Long-Term Care Insurance vs. Life Insurance with a Long-Term Care Rider

Q. My mother was in a nursing home for about two years prior to her death, and it cost the family most of her savings. I don’t want the same to happen to me and my husband. Therefore, we are trying to make the decision of buying either long-term care insurance or life insurance with a long-term care rider to pay for long-term care. I know that you are both and Elder Law Attorney and that you offer specialized financial services. Do you have a recommendation or a list of factors that we should consider in making our decision?

A. A recent survey shows that as many as 70% of Americans will require long term care at some point in their lives, so it is wise to think about it and plan for it. Currently, costs for long term care facilities in the D.C. Metro area can run anywhere between $120,000 – $150,000 annually. If you multiply that figure by the average stay of approximately 3 years, it comes to quite a significant sum! Most of us would be broke if we had to pay that amount!

So . . . it definitely makes sense to consider long-term care insurance or a life insurance policy with long-term care benefits. Which is better is different for every person and depends on a variety of facts and circumstances, but here is some general guidance.

Long-Term Care (LTC) Insurance

To be honest, there are not many advantages these days when it comes to traditional, stand-alone term-care insurance policies, and most analysts suggest you should avoid these stand-alone policies altogether. The only pro is that there may be some tax deductibility for the insurance premiums you pay as an individual (if you itemize deductions) to the extent that the premiums paid, along with other medical expenses, exceed 10% of your adjusted gross income. Many states also offer tax incentives (credits/deductions) to encourage the purchase of LTC insurance.

The drawbacks of traditional long-term care insurance policies are as follows:

· Stand-alone LTC policies can be very expensive to purchase.

· These types of policies have no cash value.

· You have to be fairly young and healthy to qualify.
· Your premiums might increase drastically as you get older, even if the LTC insurance company told you that you were “locking in” your premium at the time you purchased the policy.

· Some policy holders have experienced their premiums doubling or tripling —becoming so high that they ended up having to cancel their policies in later years, losing all the money already put into the policy. Or, they were forced to accept drastically reduced benefits in order to keep their premium from increasing.

· In most cases, when long-term care benefits are actually paid, they are usually far below the actual cost of care, and then they eventually run out.

· What if you’re among the 30% of people who don’t end up needing long-term care? Or, if something happens to you before you can use your benefits. People generally don’t like the “use it or lose it” nature of these benefits.

· Companies have underestimated the true cost of coverage and have been struggling to make good on all their promises. Read our article about how Penn Treaty faced liquidation for more details.

Many insurers have come to realize that this type of stand-alone policy has become unattractive to buyers, so they have developed more user-friendly annuity and hybrid life insurance packages.

Hybrid Long-Term Care Life Insurance Policies

As you may know, I offer specialized elder-focused financial planning services through Lifecare Financial Services, a company I started over 10 years ago. I am also the co-author of the Northern Virginia edition of the book, “Tax-free Money for Long-Term Care,” where I discuss the advantages of hybrid LTC life insurance policies, especially policies that utilize money in an IRAs or 401(k) to purchase long-term care coverage.

Among our offerings are hybrid products such as annuities and life insurance policies that provide a long-term care benefit which is much less risky than the traditional long-term care insurance described above. The appeal of these hybrid products is that you are guaranteed to receive the benefits you pay for, and these products are usually easier to qualify for than traditional long-term care insurance.

These hybrid products can:

· pay for some or all your long-term care costs should you need care;

· provide you with income or provide your heirs with a tax-free life insurance benefit if you don’t use up all the benefits for long-term care;

· offer you a 100% money-back guarantee should you change your mind.

A hybrid life insurance policy with a long-term care benefit may be worthwhile for you to consider if you have liquid assets that you probably will not need for retirement income.

For example, let’s say you’re a healthy 60-year-old woman with $500,000 in an IRA that you probably won’t really need for retirement. You could certainly hold onto that $500,000 in the IRA (hoping it grows with the market, but perhaps investing very conservatively so that the money does not get potentially cut in half if we have a huge market crash similar to crash that happened in 2008) and simply use that money to pay for long-term care if and when needed. Or, as an alternative to self-funding your long-term care needs, you could choose to move $250,000 of the $500,000 in your savings into a linked-benefit policy. In doing so you could receive:

· a $507,000 tax-free life insurance benefit to your beneficiaries should you not need long-term care; or

· up to $10,140 per month tax–free for 50 months to pay for Home Health Care, Assisted Living, or Nursing Home Care; or

· your entire premium of $250,000 returned to you should you change your mind.

Please note that these numbers are very person-specific, and you should not rely on this as financial advice, as this is general information only.

I generally do not recommend traditional long-term care insurance for the reasons described above. I do generally recommend and offer hybrid policies with long-term care benefits, when appropriate.

Talk to an Experienced Elder Law Attorney/Financial Advisor First!

If you have done your research and decide that long-term care financial planning might be right for you and your family, you should first meet with an experienced Elder Law Attorney, such as myself, who also does elder-focused financial planning, in order to understand all of your options. Hybrid financial products provide numerous options, and there are also dozens of long-term care asset protection strategies, including the Living Trust Plus™ Medicaid Asset Protection Trust, Veteran’s Aid and Attendance Benefits (for eligible Veterans and their spouses), and Medicaid Planning.

To discuss the strategies listed above further, or if you have not done long-term care planning, estate planning, or incapacity planning (or had your planning documents reviewed in the past several years), please call us to make an appointment for a consultation:

Fairfax Medicaid Planning: 703-691-1888
Fredericksburg Medicaid Planning: 540-479-1435
Rockville Medicaid Planning: 301-519-8041
DC Medicaid Planning: 202-587-2797