Long-Term Care Planning

Guest Post by Michael Feinberg CLU, ChFC, Director of Insurance for Madison Financial Strategies

As the population has continued to age over the last 30-40 years, one major risk to the financial wellbeing of individuals and families in retirement has emerged above all else – the extreme cost and burden of long-term care – specifically ongoing care provided to individuals in their homes, assisted living facilities, and nursing facilities.

The monthly costs of this “custodial” type of care (assistance with your everyday activities required by the physically and cognitively impaired) is not covered by traditional health insurance or Medicare and can average anywhere from $6,000 to $20,000 per month depending on geographical location and the type/amount of care required.  Average durations of care required are approximately 3.5 years for women and 2.5 years for men, though there are some situations (generally cognitive disorders such as Alzheimer’s and other dementias) where these care needs can last 5-10 years or longer.  This presents a risk to retirement savings that can easily approach $300,000-$500,000 or more in today’s dollars and far more in the future as inflation continues to impact these costs.

In addition to qualifying for Medicaid and/or Veterans Aid and Attendance benefits, both of which involve working with a specialized Elder Law attorney such as Evan Farr at the Farr Law Firm, and meeting specific financial and medical guidelines, there are two primary options for planning for this care:  Long Term Care Insurance or “self-insuring,” aka putting your own assets at risk. Over the last 20 years there has been an evolution in Long Term Care insurance planning to where there are now multiple ways that an individual or family can plan for this risk. I will explain these options, and their pros and cons in this article. As with most financial/insurance products, no one solution suits everyone best, so understanding the options will help you choose the best way forward for your specific situation.

Option 1:  Traditional Long Term Care Insurance

Long Term Care Insurance hit the marketplace in the late 1970s, primarily to transfer the risk of nursing home expenses.  Over the last 40+ years, policies have evolved to cover all forms of care (nursing home, assisted living, and home/community-based care).  Care is generally, with few exceptions, required to be provided by “qualified” or licensed caregivers and is “reimbursed” by the insurer upon submission of proof of claims.

The determinant of eligibility for benefits involves your physician indicating that you require assistance with 2 or more of 6 “Activities of Daily Living” – eating, dressing, bathing, toileting, maintaining continence, and transferring – or require supervision as a result of a cognitive disorder. This is referred to as the “benefit trigger” for a claim.  There are a few different “features” in Long Term Care insurance policies that the insured can select that determine the ultimate level of coverage.

  • Monthly Benefit Maximum: This is the maximum amount per month that the policy will reimburse for covered care. Some policies use a daily maximum instead of a monthly maximum. If the actual expenses are less than the policy monthly benefit maximum, only the actual expenses incurred will be reimbursed. This is called the “reimbursement” model, where the insurer reimburses you for expenses incurred after reviewing invoices and details of providers.
  • Benefit Period: This is a minimum number of years of benefits that the plan will reimburse the insured at the monthly benefit maximum.  Options generally range from 2-6 years, with some policies offering longer options (10 years to “unlimited”); of course, the longer the benefit option and the higher your monthly maximum benefit, the higher the premium will be for the policy.  The combination of the monthly benefit maximum, multiplied by the number of months in the benefit period, produces a “total benefit maximum.”  For example, if you purchase a $9,000/month benefit with a 3-year (36 month) benefit period, your total “pool of benefits” available will be $324,000 ($9000 * 36). It’s important to note that with almost all Long-Term Care insurance policies, it is this total pool of benefits that defines the upper limit of your what your policy will reimburse, not the number of months or the number of years stated in the policy. For example, and the above policy that pays up to $9,000 per month for three years, if you only need to use $4,500 per month, your policy will last for six years.
  • Inflation Protection: This option provides a built-in escalation to the monthly and total benefit for an additional premium. The premium is built-in and level (subject to increase if the insurance company gets permission from the state Bureau of Insurance) from the inception of the policy, but the monthly benefit (and therefore the total benefit) increases annually by a certain percentage (typically 3-5%) and usually on a compounding annual basis. This option can be expensive, but valuable to an insured who believes they are 15-20 years or more away from an expected claim.
  • Elimination Period: This is akin to a “deductible” – this is a number of days from the beginning of a long-term care need before the benefits of the policy kick in. Typically, this will be 90-100 days, but options for shorter and longer elimination periods are available which have a resulting impact on the premium costs.

