Long Term Care Funding Options: Are You Confused?

Mon, 01/04/2016 - 4:13pm
Cartoon person scratching head and standing next to question mark.

When it comes to options regarding how to fund a future Long Term Care need, it is easy to be confused.  If you are one of the many who find this process difficult to navigate, you are certainly is good company!

Let’s Start With the Basics 

What is Long Term Care (LTC)?  Simply stated, this is custodial type care which is chronic in nature.  That is, it is care which is expected to be needed for the long haul, usually at least 90 days or more.  Medical insurance, such as Medicare or Health Insurance typically does not cover LTC—or if it does, only for a short period of time.  Some examples are care needed after a stroke, a debilitating accident or illness, or simply care needed by someone with dementia who needs substantial supervision in order to be safe.  The list of possibilities is exhaustive, but the end result is the same: you or someone you love needs care for an extended period of time.  

What is Custodial Care?  Help is needed with bathing, dressing, toileting, continence, eating, or transferring.  These are called the “Activities of Daily Living.”  (ADL’s).   Your LTC insurance carrier will require that you be unable to perform two of these six activities in order to receive benefits OR that you need substantial supervision due to a “cognitive impairment.”  This could be due to a dementia or other problem that makes you unsafe to be alone.  

What is the best age to purchase Long Term Care?  There are many factors to consider.  
I would say that most of my clients fall into the 52-65 age category.  I bought my own policy at age 48, and have never looked back.  There are graphs that address the “cost of waiting.”  But in reality, the best answer is:   invest while you are healthy. You really don’t save in the long run.  For example, if you could insure now and get a 15% preferred discount, then numbers going forward if you only get a standard rating become skewed.  Not knowing the age at which you will need care, also makes the answer to your question difficult.  Underwriting is quite different from life or health insurance.  

Articles that promote a perfect age to purchase a policy do not address health thoroughly, if at all.  The articles are basically looking at dollars and longevity tables, rather than the real world of health and underwriting.  If someone cannot qualify due to health reasons, then their age is a moot point.  The article authors have little understanding, if any, of how challenging LTC underwriting can be.  Carriers that have chosen to stay in the market are tightening their reins.  Carriers collectively pay $10 million a day in claims, and pay greater than 98% of claims submitted.  Therefore, they are more careful than ever to not buy risk.

What are my odds?  Most of what you read will say your chance of needing care is at least 70% for men and even higher for women.  As an advisor in the business for over 16 years, most of my clients see themselves in the percentage of folks who will never need care.  It wouldn’t matter if I said chances were 50/50, 80/20, or 65/35 because seeing yourself needing care in the future is a hard pill to swallow!   I prefer to say “Your odds of needing care are much greater you will need care than you will not.  And if you’re female, your odds are higher than males.  

Getting lost in statistics is generally not worth the effort it takes to digest the information.  People will accept the fact that they will die someday.  Hence, planning ahead with life insurance is easier to choose than protecting one’s future due to needing care that may or may not happen. But the question must be asked: “If you needed care today, what assets would you use to fund the care?  How long will those assets last?  What if you and your spouse both need care?”  Who would you ask today to care for you?

How long do people usually need Long Term Care?   Statistic are all over the board.  Years of care range from 1 to 5 years.  There are so many variables, the numbers get skewed: age at disability, what the disability is, male, female, income level etc.   But here are some *facts to consider:

  • If men live to age 65, their average age at death is 86.6  2 cartoon figures building a bar graph
  • If women live to age 65, their average age at death is 88.8
  • Every 67 seconds someone in the US develops Alzheimer’s.  By 2050 someone will develop the disease every 33 seconds.  Almost 2/3rds are women. 
  • Affluent Americans live longer, and thus use more care.  

Doesn’t Medicare pay for Custodial Care?  Medicare and Health Insurance do not pay for long term care expenses, unless for a short period of time.  For example, Medicare will pay for care in a skilled nursing unit—if qualifications are met—for up to 100 days.  Also, there is no government program in the works to care for us as we age.  It is simply not fundable.  According to an article by the Wall Street Journal in 2013, the unfunded liability in Medicare is already $34 Trillion over the next 75 years. 

