By: Dennis Ho
(A version of this article was also recently published by Considerable, a website focused on helping people redefine what it means to grow older)
Long-term care (LTC) refers to the need for assistance with activities of daily living (ADLs) such as bathing or dressing. According to the US Department of Health and Human services, for anyone turning 65:
· Almost 70% will need long-term care services at some point
· 1-in-5 will need care for more than 5 years
· Average care costs can be substantial ranging from $4,920 per month for full-time help at home to $7,698 a month at a nursing home.
LTC needs will affect many people, and for some, the financial impact could wipe out their life savings. Insurance might be the right solution, but it’s important to understand how the products work before jumping in.
Let’s start with the basics. LTC insurance is designed to help you pay for care, if you need it. There are six core activities of daily living (ADLs):
You generally qualify for LTC benefits if you need help with two or more ADLs. Most policies today give you the flexibility to receive care at home or at outside facilities, and if you need to make a claim, many policies will also connect you with a concierge that helps you find care providers in your area.
There are two major types of LTC policies: Traditional and Hybrid Life & LTC (or simply “Hybrid”).
Traditional LTC policies have been around for decades and work like regular insurance. You pay an annual premium (typically for life) and if you qualify for benefits, you receive funds to help pay for care. If you don’t need care, then your premiums go to help other policyholders.
Because these policies require full medical exams, they are most cost-effective for younger, healthier folks. Traditional policies also qualify for participation in State LTC Partnership Programs — a program that makes it easier to qualify for Medicaid if you purchase a traditional policy.
However, there are two important considerations.
First, the premiums are not guaranteed so insurers could raise rates in the future. While insurers and regulators believe the risk of rate increase is low, the risk is there.
Second, because LTC insurance premiums are substantial even if you are young and healthy, many people can’t bear the thought of paying thousands of dollars a year into a policy only to receive nothing if they don’t need care. These concerns led the industry to create Hybrid policies.
With Hybrid policies, you deposit a fixed amount inside a special universal life insurance policy that is designed for long-term care. This deposit can be paid upfront or over a fixed period (e.g. 10 years) and premiums are guaranteed to never go up. In return for this deposit, you receive the following benefits:
LTC insurance — if you need long-term care and qualify for benefits, the insurer will pay you a monthly amount to help cover care costs.
Money-back guarantee — if you die without using your benefits, you’ll usually receive a refund of 100% of your premiums less any benefits received.
Early termination options — most Hybrid policies let you get most or all your premiums back if you decide to terminate your policy altogether. You’ll generally need to hold the policy for a minimum period (e.g. 7 years), but after meeting that threshold, you can cancel for any reason and get your premiums back less any benefits you’ve received.
With this combination of benefits, Hybrid policies eliminate the “use it or lose it” and “rate increase” risks of Traditional policies. Also, while Hybrid policies generally require you to be in good health, the underwriting is not as stringent, making the product available to a wider audience. So, what’s the catch? Because Hybrid policies provide more benefits that traditional policies and collect premiums over a shorter period, they’ll have a greater upfront cost. In addition, Hybrid policies currently don’t qualify for State LTC Partnership Programs.
The LTC insurance market is sizable — according to the American Association for Long-Term Care Insurance, roughly 350,000 LTC policies were purchased in 2018. Hybrid products have proven more popular with consumers in recent years and accounted for 84% of 2018 sales, with Traditional products accounting for only 16%.
If you’re thinking about LTC insurance, here are some tips:
You first need to decide if LTC insurance is right for you. LTC Insurance generally makes sense for people who have $250,000 — $3 million saved for retirement.
If you have more than that then you could probably self-insure. If you have less savings than that then you may very well need the money for other priorities.
If you decide LTC insurance is for you, set aside a clear budget. It’s easy to be scared into buying as much coverage as possible, but insurance won’t do you any good if you can’t afford to keep the policy.
Also, you want to keep enough funds to support other retirement needs. A good rule of thumb is to spend no more than 10–15% of your retirement savings on LTC insurance.
You are under 60, in great health, and have limited funds to contribute in the short term. In this case, a traditional policy likely gives you the most LTC benefits for your money and let’s you pay over your lifetime. Just make sure you’re ok with the rate increase and “use it or lose it” risks, and have extra funds available incase rates are increased in the future.
You like knowing that your rates are guaranteed and that you’ll always at least get your money back. Just make sure you’re able to afford the higher upfront costs.
Also keep in mind that you’ll get more benefits if you pay over a shorter period. If possible, try to pay your premiums over 5–7 years, or even all upfront.
Whatever you decide, make sure you buy from a reputable and financially strong insurer. LTC policies can last 30 years or more, so it’s important that your insurer is there when you need them.
Once you decide you need insurance, purchase as soon as you can, since pricing goes up quickly with age.
For example, a 50-year-old woman depositing $50,000 in a hybrid policy could receive $232,000 of LTC benefits growing at 3% inflation. Whereas, a 55-year-old woman investing the same amount would receive $211,000 of LTC benefits, a 9% or $21,000 decrease.
In addition, if you wait and run into health problems, you could be locked out of getting coverage altogether.
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