The New Finance Of Longevity

Choosing the Best Long-Term Care Coverage

Three important questions your clients should ask themselves

by Dennis Ho, FSA, CFA

Mr. Ho is co-founder and chief executive of Saturday Insurance, an online independent insurance agency. This article was originally published in June 2020 on kiplinger.com and is reprinted here with permission of the author. Visit saturdayinsurance.com

Don’t hurry. But don’t wait too long. That’s the conundrum when you’re considering long-term care insurance. It’s one of those things most of us would rather put off thinking about. After all, nobody likes to contemplate the downside of growing older. However, while determining whether you need the coverage and what type of policy makes the most sense aren’t decisions you want to rush, the sooner you make them, the better off you’ll be.

The first step is assessing whether you need long-term care insurance based on your personal situation, the type of care you want, and what you have saved for retirement. The first article in this series explored how to go beyond just crunching the numbers as you consider your options. It’s a big decision that requires thoughtful discussions and working through different scenarios – both financial and emotional. Once you’re confident that long-term care insurance makes sense for you is it time to move on to Step 2: figuring out which type of policy best fits your needs.

Ready to take the next step? You’ve come to the right place. Here are three key questions to consider.

1. What should I expect from long-term care insurance?

Taking the time to understand exactly what long-term care insurance is – and isn’t – is essential. That way, you’re better able to define the coverage you need and your expectations.

Long-term care policies are designed to provide assistance with the six key activities of daily living – dressing, bathing, toileting, transferring, eating and continence. If you are unable to do at least two of the six without significant help, you’re likely to require long-term care. The needed care can typically be provided either in your own home or in a facility, such as assisted living, nursing home or hospice.

Long-term care insurance is an option to help you pay for the care you need. You pay a premium for the coverage over time. Then, if you need long-term care, the policy will pay for or reimburse you for some or all of your long-term care costs. Think of it as getting access to a personal bank account dedicated to paying for long-term care needs.

With several policy types, coverage amounts and features available, it helps to have a good sense of your financial situation and how long-term care insurance fits into it before you start shopping. And it’s a significant financial commitment, so you’ll want to make sure the coverage you choose gives you the protection you need at a price point you can afford.

To help you evaluate the financial element of your decision and establish your goals, take a moment to look back at the previous article in this series, and explore the free long-term care insurance assessment tool on our website, which provides helpful information about the costs of care in your area and the price of insurance.

As part of your decision-making process, talk through your goals and financial situation with your family. It’s critical to tell family members the type of care you’d like to have and get their input on the best and most realistic ways to plan for it. Not only will the conversation help you clarify your plans, but your family will also gain an understanding of your wishes and the type of coverage that’s in place to help.

2. What type of long-term care insurance makes sense for me?

With your goals defined, it’s time to shop for coverage. There are two main types of policies in the market today: traditional and hybrid policies. Both provide similar long-term care benefits. To appreciate the differences, you’ll need to dig into the other features that each product offers.

Traditional long-term care insurance policies function much like your auto or homeowner’s insurance. You pay a premium for as long as you have the coverage and collect benefits if and when you need them. If you don’t need the benefits, you don’t recoup your premiums. While this may be acceptable for car insurance, the higher price tag and extended payment period can make the costs more difficult to reconcile if you don’t end up needing long-term care. In addition, the premiums aren’t guaranteed and could increase down the road.

On the plus side, traditional policies usually have lower initial premiums compared to other options. They may also qualify for state partnership programs that allow you to protect more of your assets if you exhaust your long-term care insurance benefits and need to turn to Medicaid.

A hybrid policy combines life insurance with long-term care insurance in order to address some of the risks that may come with a traditional policy. With a hybrid policy, the premiums are paid for a limited time, such as all upfront or over 10 years, so you won’t have to worry about having enough income to cover premiums 20 or 30 years from now. The premium is also guaranteed and cannot be increased. In addition, if you pass away without using the long-term care benefits, your beneficiaries receive your premiums back. Because of this, you’re always guaranteed to at least recoup your premiums via long-term care, death benefits or a combination of both.

