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Should you buy Long-Term Care insurance?

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Neither Medicare nor health insurance covers traditional “custodial care” despite many people’s beliefs to the contrary.  As our population ages, more people are living longer with chronic conditions, increasing the odds that you will be one of the people needing Long-Term Care.  With the cost of Long-Term care growing you would think that insurance to cover the potentially catastrophic costs would be in demand.  Instead, only about 10 percent of the elderly have private Long-Term Care insurance and only 4 percent of Long-Term care expenditures are paid by private insurance (one third of expenditures are paid out-of-pocket) according to the National Bureau of Economic Research.  There are several reasons for this including the high cost of the policy, the potentially even higher increases in the cost of the policy over time and the extreme flux of the industry.  However, without either a Long-Term Care policy or a financial plan to cover the cost, most people will find a gaping hole in their ability to pay for long-term care in retirement.

When should you buy Long-Term Care insurance? 

If you’re going to purchase Long-Term Care insurance, you need to do so while you’re relatively young.  The insurance industry has an expression, “Your money pays for long-term care insurance—but your health buys it.”  When it comes to buying Long-Term Care insurance, your health is the single most important factor in determining price.  So, what age is the best age to buy Long-Term Care Insurance?  According to the American Association for Long-Term Care Insurance, it’s when you are in your 50s.  That’s because you have to health-qualify for Long-Term Care Insurance, meaning that you can lock in your good health with a policy but once your health takes a downward turn your health isn’t likely to improve and you hurt your chances for qualifying for a Long-Term Care Insurance policy.

According to the association, 62 percent of individuals between the ages of 40 and 49 qualify for Long-Term Care Insurance, 46 percent of individuals between the ages of 50 and 59 qualify for Long-Term Care Insurance and 38 percent of those between 60 and 69 qualify.  So you can see that your chances of being able to procure Long-Term Care insurance begins to drop off after a certain age.  Having an existing health condition may either prevent you from qualifying at all for insurance or it may cause your premiums to be higher so you want to aim for getting approved while it’s the most feasible and the most affordable.

In 2013, the average first-year premium for Long-Term Care Insurance was $2,359, a 5 percent decrease over the previous year.  What may at least partially explain the drop in premium rates was a drop in the average age that people applied for coverage (down to 56 years of age) according to the Insurance Information Institute.   Just as with a term life insurance policy, the earlier you lock in your rate for a Long-Term Care insurance policy, the lower your premiums.  If you’re like many people in their 40s and 50s, you may feel like there isn’t much money at the end of the month after paying mortgage payments, tuition etc.  In fact, you can get started on preparing for your Long-Term Care needs by locking in a lower amount of care and adding to your policy later on.  The drawback to this plan is that you will have to go through underwriting again.

Your long-term care plan should be tailored to your needs and only a knowledgeable professional can help you achieve that.  An agent works for a specific insurance company whereas a broker works with multiple companies.  You’re more likely to get a better deal and coverage that is more tailored to your own needs if you work with a broker rather than an agent.

If you plan to purchase Long-Term Care insurance, how much should you buy? 

Why don’t people buy Long-Term Care insurance?  Some people don’t buy coverage because they incorrectly believe that Medicare covers Long-Term care.  It doesn’t.  It will pay for some Long-Term Care costs if a hospital stay of three days precedes any medically necessary skilled nursing.  With annual costs for nursing home care hovering around $100,000, privately paying for Long-Term Care will impoverish most people fairly quickly.   How much care you’ll need varies widely.  A Robert Wood Johnson Foundation study brief found that 30 percent of people turning 65 will not need Long-Term Care services at all, 30 percent will need care for less than two years and the remaining 40 percent will require care for two or more years.  The problem is that no one knows where they will fall on the continuum.

With the average cost of a private room in a nursing home at nearly $250 a day, the first order of business is to calculate how much you can self-fund.  If you are able to pay a portion of the cost, you can lower your coverage amount needed and thus your premium.   There are some riders you can purchase that will also heavily impact the cost of your premium.

Long-Term Care insurance companies all offer at least one rider—a Return of Premium.  This rider gives your beneficiary a death benefit equal to the sum of your Long-Term Care premiums.  That rider may be a full return, a return less claims or a graded return that goes away over time.

A Survivorship Rider provides an optional (and therefore additional cost association) to the surviving spouse once one spouse dies.  Under this rider, the surviving spouse no longer has to pay their premium.  Most companies offer a ten-year survivorship rider, requiring that either partners or spouses must add to the rider for ten-years before it kicks in.  Some insurance companies offer a 7-year enhanced survivorship rider that is still valid even if claims are made during the seven year period.  This rider can be beneficial for those couples who have a single spouse with significant annuitized income that will stop upon death (think pension or retirement plans that don’t pay out after the death of the beneficiary).  Another time it might be beneficial is if one spouse is significantly older than the other.

Inflation Protection helps your benefit grow enough to keep up with inflation.  There are several options to this rider.  One is a 5 percent equal or 5 percent simple inflation protection for those people between the ages of 70 and 75 who expect to need to use their Long-Term Care plan within the next 10 to 15 years.  The other option is to select a 5 percent compound inflation protection rider.  Because costs compound, within a very short time-frame a simple inflation protection will be outgrown.

One reason states are paying more attention to the lack of enthusiasm from consumers about purchasing Long-Term Care insurance is that they are on the hook for the higher costs associated with more people applying for and receiving Medicaid.  Partnership Plans are joint federal-state policy meant to promote the purchase of private Long-Term Care insurance.  This “dollar-for-dollar” benefit allows purchasers of Long Term Care insurance an asset disregard for every dollar of insurance coverage paid.

There is an asset-based Long-Term Care plan for people who have assets they are protecting that allow them to use the policy as a second-to-die Life Insurance policy.  This policy does not pay out until the second individual dies but then pays out to the beneficiaries.  These policies are often not underwritten as tightly, they don’t have medical exams and policy holders automatically qualify for a life-time rider.

On top of deciding which riders you should purchase or avoid, you’ll need to figure out how long you think the future you may need Long-Term Care.  Policies with lifetime benefits are about as scarce as hens’ teeth and likely to cost you for the privilege.   Married couples can choose to purchase a shared-benefit policy that will allow you to pool your benefits.

If you are a woman, should you purchase Long-Term Care insurance?

Long Term Care expenditures represent a serious financial threat especially for women.  Women account for two-thirds of Long-Term Care claims.  The result is that women and especially single women tend to pay higher premiums than their male counterparts. One reason for this is that women make up approximately 80 percent of nursing home residents.  This is partially due to the fact that women live longer and generally marry men older than them and thus are available to provide care to men that is not reciprocated since the men die before them.  According to the National Bureau of Economic Research, a 65-year-old woman has a 44 percent chance of entering a nursing home during her lifetime and upon entering faces an average stay of two years.

The final analysis

Authors of a recent look at the market of Long-Term Care insurance point to evidence that as long as Medicaid exists to pay for some Long-Term Care, its existence will discourage individuals from purchasing private insurance.  However, everyone but the very poor runs the risk that as the government struggles to become more fiscally responsible, that the burden of care may shift from Medicaid to private payers.  In addition, the bare bones existence possible while on Medicaid may be reason enough for people to take a serious look at how they’ll receive care at the end of life.    Attend a LifePlanning Seminar to see how it might be possible for you to combine both the world of Medicaid and private pay in order to protect your assets from the effects of an unexpected catastrophic health issue, prevent your care issues from creating a burden on your children and help you to continue to age in the home you have chosen to age in.

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