Consider today’s options for covering the future cost of long-term care
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Key takeaways:
- The marketplace for long-term care insurance has been evolving during the past few decades.
- Long-term care costs are increasing.
As their parents age, many of our physician clients have asked us about long-term care insurance.
They see the high and unexpected cost of caring for their parents and want to make sure they take the steps to protect their finances. Fortunately, the marketplace for long-term care (LTC) insurance has been evolving during the past few decades.
This article provides an overview of current options available to address LTC insurance needs.
Traditional LTC insurance policies
Traditional LTC policies are what the insurance industry started offering in the 1980s. Much like disability insurance, these policies offer a stated daily benefit. Should the policy be unused throughout the insured's life, there are no refunds or death benefits, so it is a use-it-or-lose-it option.
The insurance industry mispriced LTC insurance in the 1980s, which led to significant losses for the carriers, resulting in premium increases (premiums are not guaranteed) for both in-force and new LTC policies.
In more recent years, higher LTC insurance premiums have caused many to conclude that the potential LTC benefit does not justify the cost of the policy, especially when compared with other options now available.
Hybrid LTC insurance
Hybrid LTC insurance uses the death benefit of life insurance to provide the LTC benefit. This is done by adding a LTC rider to the policy, allowing the insured to access the death benefit to pay for LTC expenses.
Benefits are received in much the same way as under a traditional LTC policy. The monthly benefit amount is selected as a percentage of the death benefit, with the most common being 2%. As you use the benefit for LTC expenses, the death benefit will be reduced dollar-for-dollar, and any cash value is typically reduced proportionally.
With this option, you lock in your benefit. Your beneficiaries will either receive the death benefit at your death, or you will be able to access that amount for LTC needs. Typically, it is a little more expensive and, while it has the advantage of a known benefit amount, the overall LTC benefit can end up being lower for options designed with the LTC benefit as the primary purpose. Also, the premium is normally guaranteed for an extended period (20, 30 or 40 years), but not for life.
Asset-based LTC insurance policies
Quickly becoming the most popular option to deal with LTC costs, asset-based LTC insurance policies have a mix of traditional and hybrid with a focus on LTC benefits. Asset-based LTC insurance policies feature leveraged LTC coverage (about 3:1) in addition to a death benefit.
These policies pay regardless of outcome: if you need coverage, it is there; if you cancel your coverage, there can be return of premium options and/or cash value; if you never make a claim before you die, your beneficiaries will receive a death benefit.
One aspect that makes this option attractive is that you can have a joint policy with your spouse. This helps the pricing of the policy and gives more flexibility in the design. This can allow a design with inflation protection that can lead to the LTC benefit being 6 to 7 times of the death benefit in 30 years because the LTC benefits grow each year.
These products offer different premium payment options, ranging from single premiums to 10-payment, 20-payment or lifetime payments. Unlike the traditional and hybrid options, most products in this category are fully guaranteed (LTC benefit, death benefit, cash value and premium).
Which LTC insurance option is right for you depends on your priorities and the amount of risk you are willing to take. But the structure and design of LTC policies today are allowing people to avoid the riskiest option — self-insuring and paying their own long-term care costs.
Value of LTC insurance
When considering LTC insurance options, it is important to compare having LTC coverage to not having any coverage. Let’s consider the following example: Meet John and Jane.
John and Jane are both 55 years old. They both plan to retire at age 63 years with a monthly retirement income of $13,000, including Social Security benefits. This income will grow by 2% yearly, making it slightly higher in 8 years when they retire.
They have $1.5 million in 401(k)s, $500,000 in IRAs and $1 million in a brokerage account. The annual contributions to all accounts total $63,500. Let’s assume here that they will live to age 93 years and those contributions will continue until retirement. Let’s also assume they earn a rate of return of 6% pre-retirement and 5% during retirement.
Scenario #1. John and Jane do not have LTC coverage and have a need for long-term care. John and Jane decide not to purchase a policy and instead "self-insure," understanding this means they will need to use their own assets to pay for any LTC needs, in addition to their other expenses in retirement. At age 85 years, one is diagnosed with an illness and needs long-term care for the next 8 years. The cost of the assistance is $8,000 a month. The couple must liquidate assets to pay for the care and when they both pass away at 93 years, they leave behind $273,000.
Scenario #2. John and Jane buy LTC coverage and have a need for long-term care. John and Jane realize the odds are relatively high that one of them will need LTC assistance during retirement, so they purchase a joint asset-based LTC policy. They found this type of policy met their needs of keeping premium costs down, but still providing a strong LTC benefit for them.
At age 85, one of them is diagnosed with a long-term illness and needs LTC for the next 8 years. The cost of the assistance is $8,000 a month. Because they have LTC coverage, the only cost they pay is in the premiums, so when both pass away at age 93 years, they leave behind assets totaling $2.63 million.
Having the LTC coverage leaves John and Jane with more than $2.3 million more in ending assets for their beneficiaries than if they had self-insured.
Conclusion
Long-term care costs are increasing and we have no reason to think that will change. For both physicians and their family members, planning to pay for such costs is an important part of wealth management. LTC insurance policies can play an important role for many families — and their complexity often dictates working with an experienced independent financial advisor who can help navigate options.
For more information:
David Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Michael Lewellen is a partner and director of financial planning. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
Mr. Mandell and OJM Group partners are pleased to announce the 2024 publication of their newest book, Wealth Strategies for Today’s Physician: A Multi-Media Playbook. The playbook’s innovative format features more than 90 links to videos and podcast episodes to enhance important financial topics for physicians. To receive a free print copy or ebook download, text HEALIO to 844-418-1212, or visit www.ojmbookstore.com and enter code HEALIO at checkout.
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