A lot to consider with long-term care insurance
I am on the record as being an advocate of long-term care insurance, since both of my parents spent their last days in nursing homes, and I am well aware of the cost/benefits of this type of insurance coverage.
The purchase of long-term care policy makes sense for we middle-class types, as well as for the well-heeled, since even a $3 million to $5 million retirement fund can be hit pretty hard by the annual cost of custodial care for a spouse, which in South Carolina has risen to almost $70,000.
In the case of a person with Alzheimer's, this annual outlay could reoccur for upward of 10 years or longer.
When one considers the fact that the U.S. Department of Health and Human Services states that "at least 70 percent of people older than 65 will require some long-term care services at some point in their lives," the importance of long-term care planning comes into sharper focus.
And remember that Medicare will only pay these costs for persons who are essentially penniless.
The nomenclature of long-term care policies requires some explanation.
First, what are the benefit triggers? Or, stated differently, what has to occur before the insurance company will pay for care?
Modern long-term (LTC) policies define what is known as ADLs, or activities of daily living, and if an insured person is unable to perform at least two of six ADLs, the conditions for benefit payments have been met. These ADLs are feeding oneself, toileting, dressing, bathing, transferring oneself into bed and continence. Also, if your doctor states that you have Alzheimer's or dementia, benefits will be paid.
All LTC policies have elimination periods, which define how long these benefit triggers must have existed before monies will be paid out.
The shorter the elimination period, the greater are the required policy premiums. A typical elimination period might be 90 days.
Remember that LTC benefits do not just provide coverage when we are older, but they can also generate benefits for someone who is younger and cannot perform the requisite ADLs due to an accident or dread disease.
Long-term care is defined as custodial in nature, rather than requiring skilled nursing care, such as would be provided by an RN or LPN. Generally, the health conditions that generate LTC policy benefits are chronic (which means they won't get better) vs. acute (one can get better).
The duration of LTC benefit payments is a key feature.
I favor lifetime benefits, but limiting the benefit period to five years will lower the premium.
Pundits often point out that the average stay in a LTC facility is less than five years, so why pay more for lifetime coverage? Well, averages are misleading, and if I am receiving LTC benefits, I want them to last as long as I do.
Another important consideration is whether the policy allows for custodial care at home and can a family member can provide the care and still allow the insured to qualify for benefit payments?
Virtually all modern policies provide the same benefit amounts for care at home vs. care in a facility, but benefits for care that is provided by family members varies from company to company.
The manner in which benefits are paid is important.
Usually, the benefit amounts are stated as a daily amount, such as $100 per day. Certain policies will simply reimburse for the actual expenses (up to the daily max), while others will actually write you a monthly check for the total benefit amount.
This example points up the difference between a reimbursement type policy vs. an indemnity policy. Obviously, indemnity LTC policies are more expensive.
Remember that LTC premiums are not guaranteed to remain level, but some policies will come with the option of a "rate lock" for a period of time; naturally, such a feature costs extra.
Another interesting option is a money-back provision in the event that one never qualifies for benefits. Again, there is a cost to add this feature.
Many companies offer a short pay option, i.e., pay a higher premium over, say, 10 years, rather than over one's lifetime.
An important option is a cost-of-living rider, or an inflation guard.
As an example, the policies that Barbara and I have provide an increasing daily benefit of 5 percent compounded each year. Our original benefit amount was $100 per day, and now it is more than $171 per day.
One important factor in this regard is one's age when a policy is purchased. Typically, if one is pushing 70, it may not make sense to add a COI rider, since simply providing for a larger initial benefit amount may be more cost-effective.
Finally, since long-term care coverage can be expensive, it may be worthwhile to examine other alternatives, such as fixed annuity policies that have long-term care riders.
If you never need the LTC benefits, you still get the accumulation potential of a fixed annuity.
Even though these products lack some of the features of true long-term care policies, these asset-based products meet the requirements of the recent Pension Protection Act and are much in vogue now, as I have mentioned in prior columns.
Have a financial planning question for Greg? You may e-mail him at greg29803@gmail.com.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.