Many working individuals don’t stop to consider how Long-Term Care insurance (LTCi) can buy future financial security. We buy auto, home, and life insurance, even pet insurance, with very little chance of using them during our lifetime, yet we’re glad we had them when catastrophe strikes. It’s much harder to imagine oneself unable to brush their teeth, take medicine, or get out of bed without assistance, yet that could be the reality for about half of our aging population.1 If we prepare for this reality early enough, we don’t have to be a burden on our loved ones or our retirement accounts. Let’s look at a few points to consider as we contemplate this vital piece of your financial planning.
Price is only relevant in the absence of value; but, it’s still important. Yet, there’s another aspect to LTCi that most folks overlook. Who is going to care for you? LTCi turns your payments into hundreds of thousands of dollars, day one; but it also connects you with certified care professionals in your geographic area. Family members may not always be there to care for us when we need them most or our care needs require loved ones to miss work, use sick days, forgo promotions, essentially lose income and opportunities, simply because we didn’t do this planning ahead of time.
Based on a recent highly respected industry survey, in 2016, the median monthly cost of assisted living or in-home health aide (44 hours per week) or private/semi-private room in a nursing home, have all increased some 6.6% over the past 5 years.2 These costs range from $3800-$7600 p/month respectively. Now, imagine taking $45-90K out of your retirement savings to pay for a year of these expenses, how about 3 years, 10 years. When another “2008” happens, we may not want to withdraw funds during a market correction year to pay care costs.
LTCi serves as a “special asset class”, uncorrelated to your other savings vehicles. This special asset class will pay out whenever you need the funds, allowing you to ride out financial storms or liquidity events, thus preserving your wealth. LTCi benefits are not included in your adjusted gross income numbers either.
Why purchasing Long-Term Care early is important.
The earlier you purchase LTCi coverage, the less expensive your premiums will be. Buying early (between 45-55 years old) gives you the greatest value and leverage on your premium dollars. Options like 5% compounding inflation (to keep up with rising care costs), return of premium features (don’t use/don’t lose benefit), limited pay options (10 year pay-off plans) limit the chance of price increases later on in life, are incredible features that become too expensive to buy later on in life. Every year you wait to buy coverage the plan prices go up and you risk losing your good health, preventing you from obtaining a policy all together.
1 2009 LTCi Sourcebook, American Association of Long-Term Care Insurance.
2 Genworth, 2016 Cost of Care Survey, conducted by CareScout®, April 2016.
What does Long-Term Care Insurance cover?
The earliest LTCi plans only covered nursing home care. Today most plans are designed to keep you out of a nursing home. These plans cover: skilled nursing, custodial, social and rehabilitative services both at home and away from home, durable equipment, family care training, respite care, adult day care, etc.. As soon as you cannot perform the basic activities of daily living (ADL) like: eating, bathing or dressing without assistance, or if you have a cognitive impairment — benefits begin paying. Please note, a physician also needs to confirm your condition, so we recommend you review older policies to ensure they cover more than just nursing home care.
What size plan do you purchase?
First choose the daily benefit amount (dba) or maximum amount your LTCi plan will pay out in benefits. A plan that reimburses you back $3000/mo would be a $100 DBA; $6000/mo is a $200 DBA. Next, choose how many years of benefits you want, from two years to unlimited. Last, strongly consider inflation protection, 3% or 5% compounded is ideal. By choosing one of these options, your dba will grow every year with the cost of care. A $200 dba plan today with 5% compounding will grow to $530 p/day over 20 years. Looking at how big your estate may be when older, or what health concerns are in your family history, will guide you while pondering: how much LTCi to purchase.
How does Medicare & Medicaid work?
Medicare is different than long-term care insurance. At most, it will pay for 100 days of nursing home care, and only if: you are receiving skilled care, and you go into the nursing home right after a hospital stay of at least 3 days after one. Medicare also covers limited home visits for skilled care, and certain hospice services for the terminally ill. Nothing else. Also, for Medicare to cover an event, the event has to be “doctor ordered”. Medicaid on the other hand, is essentially a government/welfare version of LTC coverage; however, you need to have under $2000 of assets to qualify. Medicaid picks where and how your loved ones receive care, which could be inconvenient for family visits.
When is it worth looking into LTCi?
If you are over 40 have this discussion now. Use an independent advisor so you get matched with the best plan not just what is available to a captive agent. LTCi requires strict underwriting based on morbidity (chance of needing assistance) not mortality, so bad backs, knees surgeries, arthritis could preclude you from getting approved. Lastly, it’s important to note that LTCi plans today have much more accurate pricing than older plans, due to 35 years of available actuary data. Lastly, many states offer tax incentives for purchasing LTCi, and some business owners often get 100% write-off (depending on how your company is registered) which also includes a write-off for spouses.
Keep LTCi in mind as part of your overall financial plan in order to see its full benefits.