Not everyone will need to buy a Long-Term Care (LTC) Plan, but everybody still needs to have a plan to address LTC. If you have seen the toll that an unplanned LTC event can have on a family (like it did mine) then you know what I am talking about.
Long-term care is generally referring to a form of specialized assistance that is outside of the scope of conventional Health Insurance coverage leading many to fear how they can afford the assistance necessary to age gracefully when those expenses have to be funded out-of-pocket from a fixed-income.
According to the US Department of Health and Human Services, “Someone turning 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years”.
Those services can be costly too. The National Average for a Home Health Aide is $52,624/yr and a private room in a Nursing Home costs roughly $102,200/yr. Try this “Cost of Care Calculator” to explore the median LTC costs in your area and how they may change in the coming years. Frankly, there are enough statistics on LTC needs to make your head spin, but the key takeaways are this:
- We all will eventually face a decline in our independence as we age
- The cost of care is not cheap (and continues to increase)
If we had a crystal ball to see exactly what needs you would face in retirement, then we could simply “cherry-pick” the most cost-effective forms of insurance. Will you be able to get by with some help from the kids as your independence wanes or will you fall into the 15.2% of individuals who will spend more than $250,000 on LTC during their lifetimes? We simply don’t know today. To paraphrase Neils Bohr, the art of prediction is difficult, especially when it pertains to the future.
Mathematically, Traditional LTC insurance can leverage your premiums to provide a powerful, tax-efficient benefit should you have a lengthy Nursing Home stay. The problem is that traditional LTC policies typically force a “use it or lose it” condition on the owner. LTC policy owners who diligently pay their insurance premiums each month, but never have an LTC episode, will have “lost” those premiums. Much like auto insurance premiums for drivers who never have an accident, those funds are not refunded.
Even as the population ages and the need increases, companies have struggled to find a profitable way to offer LTC coverage without repeatedly increasing the premiums. Anyone participate in the Federal Long-Term Care Insurance Plan in 2016? FLTCIP increased the premiums for new applicants AND existing FLTCIP policyholders by an average of 83%!
Increasing premiums and fixed-incomes blend about as well as oil and water.
Since we do not know your future needs and we cannot simply afford to buy every type of insurance available, the cornerstone of a well-rounded strategy for protecting your retirement is flexibility.
Informed retirees want each dollar coming out of their budget to be working to protect both them and their loved ones from as many “what-if” concerns as possible, including LTC services. This is why many retirees are exploring alternatives to the traditional LTC policies, alternatives that eliminate the “use it or lose it” trade-off and emphasize flexibility.
Alternative Strategies for Addressing LTC Concerns
Life Insurance with Living Benefits
This form of coverage takes a life insurance policy and offers the insured an opportunity to accelerate payment of the policy’s Death Benefit while the insured is still alive.
This modern approach is attractive to many because it eliminates the “use it or lose it” condition by including a Death Benefit. If you were to pass before needing any LTC assistance, the tax-free Death Benefit that is paid out to your beneficiaries is significantly more than the total of your premium payments.
There are also a number of additional Living Benefit Riders available on these plans that can address a broader scope of concerns for those looking to go beyond just LTC.
Long-Term Care Riders on Life Insurance
This approach is generally preferred by those who want a Death Benefit but also want to focus on having a guaranteed benefit available for addressing long-term care.
The LTC rider generally provides a tax-free acceleration of the policy’s Death Benefit for those who have a qualifying LTC need (does not require Nursing Home Confinement). The acceleration offers a guaranteed payout, regardless of the age of the owner when triggered, and reduces the remaining DB dollar for dollar by the amount accelerated. These riders usually come with an additional ‘rider fee’ and may require separate underwriting.
Chronic Illness Riders on Life Insurance
A Chronic Illness Rider does not add any additional costs to the policy on the front end while still providing access to the Death Benefit should the insured be unable to do 2 of the 6 activities of daily living (eating, bathing, transferring, toileting, dressing, and continence).
A Chronic Illness Rider can also provide a tax-free benefit but the remaining DB is reduced by slightly more than the amount accelerated. This method, known as ‘discounting’, essentially ‘pays’ for the rider from the remaining Death Benefit (on the back end) rather than adding an additional fee on the front end. Many Chronic Illness Riders can accelerate up to 24% of a policy’s Death Benefit per year for up to 4 years.
Asset- Based LTC: Two Approaches
When considering Asset-Based Long-Term Care strategies, people are generally looking for assets that have the ability to provide additional protections should the asset-owner have a LTC episode or need.
This approach offers a sliding scale between growth/income and leveraging of LTC protections – meaning the more leveraged the LTC protection offered by an asset, the less opportunity for growth or income that asset would be expected to offer (and vice versa).
Asset-Based Long-Term Care Policies
These single premium policies are ideal for “under-employed money” (money that is not working hard enough in todays interest rates – such as CDs or money market accounts). This approach allows us to have a low-risk asset that purchases leveraged benefits in the event of an LTC need.
This flexible approach allows one asset to do “double duty” – both as a savings and a protection vehicle. If you had an LTC need a decade after establishing a plan, your benefit may be 3:1 on the original investment. If you passed away, your family would still receive the account balance as an inherited asset. If your needs changed dramatically, you could elect to cash out the account balance to use as you see fit.
Lifetime Income Riders with Income Multipliers
This approach is ideal for those whose primary concern is sustaining their lifestyle through retirement but who also want to have some form of an LTC safety net in place – preferably without facing additional underwriting hassles or premium expenses.
This strategy commonly uses a Fixed Indexed Annuity to guarantee a lifetime payment that the owner cannot outlive but, should the owner lose the ability to do 2/6 Activities of Daily Living, the income payment may double or even triple for 3-5 years.
If the owner were to recover and live another 30 years after their LTC episode, this Lifetime Income Rider would continue paying them for life. If the owner passed before the account reached zero, their listed beneficiaries would receive the remaining balance. This approach normally does not require any medical exam nor add any additional monthly premiums but can still provide supplemental protection and help informed retirees rest easier.
Many people do not have a written plan for LTC because the idea of leaving their homes and families for Assisted Living is truly uncomfortable to think about. But, those who design a plan to Age Gracefully have the flexibility to stay in control of where and how they receive care in their later years… making all of the difference in the world.