Unless you're very
rich or very poor, you should be looking into all of the long-term care
possibilities out there. Because of the costs and complexity involved, the
choice isn't easy. But it is necessary.
by: Evan T. Beach, CFP®, AWMA® January 2, 2018
As
a financial planner, I have learned that finding a simple way to plan for
long-term-care expenses is about as simple as talking Donald Trump out of
tweeting. Ignoring the issue is a non-starter. According to the U.S. Department
of Health and Human Services, 70% of those age 65 and up will need some sort of
long-term care. Paying out of pocket is out of reach for most of us since the
median annual cost of a private nursing
room is $97,455. If you live in a major metropolitan area, you
can expect to pay even more.
The
long-term care insurance industry is in flux, with many carriers shutting down
this arm of their business as claims are much higher than expected. Lastly,
unlike life insurance, long-term care insurance premiums are adjustable.
Therefore, if a company is struggling to pay its claims, you get to bail them
out.
Now
that we know there is no perfect, easy solution, let’s talk about what you can
do. Long-term care insurance has been around since the late ’70s and became
popular in the late ’80s. Policy sales grew exponentially until the 2000s, when
premiums began to skyrocket. At that point, the best option for the consumer
was to say, “No problem. I’ll self-insure.” Essentially, self-insuring is
jargon for paying out of pocket.
The
problem? It works only for those with either several million dollars or else
very little in savings. Those with several million could afford to pay out of
pocket, and they would only opt for long-term care insurance as an
estate-preservation tool. They might rather pay the premiums today and pass
along a larger amount to their beneficiaries. Those with little or no savings
will quickly run out of assets and rely on Medicaid to pay their expenses. This
is not ideal and should not be thought of as a “plan.”
The
rest of you fall into what I call “the dangerous middle.” You are the
mass-affluent, whose financial situation could be ruined by the average
long-term care event. For you, transferring some of the risk to an insurance
company may be the only solution outside of eating well, exercising and
crossing your fingers.
You’ve
decided that you need to insure at least some of the risk, but how much is the
right amount? I’ve come across many insurance agents who simply recommend a
monthly benefit that aligns with the average facility cost. In other words, if
a facility costs $10,000/month, you should have $10,000/month in policy
benefit. I (somewhat) respectfully disagree. Given the high cost of long-term
care insurance, it should be used to fill a gap, not cover the entire expense.
So, if that same person has $6,000/month coming in from Social Security,
pension(s) and investments, I believe she needs to insure only the $4,000 gap.
I also wouldn’t recommend stretching to buy a policy you can barely afford today. In 2016, Federal Long-Term Care Insurance Plan (FLTCIP, the plan for federal employees) premiums rose, on average, by 83%. One hike like that and you may end up dropping the policy you could barely afford in the first place.
Once
you decide to transfer some of the risk and determine the proper amount, it’s
time to select the policy type that is the best fit for you. Traditional
long-term care insurance is the easiest to understand and the type that
everyone bought until a few years ago. You pay a monthly, quarterly or annual
premium, typically for life or until you need care. In exchange, the insurance
company will offer you a monthly or daily benefit amount should you become
eligible for care.
The pros: You
are covering a big risk from both a likelihood of need and a dollar
perspective. You are also getting more benefit per premium dollar paid with
traditional insurance. The cons: Like any insurance that gets
used often, it’s expensive. You also can’t predict what you will pay in the
future. Premium increases can impact anyone, so long as the state insurance
commissioner approves. Lastly, use it or lose it. Like all pure insurance, if
you don’t use this benefit (which is a good thing), the premiums you paid are a
sunk cost.
A
few years ago, the life insurance industry tried to solve some of these
problems. Its solution: hybrid universal life insurance with long-term care
riders. Huh? Universal insurance is permanent insurance with flexible premiums.
“Riders” are a more compliant word for “guarantee” in the insurance world.
Essentially these are policies with set periods for the premium. You can pay
for them all up-front or with some companies over up to 10 years. The premiums
are guaranteed not to rise, and if you don’t use the insurance, it will pass to
the next generation in the form of a death benefit.
Sounds
pretty good, right? Once again, you are covering a big risk, but I wouldn’t
consider this a highflying investment that you’re using for legacy purposes.
The death benefits that pass along are lower than they would be without the
long-term care component, and the monthly benefit amounts are typically a bit
lower than they would be for the same amount in a traditional policy. Many
people will accept that tradeoff for the certainty of knowing what their
premiums will be.
One
thing I failed to mention earlier is that this insurance is not easy to get. It
takes a standard life insurance exam plus a memory test. If you have health or
cognitive issues, you may be facing rejection. If you still want some sort of
hedge, an annuity with a long-term-care rider may be the only option. These
policies will typically increase your monthly annuity income if you enter a
facility. Alternatively, they may be structured to pay you a multiple of your
original annuity premium should you become eligible. This is often the easiest
“insurance” to get and is better than nothing.
Before
people hated the long-term care insurance companies for raising premiums, they
hated them for refusing to pay claims. Unfortunately, individuals were often to
blame here because they didn’t understand the original contract they signed.
The devil is in the details. Every policy has three major components. The
premium is what you pay in. The benefit is what they pay out. The language is
what you don’t understand—but that you sign anyway. Language includes things
like COLAs, elimination periods, shared care, home care coverage, etc. Make
sure you do your research before you sign that thick packet.
Unless
you fall above or below the dangerous middle, this is a game of hedging. A
long-term-care event will change your lifestyle and likely the lifestyle of the
family members around you. You are better off making it a detour for them
rather than a total course change. Women end up in LTC facilities more often
than men do — and for almost twice as long. In fact, 70% of the nursing home
population is female. Therefore, if only one person in a couple can afford the
insurance, it often makes sense for the woman to buy it.
The opinions voiced in this material are for general information
only and are not intended to provide specific advice or recommendations for any
individual.
Riders are additional guarantee options that are available to an
annuity or life insurance contract holder. While some riders are part of an
existing contract, many others may carry additional fees, charges and
restrictions, and the policy holder should review their contract carefully
before purchasing. Guarantees are based on the claims paying ability of the
issuing insurance company.
This
article was written by and presents the views of our contributing adviser, not
the Kiplinger editorial staff. You can check adviser records with the SEC or
with FINRA.
Evan T. Beach, CFP®, AWMA® Wealth Manager, Campbell Wealth Management is a
Certified Financial Planner™ professional and an Accredited Wealth Management Adviser.
His knowledge is concentrated on the issues that arise in retirement and how to
plan for them. Beach teaches retirement planning courses at several local
universities and continuing education courses to CPAs. He has been quoted in
and published by Yahoo Finance, CNBC, Credit.com, Fox Business, Bloomberg, and
U.S. News and World Report, among others.
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