Making Sense of Long Term Care Insurance Options
Addressing the potential costs of long term care is a critical part of any retirement plan. Just like a car or refrigerator, our parts inevitably wear out over time too. These include not only your mechanical parts, but also our cognitive functioning, or your “CPU”, just like in today’s high-tech devices. The notion of ”long term care” may seem abstract until you’ve had a personal experience with it through a parent or another family member, and then the cost and stress that accompany a long term care event becomes all too real.
While we can illustrate the potential costs at length as part of our planning, the emotional response to a recent family situation is typically the trigger that gets us to start thinking about it seriously for ourselves. The basic options to fund long term care expenses are either: to self-fund with your own assets; to have government cover the costs via Medicaid if you are completely destitute; to rely on other family members or; to purchase some form of long term care insurance.
If you’re not completely broke, but you’re not loaded and particularly if you don’t want to burden your children or other family members with the cost and administration of your care, then long term care insurance is a logical solution to consider. If/when you’ve come to this conclusion, however, then you’re still not done because there are a variety of long term care insurance options to choose from and you have to be able to healthy enough to qualify for them.
With all long term care insurance options, what you are essentially purchasing is a “pool of money” that you can potentially draw from in the future to fund long term care expenses. How big the pool is and how long it lasts determines the premium cost. How the pool of money is determined, how and when you have to pay to get it, and how you access it are what make the insurance options unique.
Traditional Long Term Care (LTC) Insurance – works like most of the other insurance you own. You pay a premium annually and you can claim benefits that are paid on a daily or monthly basis if you’re eligible when the time comes. Traditional LTC insurance annual premiums are roughly $2,000 – $5,000 per year for folks aged 50-65 and it appeals to individuals who have the wherewithal to budget for the annual premiums while they are still working and as part of their retirement expenses.
With all LTC insurance products, you become eligible for claim if you are unable to perform two out six “activities of daily living” (ADLs) and/or if you are severely cognitively impaired and after you’ve satisfied an elimination period (which is a “deductible” calculated by a number of days (90 days is common) rather than in dollars). LTC insurance policies today pay claims whether you are at home or in a facility, which is key because the majority of all LTC claims paid in the U.S. are for in- home care.
You generally get the most benefit per premium dollar with traditional LTC insurance because it comes with some particular risks. First, if you never claim benefits, then you (and your family) receive nothing for the premiums you’ve paid (just like other insurance – homeowner’s, auto, umbrella, medical – that you pay for). Second, because LTC insurance is health insurance, the annual premiums for traditional LTC insurance are not guaranteed and can increase over time. Third, some policies have specific restrictions on how you get paid (you typically pay providers first and then get reimbursed for your expenses) and who can provide your care (licensed/formal caregivers vs. informal caregivers or family members).
Hybrid Long Term Care Insurance – was initially designed to overcome both the “use it or lose it” aspect of traditional LTC insurance and the risk of future premium increases. Also known as “linked” or “asset-based” long term insurance policies, hybrid LTC policies are designed atop a life insurance “chassis” using “riders” and with the objective of maximizing the long term care benefits vs. the policy’s death benefit.
Hybrid LTC policies offer a pool of LTC benefits comparable to traditional LTC insurance, or a death benefit that can be left to your family/beneficiaries if you die before needing/using the LTC benefits, or a “cash value” equal to most, or perhaps all, of your initial premium in the event that you decide to tap into it for some reason.
These additional benefits are appealing and the tradeoff is that, with a hybrid LTC policy, you pay all of the premium up-front or over a shortened time period (up to 10 years) as opposed to paying smaller annual premiums for life. Paying the premium up-front guarantees the benefits and you don’t have to worry about any premium increases in the future.
As opposed to paying, say, $3,000 dollars per year for life with traditional LTC insurance, you may pay $100,000 up-front with a hybrid insurance policy for similar coverage and have all of your benefits locked in. As a result, hybrid policies appeal to folks who may have missed the boat on an annual premium amount that fits their budget when they are younger, those who have available cash to reallocate to a hybrid policy, or those who may have cash value in another life insurance contract (whole life, for example) which can be used as a tax-free source of funding for a hybrid contract.
