Insurance, especially when it’s expensive like LTC, is a difficult thing for clients to get on board with. Let’s look at the various forms of coverage to have a better understanding of the mechanics of the policies.
Traditional
This is the most common type of LTC coverage because in almost all cases, it will offer the highest benefit payment. This of course, comes at a cost. For a healthy 60 year old couple, it’s not uncommon to see the annual cost (from both policies) be between $7,000 and $10,000, depending on coverage. In most cases, we recommend a more basic policy that does not have all the “bells and whistles” but can still be a great safety net if claim is required. Similar to a disability policy, there is a waiting period before benefits will kick in, which typically 90 days. For benefits to be paid, certain activities of daily living (ADLs for short) must be impossible for the insured to do on their own. This must also be verified in writing by a licensed physician. One of the most important aspects of a LTC policy is the cost of living adjustment (COLA) rider. In the majority of cases, this is something we almost always recommend so the benefit you’re paying for will increase each and every year to (somewhat) keep up with the rising cost of care. Similar to college tuition, the inflation rate for long-term care coverage is rather high in comparison to normal inflation for the rest of our economy. Unfortunately, traditional LTC coverage is almost always “use it or lose it” – similar to your car and homeowner’s insurance, if you never need it; you don’t get reimbursed for premiums paid.
Hybrid and Life Insurance
One of the gripes most of us have with LTC coverage is that they lose all of their premium dollars if they never need to actually use the coverage. Different products have emerged in the LTC world to accommodate those who may not purchase LTC insurance for this reason, known as “hybrid” policies. Without digging too deep into the weeds, these policies offer additional flexibility on receiving a portion of premiums back if you never use the coverage. It’s important to note, however, that the leverage you receive in regards to your overall benefits if you did actually need to go on claim are typically far less than a traditional LTC policy.
Life Insurance
Life insurance may also be considered as a form of LTC protection. The average length of stay in a nursing home is approximately two and a half years which, depending on the level of care, could easily exceed $250,000 without LTC coverage. In many cases, this means that the now surviving spouse is truly the one who is facing the financial hardship because they had to pay such a large amount, out of pocket, for care which could have easily erased the majority of their once plentiful nest egg. Using life insurance in this case would guarantee a death benefit on the spouse who required care but has since passed, which would essentially “replenish” the assets that were spent down to cover the cost of care. As with hybrid policies, in most cases, the benefit you’d receive using life insurance isn’t comparable to a traditional LTC policy but it certainly has its place in certain situations.
When you’re working and accumulating assets, your two greatest financial perils are typically a pre-mature death or a disability – which is why we purchase life insurance and disability insurance to protect us during this stage of life. As you transition into retirement, however, those perils typically disappear and a new one emerges – the threat of a long-term care event. Just like we purchase insurance to cover the cost of an unforeseen event such as a pre-mature death or disability, LTC coverage is obtained to help cover a portion of the cost to potentially help avoid a financial catastrophe. This form of coverage does not make sense for everyone but there are many out there who should seriously consider it. Risk management is a key component of a well-rounded financial plan, and having a formal game plan on how you’ll pay for a potential LTC event is a must.
