Research shows at least 70% of people over age 65 will need long-term care services at some point in their lifetime. Medicare and health insurance only cover minimal, if any, of the cost of assisted-living facilities or in-home care. Long-term care insurance provides dual protection; protection from depleting your assets to pay for the cost of care as well as protection for your loved ones from the financial burden and stress of helping care for you, or helping fund your long-term care expenses.
Preparing for future long-term care expenses is an essential part of a financial plan. There are many different options when deciding how to protect your retirement nest egg from the rising cost of long-term care. Some individuals have acquired enough assets to essentially self-insure. Another option is to purchase a small amount of coverage (either traditional coverage or a hybrid policy) and pay out of pocket for any additional expenses.
Traditional Long-Term Care Insurance
Long term care insurance is a turbulent marketplace that is in transition. In the past few years, several major long-term care insurance companies stopped selling new policies, and many have significantly increased premiums on existing policies. When purchasing a long-term care policy, it is important to find a well-known company with excellent financial strength ratings. To obtain multiple quotes, use an independent agent who works with several insurers.
When purchasing long-term care insurance, be careful not to over insure. About 20% of the cost of care in most nursing homes is for essentials (meals, laundry, cable and OTC medicine). If you are looking for a long-term care insurance policy that will cover most or all of your long-term care costs, research the cost of care in your area, and purchase a policy with an inflation rider and coverage equal to 80% of the cost of care in your area. Click here to view Genworth’s survey to determine the average cost of long-term care in your area.
Hybrid Life or Annuity Long-Term Care Insurance
Unlike purchasing traditional long term care insurance, buying a hybrid policy is a one-time cost which protects you from long-term care insurance companies increasing premiums (it allows you to lock in the cost of care). These policies have changed the long-term care insurance industry and many people prefer them because it protects individuals from paying for something they may never use. Also, similar to traditional long-term care policies, any benefits paid for long-term care out of these policies are paid tax-free.
Hybrid Life Insurance
This hybrid policy combines a permanent life insurance policy with a long-term care insurance benefit. Your dollars can do double duty; if you need money to cover the costs of long-term care, you have it. If you never need long-term care, the life insurance death benefit will be paid to your beneficiary. If you use just a portion of the long-term care benefits, the death benefit is reduced correspondingly.
Some policies will emphasize the death benefit and others will emphasize the long-term care benefit. If you use a lump sum of money to purchase a hybrid life/long-term care policy, you could automatically double or even triple the pool of money available for your long-term care benefits. If you currently have an existing life insurance policy with cash value, you can do a 1035 exchange for a hybrid policy that offers a long-term care benefit without having to pay taxes on the buildup of the value inside of the policy.
This hybrid policy combines a fixed deferred annuity with a long-term care insurance benefit. It protects you against the cost rising cost of long term care and/or provides you with a pension-type income that can’t be outlived. Also, if you don’t use all the cash value, the remainder can pass to your beneficiaries depending on the type of policy.
This is a good option for individuals who plan on self-insuring by setting aside a portion of assets for future long term care expenses. For example, instead of purchasing a $100,000 CD earmarked to cover your long term care costs, if you used that money to purchase a hybrid annuity, the pool of money available for your long-term care benefits could double or triple and your annuity cash values would begin to grow at a fixed interest rate.
If you currently have an existing annuity or cash value life insurance policy, you can do a 1035 exchange for a hybrid product that offers a long-term care benefit without having to pay taxes on the buildup of the value inside of the policy.
Given the rising cost of long-term care, it is important to incorporate future long term care expenses in your retirement plan. When looking for long-term care insurance, it is important to include your need for long-term care insurance in conjunction with your need for life insurance, and monthly cash flow to determine which policy best meets your needs. Because every situation is unique, you should strongly consider seeking the help of a CFP® or CLTC to determine which option would be best for you.
By: Ryan Pace CFP® – May 15th, 2014