October 05, 2020
Long-Term Care Insurance: When and What Kind?
Although the current and future costs of long-term care are a chief concern for many, especially as we age, long-term care planning remains one of those less-than-desirable topics to raise with your advisor.
Incapacitation can be a very difficult and sobering subject to broach, and I’ve found most people are more comfortable discussing death than the potential inability to manage their own affairs or the acute loss of mental or physical wellbeing.
Nevertheless, planning for a potential long-term care event, and whether or not long-term care insurance should be a component of that plan, is a necessary topic to tackle with your advisor. To that end, and rather than cover all facets of long-term care insurance, let’s create a starting point for this conversation that, hopefully, sets you in the right direction. Because while not everyone may need long-term care insurance, everyone does need a long-term care plan.
As it relates to long-term care planning, there are three questions that loom large:
1. Should I purchase insurance, or can I self-insure?
2. What kind of long-term care insurance product should I purchase?
3. When should I buy long-term care insurance?
Let’s address each of these in turn.
Transfer risk or self-insure?
Whether you should transfer the risk of long-term care expenses eroding your financial plan or you should self-insure (pay your own way out of pocket) must be answered within the context of your overarching financial plan. The best way to do this is with a Monte Carlo analysis, which simulates the impact of a long-term care event on a financial life plan. One comparison your advisor can model to provide clarity is the difference between needing care in the future while having no insurance and, on the other hand, purchasing insurance but never using it.
Even if you find yourself in the fortunate situation in which you are able to self-insure, from an emotional standpoint you may still want to transfer the risk. Some people find peace of mind in purchasing long-term care insurance, knowing that their loved ones will not be saddled with a financial burden or caretaking responsibility.
If you determine that transferring risk to an insurance company is the most prudent option (and assuming you qualify medically), you must then choose the appropriate product. There is a dizzying array of choices, both in terms of structure and features. However, long-term care insurance is primarily offered in two different product structures: standalone and hybrid.
A standalone long-term care insurance policy only provides coverage for a long-term care event. A claim is typically triggered by being unable to do two out of six activities of daily living (bathing, dressing, toileting, transferring, continence, eating) or by requiring substantial supervision due to a severe cognitive impairment. Like most types of insurance, if you never qualify to receive insurance benefits, then the premiums paid into the policy are a sunk cost.
If the idea of purchasing long-term care insurance protection and never “using” it (which, frankly, is what we hope for) is untenable, then you may consider a hybrid insurance policy, which combines an annuity or life insurance policy with long-term care protection. Hybrid policies are currently the most commonly sold long-term care insurance products. The cost of a hybrid policy is typically higher than a standalone policy, yet the hybrid policy structure offers more flexibility. For example, a hybrid policy combining life insurance with long-term care insurance could still pay a death benefit even if the policyowner never receives long-term care insurance benefits.
After carefully choosing the type of product that best meets your needs, there are many other policy features to sort through. Some common options include the duration of the elimination period (a waiting period before benefits begin to be payable, similar to a deductible), amount of coverage, benefit period (how long benefits will be paid), and inflation protection.
When it comes to wading through your various options and customizing a policy, do not go it alone. Your advisor and a trusted insurance professional can provide valuable guidance. Regardless of the type of product you choose, be sure the insurance company behind it is financially strong, and that the policy covers not only nursing home care, but also assisted living and home health care.
When should I buy?
There is no defined age at which you should purchase long-term care insurance. The average age for purchasing long-term care insurance is around the mid- to upper 50s. Insurability is still relatively high for applicants in their 60s, which may no longer be the case for many applicants in their 70s.
The earlier you begin exploring this topic, the better. If you are in your 50s and have not yet begun familiarizing yourself with long-term care planning, your advisor is standing by to guide you through the process. We recommend you learn about the options available to you so that you can make an informed decision, before the decision is made for you out of necessity.
The year 2020 will forever be remembered as a sea change in the way we view public health, the economy, and perhaps even our own financial situations. As you embark upon year-end planning, consider making long-term care a subject to address with your advisor in 2021. Do not let the myriad changes in 2020 cause this important part of your financial life plan to get lost in the shuffle.
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This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. IRN-20-1133
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