Long Term Care insurance has premiums which are “guaranteed renewable” – meaning they are designed to remain level; however, all plans give the insurer the limited right to raise premiums as long as they do so for all policyholders in a given insurable “class.”  Individuals cannot have their premiums raised, or policy nonrenewed/cancelled just for them due to any reason.  Insurer premium increases have been fairly common since 2010 due to the very extended low interest rate environment of the early 2000s (which resulted in insurance companies not earning as much interest on your premiums as they anticipated) and due to the fact that insurance companies did not accurately predict the number of people who would make claims on these policies.

Long Term Care insurance can be an excellent solution for some individuals.  Long Term Care insurance also carries some unique tax advantages, with partial or complete state and/or federal tax deductibility available to policyholders varying by age, location, as well as tax benefits to employers and employees when Long Term Care insurance premiums are paid by a company.

Traditional Long Term Care insurance is what I call “pure insurance” – meaning that it is meant to cover a specific risk (that of experiencing the costs of Long-Term Care) and only that risk.  If you do not require long-term care during your lifetime, there is no benefit paid and no refund of premiums paid. In this regard, it is similar to health insurance, homeowners’ insurance, and automobile insurance.

Option 2: Asset-Based or “Linked-Benefit” Hybrid Products

A second type of coverage for long-term care expenses that has become more and more popular over the past 20-25 years is referred to as “asset-based” or “linked-benefit” hybrid coverage. These policies are a blend of two types of insurance – an annuity or life insurance policy along with a long-term care benefit. This type of coverage came to the fore as an alternative to traditional Long Term Care insurance that would provide those who were willing to devote a higher level of premium investment at the outset in order to ensure that, at worst, they receive their money back even if there is no long-term care need.

Most asset-based hybrid products allow you to fund the premiums with either a single premium payment (lump-sum) or short-pay (e.g., 10 total annual payments) premium structure.  Premiums can be paid out of pocket, or in many cases can be paid with a rollover of funds from an annuity, existing cash-value life insurance policy, or even a qualified retirement account such as an IRA or 401(k). The benefit trigger for these types of policies is the same as for traditional Long Term Care insurance policies, and most asset-based hybrids also follow the same “reimbursement” model as traditional Long Term Care insurance policies.

Asset-based hybrid policies have 3 different methods for extracting benefits from the policy:

  • Surrendering the policy: If you surrender the policy before using any benefits, you will recoup anywhere from 10-100% of your initial premium investment, depending on the timing of your surrender (the longer you hold the policy before surrendering, the higher % of your premium you receive back).
  • Death: If you die without using any benefits for long-term care, a death benefit is paid out which generally equals or slightly exceeds the total premiums paid – if you have received a small amount of traditional Long Term Care insurance benefits, the death benefit will be paid minus any benefits you already received for Long-term care reimbursement.
  • Long Term Care: If you require long-term care, the policy will have similar characteristics to a traditional Long Term Care insurance policy – with a monthly benefit reimbursement maximum, a maximum benefit period, and inflation options selected at the outset.  If you were to continue to need long-term care, this benefit will greatly exceed the premiums you would have paid in.

Asset-Based Hybrid policies differ from traditional Long Term Care insurance because they provide a similar benefit structure for long-term care claims but with the added feature of ensuring that no matter what happens, the policyholder/family will receive at least their premium investment back. Also, unlike traditional Long Term Care insurance, premiums for this approach are guaranteed to never increase. The other main advantage is the flexibility of how premiums can be paid – which makes it a great solution for individuals who have ample retirement savings, deferred annuities, are over age 59 1/2, and don’t anticipate needing all of their retirement plan assets to live on during retirement.

Option 3: Life Insurance with Chronic Illness/Long Term Care Accelerated Benefit Rider

The most recent addition to the options for planning for long-term care is the concept of adding Chronic Illness or Long-Term Care riders to permanent life insurance policies. This is a further evolution on the Asset-Based Hybrids in that instead of purchasing a guaranteed return of investment (and the potential for a significant additional benefit if you require LTC), you are essentially pre-purchasing a set dollar amount of protection (e.g., $300,000, $500,000, $750,000), which you and your family will receive in full either during, or at the end of your life. There is less left to chance, with the only “unknown” being whether/when you will require long-term care or pass away.

The “body” of these types of policies is a permanent life insurance policy (either whole life or universal life) which can be structured to provide coverage for life (to age 95, 100, 105, or beyond depending on your preference). Premiums are established at the outset, are guaranteed to never increase, and can be paid over a specific period of time (1 year, 10 years, 15 years, etc.) or on a monthly/annual ongoing basis until such time as you have a claim (for long-term care or death).