Why do people invest in LTC plans?  Reasons vary, but the most common concern I hear in my practice is that clients are concerned about not being a burden on their children.  Often, these are adult children who are in the midst of caring for a parent or loved one.  They are seeing firsthand the financial, emotional, and physical burden care-taking has placed on their family.  The second most common reason is asset protection. Clients either fear they will not have saved adequately for a future LTC event, or they choose not to spend hard earned assets on care.  Rarely, a concern is voiced from a single person with no children.  “Who will be there to care for me”?  This argument—if we have children or are married they will care for me—is ludicrous.  Not being single does not equate to a built in care-giver system.  Care-giving is emotionally and financially exhausting.  Many are simply unable or unwilling to render care.  The flip side is, the care-giver becomes ill themselves.  This is very sad to witness.    

Tax Advantage: Another reason to plan with LTC coverage:  I am seeing a steady interest in LTC insurance as a tax strategy for higher income employers.  Premiums can be 100% deductible to C-Corps.  In addition, premiums paid on behalf of an employee are not counted as income to the recipient.  Long term care insurance products are not subject to the discrimination rules which are applicable to health insurance, so therefore can be a very meaningful way to reward /retain higher income employees.  Policies are portable, so the employee can take the policy with them when they retire.  Multiple options for premium payments can be set up, to incentivize tenure.

Workplace LTC options:  Generally, the best employee options will be for a workplace with at least 10 or more employees.  Plans can be voluntary, employer paid, or employer/employee premium-shared.

Return on Investment:  Google to your heart’s content.  You will see positives and negatives.  The negatives typically come from those who make their living selling annuities and other investments.  The objection will always come up: “But what if I pay and never use my policy? —I’ve spent all that money!!”  The positive comments will be from folks who have watched a loved one, parent, or friend zip through their life’s savings to pay for an LTC claim.  They have personally witnessed financial, physical, and emotional devastation.  So what is the answer?

  • You cannot out invest a traditional LTC policy.  My mantra has always been “What you pay for an annual premium will be about 1/10th to 1/12th the cost of care itself.”  Put another way, current costs of facility care in Oklahoma range from $4500/month to $6500/month.  A couple can purchase a very meaningful benefit together for $4500 to $6500 annually!  One annual premium = one month of care for one person!  An annuity or investment vehicle simply cannot compete.   Couples can also purchase a rider called “shared care” which allows benefits to be left to the surviving spouse when death occurs.
  • For those who are risk-adverse, and who have substantial assets, there are Life/LTC combo products which have become quite popular.  See below.

What are Life / LTC Hybrid Plans:  Sometimes called “combo plans”, these are policies that combine life insurance with long term care insurance.  They serve a niche consumer market, but work very well for the right person.  These make sense for the higher wealth individual who has “lazy money” in an investment vehicle with a poor interest yield.  A typical scenario would be dollars sitting in a low yield money market account.  The best fit would be someone who:

  • Is considering self-insuring anyway, but wants to use assets more wisely.  
  • Has other life insurance needs met, but likes the idea of having LTC available
  • Likes paying a single premium or pay for less than 10 years
  • Is risk adverse, and wants an answer for the fear of “Use it or lose it” 
  • Needs a tax advantage—especially C Corps
  • Likes being able to get money back, should they reconsider (each product’s premium return coverage works differently)

It should be stressed that [if a combo product is considered, and the investor truly wishes to make an impact on future LTC needs] a large life insurance benefit will need to be chosen. Buying a combo is NOT “killing two birds with one stone”. When a claim begins in the future, the life insurance proceeds of the policy will be spent first.  After the life benefit is used up, then the LTC benefit portion begins to be used.  The LTC portion is always just a % of the life portion.  Therefore, the bigger the life benefit, the bigger and more meaningful the LTC benefit.  

Premium vs Value:  Be leery of choosing LTC coverage by premium alone.  There are many variables to consider.  Some important benefits and features are:

  • Are benefits paid monthly or daily?
  • What is the elimination period?  How does it start?
  • What are the company ratings?  What is their rate increase history
  • Is there a benefit to pay family members or unskilled caregivers?
  • Is there coverage for home care, as well as, assisted living and nursing home?
  • How long do my benefits last?
  • Do I need inflation protection?
  • Can I use my benefits internationally?

I appreciate your interest in Long Term Care planning.  It is a vital part of preparing for longevity.

*(AALTCI Source Book 2015-2016) 

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