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Long-Term Care Insurance: Know Your Options

Allan Goldstein

It’s no secret that planning for long-term care (LTC) is an important consideration for Americans as they approach retirement. Almost 70% of people turning age 65 will need some form of LTC at some point in their lives, according to the U.S. Department of Health and Human Services.

The rising costs of nursing homes, assisted living and other forms of LTC can pose a major threat to your retirement and wealth-transfer plans. Genworth’s 2014 Cost of Care Survey  found that a private room at a nursing home costs, on average, more than $87,000 per year. With stays in nursing homes often spanning three to six years, LTC can end up costing families hundreds of thousands of dollars.

Things to Consider When Self-Insuring

Despite these significant costs, many affluent individuals decide to self-insure when it comes to LTC. “If I do end up in a nursing home, I can afford to cover the expenses out-of-pocket, so why pay premiums for a policy I may never use?” goes the thinking behind this approach.

Self-insuring is certainly a viable option for many wealthy families. With this approach, however, there are several factors that need to be taken into consideration.

  • What funds will you use to pay for LTC? Paying for LTC isn’t just about having enough wealth; it’s about having enough liquidity. If you plan to self-insure, it’s important to plan ahead for which assets you will use to pay for LTC. If you are suddenly forced to liquidate a large pool of assets, issues such as market timing and capital gains tax can significantly reduce your available resources.

    If you plan on using cash reserves or some other highly liquid asset that provides virtually zero yield, you are essentially creating an LTC fund that generates a negative return once you factor in inflation. Using a hybrid LTC policy (described below), on the other hand, could provide $4 to $6 worth of benefits for every $1 set aside.

  • What about the emotional toll on your family? Planning for LTC isn’t simply a financial decision; it’s a highly emotional one as well. Even in the wealthiest families, where running out of assets is rarely a concern, we have seen many examples where the healthy spouse or the family is reluctant to bring in a professional caregiver because the spouse or family does not want to relinquish that important role.

    Despite these loving intentions, caring for a chronically ill family member can place tremendous emotional stress on the spouse or family. Having an LTC policy in place often makes it easier for the family to draw on this existing resource and bring in the support they—and their loved one—desperately need.

Three Approaches to Long-Term Care Insurance

If you decide insurance should be a central part of your LTC planning, there are three primary tools available for addressing this risk: standalone LTC policies, life insurance with LTC riders and hybrid life insurance/LTC policies.

When evaluating the pros and cons of these three types of policies, the amount of the premium is just one factor to consider.

  • Standalone LTC insurance: The most common approach to insuring against LTC expenses is to purchase a standalone (or individual) LTC policy. With these policies, the insured pays an annual premium and the policy covers the cost of LTC up to a stated benefit, which can be indexed for inflation.

    Benefits of this approach: For individuals who are primarily focused on their LTC needs, standalone LTC insurance offers the greatest ability to customize the policy, as well as the strongest cost of living (COLA) adjustments. It is important to note, however, that these policies are rarely guaranteed and there are no death benefits.

  • Life insurance with LTC riders: LTC riders can be added to many life insurance policies. There usually are multiple ways to pay for these riders, and funds within the policy not used for LTC benefits translate into a death benefit for heirs.

    Benefits of this approach: For individuals primarily interested in life insurance and who are concerned about paying for an LTC benefit they may never use, life insurance with an LTC rider can be an attractive option. This approach can also be attractive to clients looking for flexible premium-funding options.

  • Hybrid life insurance/LTC policies: In a typical hybrid LTC policy, a single premium is used to fund the insurance (although multi-year payment options are available). If LTC is needed, the policy leverages these assets into LTC benefits that may reach as much as 4-6 times the amount of the initial deposit. If benefits are not exhausted by LTC needs during the insured’s lifetime, the policy provides an income tax-free death benefit to heirs.

    Benefits of this approach: Many affluent individuals today are using hybrid policies to augment a self-insurance strategy. In addition to offering a single-premium option, these policies provide the simplicity of having one policy to cover LTC and life insurance, along with a faster and more streamlined underwriting process. Hybrid policies, however, provide smaller death benefits than individual life policies with LTC riders, and fewer customization options than standalone LTC policies. Learn more about hybrid LTC/life insurance

Evaluating Your Options

When planning for how to pay for LTC expenses, it makes sense to consider all four options: self-insuring, standalone LTC insurance, life insurance with LTC riders and hybrid policies. The appropriate strategy depends, not only on your financial resources and wealth-transfer goals, but also on your family situation and your medical history.

At Goldstein Financial Group and The Insurance Design Center, we work closely with individuals and families to help them decide which approach is most appropriate given their financial priorities and personal circumstances. If you would like to consult with us as you plan for LTC expenses, we are always available to help.

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