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Should I Have Long-Term Care Insurance?

Posted February 18, 2020 by John Posey

This is a question that commonly comes up when we learn about someone needing some form of care as they age whether it’s home health care, assisted living or skilled nursing care. Long-term care insurance is generally designed to pay benefits if someone needs help with 2 or more activities of daily living. Policies issued today commonly cover 3-5 years of expenses and provide some inflation protection (ie – simple (level) or compound inflation protection increasing benefits at 2-5% annually) so the benefits are designed to grow as the cost of care continues to grow.  Some people have long-term care insurance to help pay for such expenses, but I find many do not and the underlying reasons seem to vary widely. I think some of the common reasons people forgo coverage include high premiums, possible and likely premium rate increases over time – premiums aren’t guaranteed to stay level, the expectation their kids will take care of them (that’s a loaded aspiration!) and the feeling that if you don’t use it you wasted all that money on insurance you didn’t need. When you consider that approximately 70% of people turning age 65 can expect to use some form of long-term care during their lives according to the US Department of Health & Human Services, that last concern doesn’t feel so significant anymore, although I hope everyone reading this is in the lucky 30%. I don’t think I’ll chastise grandpa and grandma’s decision to purchase long-term care insurance if they are fortunate enough to never need it. I’d call that just being a responsible, caring person and I think that represents the kind of values many of us want to leave to our children.

 So what’s the primary motivation for people who ultimately buy long-term care insurance? You’ve probably guessed it, but I believe it’s primarily because they don’t want to become a burden on their family. I also think seeing a close family member needing care encourages many to put a plan in place.  If these are feelings you share, here are some things to evaluate to help gauge if you’re a good long-term care insurance candidate before pursuing coverage: 

  1. The best age range to consider buying long-term care is between 50 and 60 years old. You won’t benefit from buying before 50 (assuming no special health/insurable considerations) because the premiums are not significantly cheaper unlike life insurance. As you move into your 60s the premiums start to increase exponentially each year and I can’t imagine many scenarios where you won’t scoff at the cost beyond age 70. It’s not too late if you’re over 60, but you better “make hay while the sun is shining” as a wise farmer once said.
  2. Compare your expected or current income sources in retirement to current long-term care costs. You can research costs nationally and by your state by referencing Genworth’s most recent cost of care survey here. Nursing home costs are the most expensive at a national median in 2019 of $8,517/month (private room), assisted living at $4,051/month and in-home health aide at $4,385/month. If it’s a stretch for your income sources to cover the potential costs, you should consider coverage. Even if you get coverage, it’s only going to last for a limited time (typically 3 or 5 years) but could prove to be a substantial benefit for you and your family by not being immediately burdened with hefty long-term care expenses. This also allows time to formulate a longer-term plan.  If your income sources look like they can cover the costs, you might prefer a self-insuring approach but it’s still wise to weigh the odds and have a plan for the possibility.
  3. As a rough rule of thumb, I’d say those with a net worth (net worth = total assets minus total liabilities) between $2M and $5M should be considering long-term care insurance. Those beyond $5M may prefer to self-insure and below $2M may or may not want to pursue coverage based on the cost and possibility of Medicaid eligibility (more on this later).
  4. Be prepared to share your current and past health history when applying for coverage and be detailed with any adverse health conditions because it will save you time later.  Long-term care insurance underwriting has become very stringent over the years from my perspective and it can be very difficult to get coverage. Unfortunately, the biggest hurdle could be getting an underwriting approval once you’ve decided you want and need the coverage. Some things that negatively affect life insurance underwriting like smoking aren’t really much of a factor when it comes to long-term care insurance. Long-term care underwriters are going to focus on things that are associated with chronic, long-lasting health and mobility issues such as diabetes, osteoporosis and cognitive disorders. A good independent agent will ask for your medical history and medications before applying for coverage to prepare you for likely outcomes and to seek out the most appropriate insurance carrier based on your circumstances.

