Long term care is a topic that increasingly comes up in both the media as well as in conversation among friends, family and with financial advisors. As we live longer, we are more likely to need care in our declining years. While many statistics can be found to support this assertion, we have found that it is the personal stories our clients bring to us that causes them to ask: “Should I buy Long Term Care (LTC) Insurance?”
Most of us know someone suffering from a chronic or acute medical condition that causes them to need additional help to maintain their living standard. Being prepared for this possibly happening to you, a spouse or a family member means thinking through both the financial and emotional implications and developing a plan.
The financial implications are fairly straight forward—should you buy insurance or are you able to self-insure? The emotional aspects are more nuanced. As an example, assume a husband and wife in their 60’s are contemplating long-term care insurance. Health care and mortality statistics tell us that the most likely scenario is that the husband will require care first—and the care burden is likely to fall on the wife. While they may have sufficient funds to self-insure, will it make the wife feel better knowing that there is insurance dedicated to this need and thus make her feel more secure? Insurance is not only about money—sometimes it is about comfort.
Long-Term Care Basics
Levels of Care
LTC needs can vary from requiring help with basic tasks to full-time assistance with more complex needs. Care can be delivered at several different levels. The levels below are arranged from the least to the most skilled care provided.
Unskilled: Non-medical care providing Personal Care Services, companion or Sitter Services, Transportation Services, or Travel Companion Services.
Custodial: Non-medical care that helps individuals with basic daily care, such as eating and bathing; providers are not required to be medical professionals.
Supervisory: Services for people with memory or orientation problems.
Skilled: Prescribed by a physician; may include physical therapy, occupational therapy, nursing care and other services.
Note: Medicare and Medicare supplements will approve up to 100 days for skilled care only in the event of an acute medical condition (requires hospitalization first). Unskilled, Custodial or Supervisory levels of care and chronic conditions needing skilled care are NOT covered. LTC policies DO cover all these levels of care.
Where is Long-Term Care Provided?
Care can be delivered in several different settings and an LTC policy can give you the option to receive care in the setting of your choosing. The options below are arranged from those providing the least to the most skilled care.
Home Health Care: Services provided at home.
Adult Day Care: Community-based, daytime supervision providing social, recreational or health assistance.
Continuing Care Retirement Community: Access to multiple care levels on a single campus. Care levels include Independent Living, Assisted Living, Memory Loss Units and Nursing Home Care.
Assisted Living Facility: Residential care setting that provides housing and support services.
Nursing Home Care: Full-time care in a dedicated facility.
When Will a Policy Pay for Care?
An LTC policy will begin to pay benefits when either one of two following criteria is met.
- You are unable to perform two of six activities of daily living (ADLs) without assistance or supervision:
- Continence: Control over bladder and bowel movements.
- Dressing: Clothe oneself.
- Toileting: Use a toilet and perform associated personal hygiene.
- Eating: Feed oneself.
- Bathing: Bathe oneself.
- Transference: Move oneself into or out of a bed or chair.
- You have a severe cognitive impairment that makes it impossible for you to live independently. Alzheimer’s would be an example.
Key Features and Benefits
When considering long-term care insurance, you should be familiar with the following terms and key components of an LTC policy:
Daily/monthly benefit: The maximum daily or monthly amount your policy will provide.
Benefit maximum: The total maximum benefit amount available under the policy (e.g., $500,000).
Elimination period: The waiting period before benefits are paid (e.g., 90 days).
Inflation rider: A feature that helps benefits keep pace with the increasing cost of care.
Shared benefits rider: A provision that allows a couple to share benefits between their policies.
Long-Term Care Solutions: Self-Insuring and LTC Products
Note: You may have the impression that Long Term Care product premiums have “gone up a lot” in recent years—and that is true for older products. Insurance carriers underestimated their costs for earlier LTC products and had to raise rates—sometimes by a lot—to maintain their lines of business. Current products have incorporated more accurate cost estimates plus some state mandated pricing guidelines and offer either non-guaranteed or guaranteed pricing. Notably, several carriers have withdrawn from this market due to the earlier pricing problems.
Description— you pay LTC costs from personal funds vs. buying insurance to cover these costs.
- No up-front costs while retaining liquidity and investment options
- Lacks the financial leverage (premiums vs. benefits) that insurance provides
- Can devastate investment accounts if care needs last a long time
- Lacks the security that an insurance plan provides
Newer LTC products make the self-insure decision somewhat less compelling than in the past. There are newer features such as better price guarantees and return of premiums and more varied product choices today.
Types of LTC Products
LTC products come in many forms and provide a variety of structures and benefits. The most common are shown below.
Traditional Long-Term Care Insurance
Description—you pay a periodic premium for “pure” LTC coverage with no ancillary benefits.
- Maximizes long-term care coverage while minimizing premium costs
- Shared benefits are available between spouses
- May be tax deductible for business owners
- Can buy inflation protection
- Premium payments are not guaranteed
- “Use it or lose it” premium (no value buildup or return of premium provision)
This product type has suffered the most from carriers withdrawing from the market. There are more options available in the product types that follow.
Hybrid Life/LTC (aka Asset Based LTC)
Description—you pay either a lump sum, up-front or periodic payments for LTC coverage plus you have the possibility of return of premium or a death benefit.
- Tax free exchanges from life or annuity policies simplify funding
- Return of premium features
- Guaranteed LTC premium costs
- Simple medical underwriting
- Can buy inflation protection
- LTC with some life insurance benefits
- Opportunity cost—could have used funds elsewhere
- No shared benefits (but survivor would get death benefit)
Hybrid Life/LTC policies are very popular now due to the guaranteed LTC premium feature and simplicity of acquisition.
Life Insurance with LTC Rider
Description—you own a life insurance policy which provides LTC coverage by a rider to the policy at an additional cost.
- Largest death benefit
- Builds cash values
- Relatively low premium cost for rider
- If LTC is needed, death benefit is reduced by LTC benefit used
- Benefits are determined at claim time
- Full medical underwriting
The main focus of this policy is the life insurance death benefit; LTC is secondary.
How to Decide Among Alternatives
It is almost impossible to show an “apples to apples” cost/benefit comparison between various product types, as they are structured so differently. The differences stem from the benefits provided including premium certainty, liquidity, upside potential, death benefits, underwriting requirements, and more. A cost/benefit review will be more like “apples to oranges to pears”—they are all fruit, but very different. Add in a comparison to self-insuring and the decision matrix becomes even more complex.
The best approach is to compare the above options side-by-side showing all of the features, benefits, and costs. Note that this comparison would involve a deeper dive into these options than provided here. Then, with proper guidance, you can determine which attributes are most important to you and make your decision.
Long term care conversations occur more often as Baby Boomers approach older ages and have personal experiences with friends and/or family incurring long term care expenses. The products available to meet those needs have changed a great deal in recent years. Your Round Table Financial Advisor can help you determine how you can best meet your long-term care needs.