurance. They buyer also has to ask, “What risks am I willing to take on?”
By my calculations, a person with $750,000 or so in net assets to as much as $2,000,000 or so in net assets can likely save for the most likely cases. In other words, if you plan correctly and save for yourself, you probably can pay for a year to eighteen months in a nursing home. If you are at the lower end of that spectrum, it’s tougher and you’ll have to invest and save very consciously, but you can probably do it. The question is what if you end up in the next to most likely case.
For example, what if you end up in a nursing home for four years or five years?
Then you’ll want to ask what if I need care or end up in a nursing home for ten years?
I suggest you ask these questions to the point of even a lifetime of care. As yourself about the worst case. What would I do if I ended up in care at age seventy-five and lived to age ninety five (for example)?
As the examples get more challenging, you soon realize that most people can’t afford to save for those extreme cases. Then the question is how much money do you put out to protect against them. I’ve found that people with about $1.2 million to about $2.5 million, probably don’t have the resources still to save for a really bad case. Because those cases are unlikely, the additional insurance premium to protect yourself against them is also lower. Therefore, if you are in the higher end of that scale, then it’s reasonable to consider a ten year or even a lifetime policy.
You can either consider that a waste of money, perhaps $10,000 to $20,000 in extra premium or you can say to yourself, “For an extra $10,000 to $20,000, I can make sure that Long Term Care expenses never threaten my retirement income for myself and my spouse.”
As with all forms of insurance, your choice will be dictated by your own tolerance for risk as well as your desire to protect against a future mishap and the desire to retain as much cash as you can now to spend or invest.
To summarize, no one can tell you how much insurance to buy. You have to determine what you can afford and what risks you are willing to live with. Your assets and current income will also influence what you can afford.
WHO CAN HELP ME DECIDE?
You can get advice from a lot of people, but I still recommend seeing a knowledgeable and honest agent who has your best interest at heart. A good agent will spend the time explaining all of your options and show you examples of how each product works for you. A good agent will also a
llow you time to think through this difficult decision and listen to your fears and your needs to help you come to the decision that is right for you. If this takes a few months, do not despair and do not buy because the agent wants you to. Work through each one of the issues outlined above in your own mind and determine if a purchase is right for you and if so, which one meets your needs and eliminates the risks that you lose sleep over.