The structure of these products is quite simple:  you select a policy face amount (e.g., $500,000), and a monthly benefit percentage (usually either 2% or 4%).  This determines the amount of your total benefit you will receive each month if you have a benefit acceleration for chronic illness or long-term care.  For example, a $500,000 policy amount with a 4% monthly benefit would provide you with up to $20,000 per month acceleration of your $500,000 when you trigger the accelerated benefit rider (the benefit trigger is the same as the other 2 types of products explained above).

The primary difference in these benefits compared to the other policies is that with the vast majority of these policies, this benefit is paid on an indemnity basis as opposed to a reimbursement basis.  This means that as long as you satisfy the benefit trigger, the full monthly benefit is paid to you regardless of:

  • how much you are actually spending on care that month;
  • where you are receiving the care; or
  • who is providing the care (including non-licensed family, friends, etc)

This means that even if you have a spouse or family member providing some or all of your care at home, or even if you only require a small amount of paid care, the full benefit is still paid out to you, without requirement for reimbursement claims to be filed, and these benefits paid to you each month can be used by you however you see fit (or even reinvested privately for later use). The accelerated benefits continue until either you exhaust the full benefit amount or until you die, at which point, any remaining benefit that has not already been paid out will be paid out as a death benefit to your named beneficiary(ies).

Advantages of this approach include a higher level of certainty as to the benefit received in the end, and generally a higher overall benefit payout for an insured who has a long-term care need of an average period of time or less (including someone who never needs care). The death benefit of this approach is much higher than the death benefit of the Asset-Based products or the zero-death-benefit traditional Long Term Care insurance policies. In fact, because there is a life insurance component to this coverage, having this type of policy may allow you to reduce other life insurance coverage you have, which may actually save you money on total life insurance premiums.

Things to be aware of with this approach is the lack of inflation protection – instead of building in inflation protection as a rider at a significant cost, there is no inflation protection, so the only way to ensure a higher benefit later on this type of policy is to purchase a higher benefit level from the start. Furthermore, the weakness of this approach is that unless you purchase a very substantial benefit amount ($750k-$1M+), you are likely to have more protection for a very lengthy long-term care need (6, 8, 10 years) with a properly structured traditional Long Term Care insurance policy or an Asset-Based policy.

These products are extremely appealing and priced ideally for applicants anywhere from age 35-65, and the younger (and healthier) you are at application, the better financial outcomes come from this approach.

Option 4:  Self-Insuring?

Prior to 2010, when traditional Long Term Care insurance was the primary and only insurance–based approach to protecting against long-term care, there was a valid concern as to whether it was more prudent to spend money transferring risk from yourself to an insurance company (knowing you may never get that money back), or to self-insure by either systematically setting money aside for long-term care, or by earmarking a chunk of your assets (100s of thousands of dollars) to be at risk in the event you needed long-term care. A risk was taken either way you decided to go.

However, in this age of hybrid products and life insurance acceleration riders, self-insuring makes much less sense because the newer options provide you with the same security as self-insuring (knowing that your money will come back to you and/or your family, often with a very competitive rate of growth) but also carry the insurance wrapper that provides for a much higher benefit relative to cost if you have an unexpectedly early care need or death. Essentially, if you have the assets to set aside and self-insure, then you have the assets to take out an asset-based or life-insurance-rider hybrid product and come out ahead of the game.

In summary, there are multiple options available to protect you and your family from the potentially devastating costs and burden of long-term care in the future. While the best option for you will vary depending on your age, health, financial situation, and family situation – the absolute worst option is inactivity.

Consult with an insurance professional with many years of experience and the ability to recommend all options for a review of your overall existing insurance protection and protection needs going forward and implement a proper solution for long-term care planning that fits your budget and retirement planning goals. I and my company, Madison Financial Strategies, and Evan Farr and his insurance company, Lifecare Financial Services, work hand-in-hand with clients of the Farr Law Firm to serve our clients who may benefit from our many years of combined experience in helping to provide you the best long-term care insurance solutions available for your specific situation.

Michael Feinberg CLU, ChFC, Director of Insurance for Madison Financial Strategies, has focused on long-term care planning since day one of his career beginning in 1995. Michael has worked with thousands of individuals and families in assessing and recommending the appropriate solutions to protect themselves against the high costs and burden of long-term care expenses.

Print This Page