Solutions for Reducing Long Term Care Risk

Many are familiar with the high costs associated with long term care. In fact, some may have had a parent or spouse in need of such care, and have experienced firsthand the high cost such care entails. According to a 2015 report issued by the U.S Department of Health and Human Services (“Medicare & You 2015”), 70% of people turning age 65 can expect to use some form of long-term care during their lives. And with the average annual cost of for a private room in a licensed nursing facility approaching $100,000 (“2014 Lincoln Financial Group Cost of Care Survey”), many people have taken steps to help protect their wealth before they retire through a long term care insurance policy.

Long term care insurance can be purchased in one of three ways:

One step that can be taken is to purchase a traditional long term care policy. An individual chooses an amount of coverage that will be used to pay for qualified long term care expenses and pays an annual premium for the coverage. The length of the elimination period, amount of inflation protection, length of coverage and amount of coverage all have a direct effect on the size of the premium. Affordability is a big issue, as premiums are due each year and these premiums can be raised by the insurance company at any time. Recent policies written by Genworth have seen premium increases of 50% or more in 2015.

A second option is to purchase a life insurance policy that contains a long term care rider. More commonly referred to as a hybrid policy, this policy allows the insured to use a portion of the death benefit (differs among carriers and policies as to how much) for long term care expenses. Since a life insurance policy is a contract, the premium and amount of the benefit are fixed. But premiums do need to be paid on an annual basis and can be a financial burden for those on a fixed income.

A variation of a hybrid policy is a single premium universal life policy with a qualified long –term care insurance rider. The insured would make a single payment in return for tax-free leverage for qualified long term care expenses. Since this is a life insurance policy, a death benefit is provided for beneficiaries and would be reduced by any benefits paid. In this scenario, the one-time payment provides a fixed amount of long term care benefits that cannot be altered, and no further premium payments are required.

An example would be a 63 year old healthy female making a single premium payment of $75,000. The initial death benefit is $130,200 and will never be lower than $117,294. More importantly, the $75,000 premium leverages to $353,772 immediately, with a minimum benefit duration of six years and maximum monthly benefit of $4,914. There is no elimination period with this policy, meaning benefits will be paid right away, and the $353,772 can be stretched out over a period of more than six years.

The single premium policy is beneficial to those who have sufficient liquid assets and in a position to pay for a long-term care policy without jeopardizing their current or future lifestyle.

This is an overview of the dynamics of these policies, and benefit amounts and premiums will differ between individuals due to gender, age, health and riders on the policy. All candidates must undergo an underwriting process to be rated and approved. Please contact your ACM Advisor for more information.

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