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Long Term Care Insurance & other alternatives

November 12, 2018
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Recently, I was speaking with one of my client and the subject of Long Term Care Insurance came up.  Here are some of the topics I raised about it:

Who needs it and Why? 

The longer you live, the greater the chances you'll need some form of long-term care. If you're concerned about protecting your assets and maintaining your financial independence in your later years, long-term care insurance (LTCI) may be for you.  As we age, the odds increase that we'll need some form of long-term care at some point during our lives. And with life expectancies increasing at a steady rate, the likelihood of needing long-term care can be expected to grow in the years to come.

If you want to retain your independence, protect your assets, and maintain your standard of living while at the same time guaranteeing your access to a range of long-term care options, you may want to purchase LTCI. This insurance might be right for you if you meet the following criteria:

  • You're between the ages of 40 and 84
  • You have significant assets that you would want to preserve as an inheritance for others or gift to charity
  • You have an income from employment or investments in addition to Social Security
  • You can afford LTCI premiums (now and in the future) without changing your lifestyle
  • You are in good health and are insurable

What if I don't qualify or don't end up using it?

A traditional Long-term care insurance isn't always right for everyone. Not only can the premiums be costly, but sometimes it can be hard to qualify for, and there is also no guarantee you'll use most or any of the benefits. 

For people with pre-existing condition that would prevent them from qualifying for a coverage, using a personal savings to pay for long-term care is a solution (also known as Self Insurance in our industry). If you choose this option, you'll have to estimate how much money you might need to cover long-term care expenses and start an appropriate savings plan.  However, there's always a risk that your savings won't be enough to cover your actual long-term care expenses.  The positive aspect of self insurance is the money is not tied up in premium payments if you don't use it.  This can benefit you and your beneficiaries if you do not use some or all of the savings toward your long term care.

For those who do qualify for a LTCI coverage, there is the risk of not using some or all parts of your benefits due to unknown or unforeseen limitations built into your insurance coverage.  Thus, it is important to always review your current policy in order to understand the details of your coverage along with its restrictions, if any.  Additionally, there is also the risk of an early untimely death.  More often than not, there aren't many options to recover these premium costs.  That being said, you'll certainly feel relieved that you had a policy in place to begin with.

But if you decide not to buy a traditional LTCI (or self-insure), what are your alternatives? 

A growing number of insurance companies are providing long-term care coverage via some type of hybrid products: Life Insurance Policy with a Long Term Care Rider or Annuity with a Long Term Care Benefit.

What's a Long Term Care Rider?

Some Life Insurance policy allow you to "add" an acceleration rider to your life insurance policy that will allow you to tap into (accelerate) your death benefit if you need long-term care during your life. For such a rider to take effect, most insurers require some type of conditions to be met and proven prior to any benefits being given, and your benefits may be limited to a percentage of the total face amount in your policy.  Of course, your death benefit will be reduced by the amount of benefits you receive. If your long-term care costs are high, you may eventually deplete your death benefit (assuming your policy allows it).

This option does negate the original purpose of your life insurance policy - to provide financially for your family members after your death.  Similarly to a LTCI policy, you will still need to be able to qualify for the life insurance coverage via medical underwriting.

What's a Long Term Care Annuity?

This is essentially a non-qualified annuity policy that provides long-term care benefits (it can't be used inside an IRAs or any employer-sponsored qualified retirement plans).   Generally, you make a lump sum payment into the policy or sometimes through a series of premium payments.  This annuity may or may not pay a fixed rate of interest each year.  In addition, the annuity provides a long-term care benefit amount, usually equal to several times the annuity cash value, subject to a maximum benefit period, which is the maximum length of time that you may receive long-term care benefit payments from the annuity. There is usually a charge for this long-term care component that is deducted from your annuity each year. 

Depending on the insurance carrier, there is always some type of underwriting requirement that may or may not be as extensive as a traditional LTCI policy.  Thus, you will still need to be able to qualify for it no matter what.

How do I decide?

As with most insurance products, there are always pluses and minuses to consider in determining the solution that would best fit your long term care needs: traditional LTCI plan vs Life Insurance with LTC Rider vs a LTC Annuity vs simply Self Insure.  Regardless, having a discussion and a plan of action is always a MUST as you enter that stage in your life.  Set aside some time to speak with your financial professional about this topic.  You'll be glad you did!

 

***The information in this blog post is intended to be informational.  It is NOT intended as tax or legal advice.  It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.