Dear First Mates,
Hello everyone! Last month we discussed the importance of developing a Long-Term Care (“LTC”) action plan. If you missed it, here’s a brief summary. Long-term care refers to the non-medical care seniors receive to help with everyday tasks collectively known as the “activities of daily living” (or ADLs for short).
There is around a 48%-70% chance someone turning age 65 will need at least some type of LTC service. These services can cost between $50,000 to $150,000 per year (and rising) for an average of 2 to 4 years. With no plan in place, it becomes quite clear how quickly ones retirement dreams or legacy goals can be shattered. So it is highly advisabile to create a plan – and create one ASAP. Here are the most common LTC strategies:
1) Self-insure
2) Rely on Medicaid
3) Rely on state-mandated coverage
4) Rely on friends and family
5) Using an irrevocable trust (as part of an overall estate plan)
6) Transfer some or all the risk to an insurance company
Let’s do a deeper dive on the last option, buying a Long-Term Care Insurance (“LTCi”) policy.
How does an LTCi policy work?
An LTCi policy provides something called a benefit pool. A benefit pool is a pool of money available to help you with your long-term care expenses. You can receive money on a daily or monthly basis from the benefit pool. The benefit period is the amount of time, typically three or more years, that these benefits will last. The elimination period is the amount of time you must pay out of pocket before benefits begin (akin to a deductible).
What types of care does LTCi cover?
Most policies will reimburse you for the care given in many places, such as:
- your home
- a nursing home
- an assisted living facility
- an adult daycare center
What triggers an LTC benefit?
Most LTCi policy benefits can be triggered by (1) you need help with two out of six ADLs (bathing, dressing, toileting, eating, transferring and continence) and (or) (2) you have severe cognitive impairment.
What are some types of LTCi?
LTCi policies come in two policy types – hybrid and traditional. Traditional policies cover some or all of your costs if you need long-term care. Hybrid policies serve that same purpose, but they also have a built-in life insurance death benefit for your heirs.
Hybrid and traditional long-term care insurance policies can both be sold as either an indemnity plan or reimbursement plan . Indemnity policies provide a cash benefit that you can spend as you think is best. In comparison, reimbursement policies require you to submit receipts for your care and then they reimburse the exact amounts that you spent on approved long-term care services.
What does an LTCi policy cost?
LTCi premiums vary by many factors, such as age, marital status, gender, carrier, and the type of plan chosen. In 2021, a $165,000 policy benefit will cost a:
- Single 55-year-old male: $950 per year
- Single 65-year-old female: $1,700 per year
- Single 55-year-old female: $1,500 per year
- Single 65-year-old female: $2,700 per year
Like life insurance, premiums for LTCi rise with age so the younger you apply the better. Riders, such as inflation protection, can be added to a policy for a higher premium. A common consumer objection in the past was that LTCi policies are too expensive. Fortunately, these policies have come a long way and can be designed to comfortably fit within most budgets.
Can I be denied coverage?
Unfortunately, yes. For standard policies, about 20% to 33% of applications were denied coverage from the ages of 50 to 59. The denials were generally due to disqualifying health conditions. Fortunately, hybrid policies have easier underwriting requirements. In any event, it is best to apply as early as you can so you can enjoy more coverage choices with reduced premiums.
Are there tax benefits associated with LTCi?
Yes – premiums for “qualified” long-term care insurance policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed a certain percentage of the insured’s adjusted gross income.
What does are some disadvantages to LTCi?
The drawbacks to LTCi include:
1) cost
2) premiums can rise over time for some policy types
3) the “use it or lose it” nature of some policy types
4) the possibility of not needing it so premiums could have been used elsewhere
Fortunately, hybrid policies overcome many of these issues.
What should I do if I currently have an active LTCi policy?
I would suggest taking the following actions:
- To protect against an unintentional policy lapse, ensure your policy is on some form of automatic payment and a responsible individual (known as a third party designation) is set up with the carrier to receive notifications if premiums aren’t being paid.
- Have a qualified professional review your coverage to determine if any changes should be made
- For hybrid policies, review to ensure your beneficiaries are correct and up to date.
To learn more about LTC, check out these resources here and here.
In conclusion, I would strongly recommend creating an LTC plan as soon as possible as I view this as the biggest risk facing clients today. The new LTCi solutions have tremendous features and benefits that have overcome a lot of shortcomings of older policies. My favorite strategy entails purchasing a LTCi policy in coordination with using an irrevocable trust where appropriate. Ideally, your financial planner and estate attorney should be collaborating in the creation of your custom plan. Ultimately, some coverage is better than no coverage. If you have any questions or would like my help in developing a plan, please book a meeting with me here.
And of course, if you enjoy my newsletters, do me a solid and share them with others.
P.S. Here is my YouTube vid o’ the month!
With gratitude,
David Warshaw, CFP®