Life Insurance with a Long Term Care Rider – are permanent life insurance contracts (whole life or universal life) designed to maximize the policy death benefit and include an ‘”accelerated death benefit rider (ADB)” that meets the IRS’s definition of long term care insurance (unable to perform 2 out of 6 ADLs or cognitive impairment). The insurance carrier offers these policies in a traditional version without the ADB rider and the annual premium is typically 10% – 20% more when the ADB rider is selected and added to the policy.
The accelerated death benefit rider operates like it is stated. As opposed to the policy beneficiary(s) receiving the full death benefit, you can draw down the policy’s death benefit on a monthly basis while you are still alive and if you meet the eligibility requirements and satisfy the elimination period (if any). The dollar amount you receive under the ADB Rider will deplete the death benefit on a dollar for dollar basis.
Once the ADB is triggered, it will payout until you either turn it off or you deplete the policy to a residual death benefit (10% of the initial death benefit) and your beneficiaries will receive whatever is left when you pass.
Depending on the carrier, payment of claims may either be on a “reimbursement” basis similar to traditional LTC insurance or on an “indemnity” basis, where claim eligibility is all that is required to receive payouts. An advantage of the indemnity payout is that you don’t have to pay providers first and then submit receipts to the carrier to be reimbursed. This makes for an easier process and provides flexibility as to who you pay and when (family members or friends, for example). The risk to the indemnity payout is that you, or whoever is handling your finances, can use the money for any purpose and not only for your cost of care when you actually need it.
Life Insurance Policies with LTC Riders appeal to those who desire a death benefit, object to the “use it or lose it” nature of traditional LTC and want the flexibility of having the ADB option. So the desire for the death benefit is key as you’ll be paying for this vs. getting more “LTC bang for your buck” with traditional LTC insurance.
Another drawback of Life Insurance with ADB Riders is the absence of inflation protection. Generally speaking, the death benefit you purchase today is the size of the pool you can draw from in the future. Both traditional LTC and Hybrid LTC are required to offer inflation protection options and most of these policies are purchased with inflation protection. The benefit of inflation protection is to allow the pool of money you’re purchasing to grow and keep up (benefits will grow by the inflation protection chosen – 3%, 5%, etc.) with health care costs as they increase over time, which is particularly important if you are paying premiums today for benefits you may not use for 20 – 40 years in the future.
Life Insurance with a Terminal, Critical or Chronic Illness Rider – work similarly to Life Insurance with a Long Term Care Insurance Rider in that you can accelerate the death benefit while you are alive and generally deplete the death benefit on a dollar for dollar basis.
These options may be construed as an LTC insurance solution, but they differ from the three options above in that they are not a form of long term care insurance under the IRS’s definition.
As a result, comparing policies with these rider options becomes more complicated as most life insurance carriers offers some version of terminal, critical and chronic illness riders as options to add to their permanent life insurance contracts and insurance agents who market these products do not have to have a health insurance license to sell them. There are numerous product specific factors to consider, including not only the differences between what a terminal illness, critical illness or chronic illness rider is, but also due to how various insurance carriers position each and the specifics of the riders they offer.
With all three, the benefits do not stop once turned on, or are paid out in a lump-sum, ensuring that the death benefit will be depleted. Claims are paid on an indemnity basis and there are generally no restrictions on the use of the proceeds received, which may be appealing but also carries risk depending on who is overseeing your care. While I don’t really consider Terminal Illness, Chronic Illness and Critical Illness riders to be LTC insurance options, I included them as they are a similar, they are marketed widely and they can be a source of confusion.
There are pros/cons to all of these options, which reinforces that working with someone who understands not just these products, but also long-term care planning, is essential.
Keep in mind that you have to be healthy enough to qualify for any of the above and the healthier you are when you apply, the lower your premiums may be. The key is to plan in advance and obtain the insurance before you actually need it. If you wait, the premiums may become prohibitively expensive or you may not qualify at all, effectively eliminating LTC insurance as a planning option.
As always, if you have questions or would like to discuss the issue of long term care for yourself or someone you know, then reach out to your ACM Wealth advisor, who has the experience and resources to help.
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