Taking the time to understand exactly what long-term care insurance is - and isn't - is essential. That way, you're better able to define the coverage you need and your expectations...

With these guarantees, the monthly premium amounts for hybrid policies are typically higher. However, when compared against the total amount of premiums paid for a traditional policy over a lifetime, the cost may be close and sometimes less for a hybrid policy.

As you begin your search for long-term care coverage, we recommend considering both traditional and hybrid policies. Since the relative costs and benefits of each policy differ depending on your age, gender and coverage amounts, being open to both will maximize your chances of finding the best fit for your situation.

Traditional vs. Hybrid: A Look At One Woman’s Choice

We recently helped a 45-year-old single woman explore her options for long-term care coverage. For a policy offering up to $255,000 of initial total benefits and including a 3% inflation benefit, a traditional policy was $267 per month, with her payments continuing up until the point when she needed long-term care (and if she never needed care, her payments would continue for life). A hybrid policy was $692 per month, with her payments ending after 10 years or at the point she starts collecting benefits.

When looking at her situation, we used a spreadsheet to compare a host of scenarios, and here were the high-level conclusions:

  • If she ends up needing a lot of care in the next few years, she would be better off with a traditional policy, because she would have only paid a few years of premiums before the premiums stopped. However, this is very unlikely. The average person needing care is in their 80s.
  • About 48% or so of retirees will not need long-term care or will need very little care, so they don’t get through the 90-day elimination period. In this case, if she just passed away without needing care or using very little care, the hybrid is better because her family gets her money back plus a little bit of interest.
  • If she ends up in the other 52% who need some care, it’s most likely she won’t need care until her 80s. In this case, the hybrid also leaves her better off, given all the premiums that would have been paid into the traditional policy.

Based on the above analysis, it was clear that the hybrid was a better choice for this 45-year-old woman as long as she could afford the higher upfront premiums. On the other hand, we looked at a similar package for a 71-year-old married man, and the opposite was true, so he went with a traditional policy.

When considering which type of long-term care insurance is right for you, make sure to work with someone who can help you consider costs and benefits across a range of scenarios so you can see the full picture.

3. When Do I need To Get Serious About LTCi?

As with health care, food and other expenses in retirement, long-term care costs are something you’ll need to be prepared for. Our advice would be to build long-term care considerations into your overall retirement planning.

Insurers offer coverage to those as young as 30. However, most people in their 30s have other priorities and are just getting started saving for retirement, so long-term care insurance may not be the most pressing issue. If you are in a position to purchase long-term care insurance in your 30s, that’s terrific, but we find buying coverage in your 40s or 50s is the “sweet spot.”

Premiums are attractive, and you’re less likely to be declined due to health issues. Also, because you’re typically more established financially and have a clearer sense of your retirement goals, you’re in a better position to make the financial commitment long-term care insurance requires.

Generally, long-term care insurance can be obtained up to age 79, so coverage is readily available. But keep in mind that pricing can go up quickly with each birthday, and the likelihood of being declined for coverage also goes up with age. According to a recent study by The American Association for Long-Term Care Insurance, only 16% of applicants age 49 and younger were declined for coverage. The percentage increased to 24% for applicants age 60-64 and jumped to 44%-plus after age 70.

If you decide to purchase long-term care insurance, you’ll want to work with a licensed agent to get quotes and apply for coverage. As with other insurance, work with someone who is independent so you can review multiple options and shop for the best price.

Make sure your agent helps you look beyond the “headline premium” when comparing policies, by answering these questions:

  • What coverage amount fits best with your goals and budget?
  • What are the nuances between the different policies you’re considering?
  • What do your costs and benefits look like under different scenarios?
  • How financially strong are the companies behind the policies?

These are all important factors to consider when selecting a policy. If you just look at a monthly premium, you won’t see the full picture, and you might not get the right coverage for your individual situation.

 

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