The Most Complex Personal Insurance Products Explained, Part 2: Long-Term Care

Not everyone will need long-term care insurance (LTC), but everyone needs a long-term healthcare plan.  Your long-term care plan should incorporate the following: facts about you (and your spouse, if applicable), your age, your personal health, longevity of lineage, your retirement income and assets, your tolerance for risk, the costs and demographics of long-term care in your geographic area and information about any long-term care insurance that you own or have considered owning.

This post is the second in a two-part series.  You can read the first on Long-Term Disability (LTD) by clicking HERE.

Long-Term Care Insurance

One very important thing to remember is that Medicare does not cover the costs of most long-term care needs. Allen Hamm, in his book, Long-Term Care Planning, shares the following statistics:

• 71 percent of Medicare recipients mistakenly believe Medicare is a primary source for covering long-term care.
• 87 percent of people under the age of 65 mistakenly believe their private health insurance will cover the cost of long-term care.

In reality, Medicare will only pay for 100 days of skilled nursing care.  Thereafter, the insured is responsible for 100 percent of the cost.  But a risk manager does not automatically assume that the reflex response is to purchase a long-term care insurance policy with all the bells and whistles.

The annual cost of assisted living care in most states ranges from $30,000 to $50,000.  The cost of full nursing care ranges from $50,000 to $100,000, with Alaska topping out at over $200,000 per year![i] States like New York, Connecticut, Maryland, and California are in the higher end of the ranges with states like Alabama, Louisiana, and South Dakota on the lower end.  Regardless, we’re dealing with a significant amount of additional expense which most retirement plans are not prepared to support.

If you have liquid assets north of $2 million, you may consider self-insuring the risk of a long-term care event as long as your retirement withdrawal rate is not rapidly depleting your nest egg. Conversely, if your net worth is below $250,000, a long-term care event would likely exhaust it so quickly that paying insurance premiums is likely prohibitive.  If you’re in that situation, you will likely qualify for Medicaid—medical care for the impoverished—shortly after your infirmity sets in.

Moving Parts

Long-term care insurance is sold most often in daily increments, so you would purchase a policy that would pay $100, $150, or $200 per day for a stated number of years or your lifetime.  LTC has almost as many moving parts as LTD. Here are the most important to understand:

• Facility daily benefit is the cost per day that the policy will cover.  It is a good idea to ask for quotes based on a policy that would cover you for $100 per day, because then you can determine a higher or lower multiple of that policy rate easily based on the round number.
• Facility benefit period is the length of time over which the policy will pay out.  The average stay in a long-term care facility is already low—around two years—but most people utilize care for even less time.  The numbers are skewed upward by the relative handful of folks who suffer from dementia or Alzheimer’s for a particularly long stretch.  If your tolerance for risk is very low, you may consider a lifetime benefit, but if you are focusing more on the probability, consider a five-year benefit.
• Home care daily benefit is the percentage of the policy benefit that could be applied to skilled care in your home.  As the preferred method for most people, you should probably only consider plans offering 100 percent of your benefit to be applied to home care.
• Inflation protection describes how the future inflation of health care costs will be factored into your benefit.  With the future costs of health care expected to rise at a pace above the normal inflation rate, this should be a primary concern for the prospective insured.  If you are in your 50s or 60s, strongly consider compound inflation protection.  Unlike the quirky long-term disability COLA factor, this feature does what you expect it to do—go up every year.  If you are in your 70s or older and considering a policy, the premiums are likely to be extremely costly, so you may consider a simple inflation protection calculation or no inflation protection to reduce the costs of the policy.
• Facility elimination period is the initial time frame in which the policy will not pay.  Because Medicare will typically pay for the first 100 days, consider an elimination period of 90 days or more.
• Marital discount is a significant discount for couples who are purchasing LTC together.  Many insurance companies now offer shared care policies offering less stringent underwriting and reduced costs; but be sure to conduct your LTC plan before choosing this insurance option.  A spouse with a history of heart disease may have a higher probability of dying in an instant from a heart attack (and, therefore, may consider opting out of LTC), whereas a spouse with a family history of dementia or arthritis should strongly consider applying for LTC before major symptoms occur (because by then, you’re likely to be turned down).

The Problem…and the Solution

In addition to making sense of the myriad of moving pieces in the policies, the problem that scares away most prospective insureds is the bottom line price.  If you buy the policy designed to insure virtually every possible scenario you may encounter—say, a $200 per day benefit guaranteed to pay a benefit for the rest of your life—you will, indeed, find shocking premiums that may send you packing.  The solution, however, for many people is to partially-insure the risk of a long-term care incident or incidents. Consider a policy with a reduced benefit, like $100 or $150 per day, and a shorter benefit period, like three or five years.

Like with many insurance products, there are knowledgeable and professional agents out there, but their economic bias is still so overwhelming that I recommend you do a ton of homework or consult with a fee-only advisor prior to engaging an agent.  I have designed an LTC app that will help you begin the process and provide a comparison tool once you begin quoting, so click HERE to find instructions and a free downloadable exercise designed to help.

If you missed the first part of this post decoding the complexities of long-term disability income insurance, get caught up by clicking HERE.

Much of the material in this post was legally stolen from the book I co-authored with best-selling author, Jim Stovall, called The Ultimate Financial Plan: Balancing Money and Life, in which you’ll find more on this particular subject in Chapter Eight: The Gift of Health.