Now if you’ve made it with me this far, you might also be wondering if Medicare or Medicaid will pay for long-term care. In terms of Medicare, it will only pay a limited number of days of skilled care up to a max of 100 days. Now you’d be correct if you thought Medicaid could pay a substantial amount but that all depends on whether you are eligible. To be eligible for Medicaid, you must have limited income and assets which vary from state to state. In most states you can retain about $2,000 in countable assets. Check out these two sources for more info: https://longtermcare.acl.gov/,  NE Medicaid info - http://dhhs.ne.gov/Pages/Medicaid-Eligibility.aspx . I would mention that you need to be virtually insolvent to qualify for Medicaid and in most states there is a 5-year look-back provision to determine if you transferred any assets for purposes of qualifying. It is noteworthy that Medicaid is the largest payer of long-term care costs so expect they will do their due diligence to ensure they pay for only those that truly meet the qualifications. Another fact to be aware of is that you will be limited to Medicaid accepted facilities to receive care. Obviously, this may not result in your preferred choice in receiving care but that’s what you can expect if Medicaid becomes your long-term care payer.

 You should also be aware of long-term care partnership programs. If you purchase qualified long-term care insurance, you may be eligible for a long-term care partnership program depending whether your state offers it. “Qualified” refers to minimum inflation protection requirements based on the insured’s age – reference the details in your state’s program. This program allows buyers of long-term care insurance access to Medicaid benefits should they exhaust their long-term care insurance benefits without the usual spend-down requirements (ie - $2,000 in countable assets).  The program allows policy owners to retain assets on a dollar-for-dollar basis equal to the amount of long-term care insurance benefits received. If you are going to buy long-term care insurance, you just as well make sure it’s a partnership qualified policy if your state sponsors a partnership program. If have already purchased coverage prior to the mid-2000s, it’s unlikely your policy is “qualified” because many states started adopting this program in that time frame and older policies are not grandfathered in. However, if you purchased a policy long ago it may have unlimited benefits (pays as long as you need it) or may have been on a limited pay arrangement (pay premiums in for limited # of years and then paid-up). These kinds of features no longer exist on policies today. And if you already own coverage and have been frustrated with rate increases over the years, rest a little easier because your LTC insurance is likely to be much cheaper than what you could similarly get today.

 You might also ask, “What about life insurance with long-term care riders? Couldn’t that be a solution?” Yes, it could and sometimes people prefer this strategy to traditional long-term care insurance. Some insurance companies do offer life insurance with long-term care riders that will essentially accelerate the death benefit to pay for long-term care expenses. To the extent long-term care benefits are paid, it will reduce the death benefit of the life insurance and generally cease benefits once the death benefit of the policy is depleted. There are a few companies that specialize in offering life insurance with long-term care benefits sometimes to refer to as “hybrid-LTC.” This can work particularly well when someone has the ability to fund a life insurance policy with a sizeable lump sum which essentially leverages that money for long-term care expense purposes. It’s important to note that this approach does not typically provide the level of comprehensive coverage traditional long-term care insurance offers. Two significant considerations that stick out to me when comparing this type of option to traditional long-term care insurance are: 

  1. Life insurance with long-term care benefits can have no or limited inflation protection benefits relative to traditional long-term care insurance. Keep in mind that LTC costs are likely to continue to rise and compound over time so you will want to factor that into a strategy that involves life insurance.
  2. The life insurance option does not qualify for state long-term care partnership programs. You should not expect any potential Medicaid benefits that are afforded to those that purchase qualified long-term care insurance. 

Another possible funding option I’ll mention is a reverse mortgage. It’s possible you could start using the equity in your home to help fund long-term care costs through a reverse mortgage. I think you really need to discuss this idea with your family to determine if this is a suitable use of your assets based on the situation before hopping down that bunny trail. Using this approach pretty much guarantees your home will have to be sold at some point.

The LTC insurance landscape has changed significantly over the years. There are less than a handful of insurance companies offering long-term care policies today and only two companies that I have much familiarity with in Mutual of Omaha and Transamerica. If you’re going to look into LTC insurance, I think it’s a good idea to work with someone that’s had some experience with long-term care underwriting and knows the options in the marketplace which in my book means seeking out an independent insurance agent. When it comes to LTC planning, my suggestion is to put some thought into it, intentionally choose a course of action and communicate it to your family so everyone is prepared rather than blindsided should you need care at some point. 

PS – If you need some comedic relief at this point, check out this video: Peyton Manning enjoying retirement.

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Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

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