The Impossible Reality of Long-Term Care Planning

As a financial planner, I have learned that finding a simple way to plan for long-term-care expenses is about as simple as talking Donald Trump out of tweeting. Ignoring the issue is a non-starter. According to the U.S. Department of Health and Human Services, 70% of those age 65 and up will need some sort of long-term care. Paying out of pocket is out of reach for most of us since the median annual cost of a private nursing room is $97,455. If you live in a major metropolitan area, you can expect to pay even more.

The long-term care insurance industry is in flux, with many carriers shutting down this arm of their business as claims are much higher than expected. Lastly, unlike life insurance, long-term care insurance premiums are adjustable. Therefore, if a company is struggling to pay its claims, you get to bail them out.

Now that we know there is no perfect, easy solution, let’s talk about what you can do. Long-term care insurance has been around since the late ’70s and became popular in the late ’80s. Policy sales grew exponentially until the 2000s, when premiums began to skyrocket. At that point, the best option for the consumer was to say, “No problem. I’ll self-insure.” Essentially, self-insuring is jargon for paying out of pocket.

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The problem? It works only for those with either several million dollars or else very little in savings. Those with several million could afford to pay out of pocket, and they would only opt for long-term care insurance as an estate-preservation tool. They might rather pay the premiums today and pass along a larger amount to their beneficiaries. Those with little or no savings will quickly run out of assets and rely on Medicaid to pay their expenses. This is not ideal and should not be thought of as a “plan.”

The rest of you fall into what I call “the dangerous middle.” You are the mass-affluent, whose financial situation could be ruined by the average long-term care event. For you, transferring some of the risk to an insurance company may be the only solution outside of eating well, exercising and crossing your fingers.

You’ve decided that you need to insure at least some of the risk, but how much is the right amount? I’ve come across many insurance agents who simply recommend a monthly benefit that aligns with the average facility cost. In other words, if a facility costs $10,000/month, you should have $10,000/month in policy benefit. I (somewhat) respectfully disagree. Given the high cost of long-term care insurance, it should be used to fill a gap, not cover the entire expense. So, if that same person has $6,000/month coming in from Social Security, pension(s) and investments, I believe she needs to insure only the $4,000 gap.

I also wouldn’t recommend stretching to buy a policy you can barely afford today. In 2016, Federal Long-Term Care Insurance Plan (FLTCIP, the plan for federal employees) premiums rose, on average, by 83%. One hike like that and you may end up dropping the policy you could barely afford in the first place.

Once you decide to transfer some of the risk and determine the proper amount, it’s time to select the policy type that is the best fit for you. Traditional long-term care insurance is the easiest to understand and the type that everyone bought until a few years ago. You pay a monthly, quarterly or annual premium, typically for life or until you need care. In exchange, the insurance company will offer you a monthly or daily benefit amount should you become eligible for care.

The pros: You are covering a big risk from both a likelihood of need and a dollar perspective. You are also getting more benefit per premium dollar paid with traditional insurance. The cons: Like any insurance that gets used often, it’s expensive. You also can’t predict what you will pay in the future. Premium increases can impact anyone, so long as the state insurance commissioner approves. Lastly, use it or lose it. Like all pure insurance, if you don’t use this benefit (which is a good thing), the premiums you paid are a sunk cost.

A few years ago, the life insurance industry tried to solve some of these problems. Its solution: hybrid universal life insurance with long-term care riders. Huh? Universal insurance is permanent insurance with flexible premiums. “Riders” are a more compliant word for “guarantee” in the insurance world. Essentially these are policies with set periods for the premium. You can pay for them all up-front or with some companies over up to 10 years. The premiums are guaranteed not to rise, and if you don’t use the insurance, it will pass to the next generation in the form of a death benefit.

Sounds pretty good, right? Once again, you are covering a big risk, but I wouldn’t consider this a highflying investment that you’re using for legacy purposes. The death benefits that pass along are lower than they would be without the long-term care component, and the monthly benefit amounts are typically a bit lower than they would be for the same amount in a traditional policy. Many people will accept that tradeoff for the certainty of knowing what their premiums will be.

One thing I failed to mention earlier is that this insurance is not easy to get. It takes a standard life insurance exam plus a memory test. If you have health or cognitive issues, you may be facing rejection. If you still want some sort of hedge, an annuity with a long-term-care rider may be the only option. These policies will typically increase your monthly annuity income if you enter a facility. Alternatively, they may be structured to pay you a multiple of your original annuity premium should you become eligible. This is often the easiest “insurance” to get and is better than nothing.

Before people hated the long-term care insurance companies for raising premiums, they hated them for refusing to pay claims. Unfortunately, individuals were often to blame here because they didn’t understand the original contract they signed. The devil is in the details. Every policy has three major components. The premium is what you pay in. The benefit is what they pay out. The language is what you don’t understand—but that you sign anyway. Language includes things like COLAs, elimination periods, shared care, home care coverage, etc. Make sure you do your research before you sign that thick packet.

Unless you fall above or below the dangerous middle, this is a game of hedging. A long-term-care event will change your lifestyle and likely the lifestyle of the family members around you. You are better off making it a detour for them rather than a total course change. Women end up in LTC facilities more often than men do — and for almost twice as long. In fact, 70% of the nursing home population is female. Therefore, if only one person in a couple can afford the insurance, it often makes sense for the woman to buy it.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.