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Is it Time to Revisit Long-Term Care Insurance Options?
In the process of building solid financial resources to provide for their families, most successful investors also recognize the importance of adequately protecting their physical assets from potential accidents or disasters through the purchase of property and casualty insurance. The same reasoning applies to basic medical and life insurance, knowing that catastrophic events can occur and devastate families. And yet, too many people leave long-term care (LTC) considerations up to chance, even though it might be a far more common peril than most insurable risks. Did you know that 70% of people over 65 will need some form of LTC assistance? And while the majority will only need help for less than two years, 24% spend more than three years in a facility. That can be very burdensome on the family finances. Yet, less than 20% of us are willing to pay for related LTC insurance to cover expenses associated with this type of care.
Indeed, many incorrectly assume that Medicare – or the various supplemental medical insurance policies – will cover the cost of their extended LTC needs. Others assume that family members will step in to provide assistance, which is not without its own adverse consequences. Often, the once healthy caregiver succumbs to emotional and physical challenges. In turn, this also often impacts the finances of others beyond just the individual in need of care. Consider the fact that lost income and benefits over a caregiver’s lifetime is estimated to average about $300,000. Moreover, with loved ones typically scattered throughout the country, should illness strike suddenly, they are ill-prepared to completely disrupt their lives and relocate.
Enter long-term care insurance, designed to cover services and support in a variety of settings, including your own home. In fact, about 80% of people who need LTC either still live at home or in a community setting as opposed to an institution. LTC insurance is activated when either an illness renders you unable to perform at least two “Activities of Daily Living” – such as eating, dressing, or bathing – or if you suffer from a cognitive impairment.
Originally, the insurance industry offered LTC coverage only as a stand-alone policy, separate from life insurance. This initial “use it or lose it” structure of LTC insurance suffered from a troubled history of premium spikes caused by faulty forecasts by insurers. In addition, traditional life insurance provided a benefit accessible only at death. This bifurcated situation has since evolved into a much more sensible and attractive hybrid solution, combining both types of coverage into offerings that give consumers much more flexibility. Unlike the older variety of LTC insurance, these policies can now return money to your heirs even if you don’t end up needing long-term care. And should you need to access the funds, the death benefit available to your heirs will simply be reduced by the amount you use for long-term care assistance. Additionally, if desired, you can avoid the risk of a rate hike because certain types of plans enable you to lock in your premium upfront.
Here are some compelling options:
Life Insurance with a Long-Term Care Rider – This type of policy allows for an acceleration of the death benefit. The LTC rider payout will reduce both the death benefit and the cash surrender values. You select the LTC amount when you purchase your policy; there is no inflation option to increase the benefit. You can select your type of life insurance policy (two examples listed below) and your premium payment duration. You would need a full medical physical in order to be considered for coverage. Be mindful of the elimination period, typically 90 days.
- No Lapse Guarantee (NLG) does not invest payments and does not build cash value. The benefit is guaranteed. It is often an indemnity style plan (you are paid a pre-determined monthly cash benefit regardless of the expense incurred).
- Indexed Universal Life (IUL) gives the policy holder the option to allocate cash value to a fixed interest rate and/or equity index accounts with a cap on maximum returns. It is available as an indemnity or reimbursement style plan (you submit receipts for the actual expenses you incur).
Linked Benefit – Its primary purpose is insuring LTC, and that is where the full leverage of coverage will be; but there is also a death benefit on the policy, which assures cost recovery should the policy be little or never used. Generally, the premium can be paid for with a single lump sum amount, or over a five or ten-year payment schedule. Unlike the above life insurance example with a LTC rider, this option instead provides inflation protection and monthly LTC benefits that grow over time. The policy can be surrendered for the cash value that is essentially equal to the premiums paid. Plus, underwriting requirements tend to be more liberal than the other option.
So, what factors should you consider when contemplating this type of coverage? With daily cost of extended care currently demanding as high as close to $500 in San Francisco, how long would it be before your assets are depleted? And what are the tax implications of having to liquidate your portfolio? Would paying the annual premiums have a significant impact on your lifestyle? The cost of coverage will be determined by your age, gender, marital status, and health as well as the amount of coverage, the elimination period, and the benefit period that you select. Should you decide to move forward, keep in mind that about 45% of applicants age 70 or older are usually denied coverage and you may not qualify if you already have a debilitating condition. Couple this with the fact that every year you delay, premiums can increase 10%, so it makes sense to explore your options at an earlier age.
Remember that the selection of the insurance company is just as important as the policy itself. Select companies with high financial ratings from the primary rating entities, including A.M. Best, Standard and Poor’s, Duff and Phelps, and Moody’s. Also, examine the size and general capability of the company, length of time it has been in operation, and the history of comparable rate increases.
Ultimately, while you may not need long-term care insurance, you do need a deliberate plan. If your assets are few, government programs such as Medicaid may defray these LTC costs. If your asset base is substantial and liquid, you can probably rely on your portfolio without running the risk of depleting your overall wealth during your lifetime. Like most individuals, though, if you do not fall into either category and your priorities include preserving assets for your family and maintaining financial independence, seek the advice of your Wealth Manager. He or she will work with you to ensure that as you age, your assets are sufficient to meet these goals.
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