Which Type of Long-Term Care Insurance Works for You?

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The cost of medical care has been a decades-old debate in America. Some argue health care should be free for all, while others support a privatized system. Regardless of where you fall on the issues, medical debt is a real concern for many Americans.

Nearly 4 million U.S. adults 65 and older reported unpaid medical bills in 2020, according to a Consumer Financial Protection Bureau report. Despite federal health care programs like Medicare and Medicaid, the same report found 68% of adults 65 and older who reported outstanding medical debt were covered by two or more insurance providers. Of those, 44% say they weren’t sure the bills they received were accurate, and 68% say they expected their insurance providers to cover part or all of the bill.

There can be a multitude of reasons for mounting medical debt, but regardless of how it builds, the consequences can be catastrophic. The good news is you can take steps now to mitigate medical debt in retirement.

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Part of planning for retirement involves planning for how to pay for long-term care. Long-term care is generally defined as the assistance a person with a serious illness, injury or cognitive impairment will need to navigate daily life. Long-term care planning largely focuses on how you wish to receive care, whether it’s in an assisted-living facility, a nursing home or via in-home care. Each option has its own associated costs, which may or may not be covered by Medicare or Medicaid — meaning you’ll need to either save up a boatload of money so that you can self-pay or invest in some sort of long-term health care insurance.

The basics of traditional long-term care policies

Long-term care insurance comes in two different types: traditional policies and hybrid policies. Traditional policies cover only the costs of long-term care services, such as nursing home care, in-home care, living costs at assisted-living facilities, adult day care programs and more. These policies provide a daily or monthly benefit. Coverage periods can range from one year to a lifetime. Hybrid policies usually allow you to make one lump-sum payment or pay premiums over time. However, traditional policies typically don’t offer a single-premium payment. Your insurer should be able to help you come up with a payment process that works best for you.

As for your specific benefits, they’re tax-free, and they can be protected against inflation — if you buy a rider for that option.

While traditional policies offer lower out-of-pocket costs, compared with hybrid policies, they have some potential drawbacks you’ll want to be aware of:

There are no guaranteed contracts, meaning the cost of your premium isn’t guaranteed (so it will likely rise over time).
These policies also have no cash value, which means no withdrawals can be made should you encounter a financial emergency.
Traditional long-term care insurance policies also don’t typically provide a death benefit. If you don’t use your benefits, you’ve essentially lost the money you’ve paid for this type of coverage. In other words, you use it or you lose it.
It’s also important to note that these policies typically don’t keep up with care and cost changes, which could lead to gaps in coverage.

How hybrid policies differ

If you’re looking for a policy that offers additional benefits, a hybrid long-term care insurance policy might be a good fit. These plans combine traditional long-term care insurance with life insurance or annuities. These plans allow you to collect dual benefits.

If long-term care is never needed, the policy still pays a death benefit to beneficiaries, which ensures that the premiums you’re paying are not lost. These policies also provide long-term care coverage similar to traditional policies.

Premiums for hybrid policies are also fixed, mitigating the risk of future increases. Some hybrid plans may even allow you to pay with a one-time lump-sum payment. If you decide to cancel the policy, many policies will refund your premium.

These policies also generate a cash value that you can withdraw or borrow against if needed. If not, the money can be left to the beneficiaries. These plans also may be more flexible on health requirements. The benefits paid out are tax-free, and they can be protected against inflation if you buy a cost-of-living rider.

However, like traditional policies, hybrid policies have some cons to consider:

One of the biggest drawbacks is a higher investment cost. Single-premium hybrid plans require a significant upfront investment, which can be unaffordable for some. Even those who pay premiums through payments over time face higher initial costs, compared with traditional long-term care insurance.
Depending on the structure, these policies can also be complex, and the benefits may vary.
The long-term care benefit amounts provided in hybrid policies may also be lower than what traditional policies offer, which could lead to gaps in coverage. Benefit periods may also be shorter.
There are also some investment risks to consider. For example, the funds used to pay for a single-premium hybrid policy could be invested elsewhere, yielding higher returns. These policies also offer reduced flexibilities, meaning funds aren’t as liquid as other investments.

The bottom line

Regardless of what option you choose, long-term care planning should be comprehensive. You’ll want to consider all factors when deciding what type of coverage to invest in. Do you have family members you plan to leave an inheritance to when you die? How and where would you like to receive care should you become disabled, injured or cognitively impaired? And how much risk can you afford? Can you afford to pay a premium that won’t be returned to you if the coverage isn’t used?

These are all important questions to ask yourself at the beginning of the long-term care planning process. Consider talking your answers over with a financial adviser. They can provide you with an in-depth analysis of traditional and hybrid plans, providing you with the pros and cons, so that you can make the right choice for your financial situation.

The content of this article is developed from sources believed to be accurate and complete; however, no guarantee can or is given for such accuracy or completeness. Nor is the information in this material intended as financial, tax or investment advice. Please consult your own qualified professional for specific information regarding your individual situation.

The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale, or the solicitation of such an offer, of any security, insurance or annuity product.

Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection benefit or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.

Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Joel Russo is a New Jersey native and has been in the financial services industry for more than 35 years. He is dedicated to helping his clients reap the rewards of a well-planned retirement. Unlike many financial professionals, Joel specializes in the retirement market, "the over-50 crowd” and has dedicated his practice to educating this community with workshops on topics relating to income from the right sources, taxes in retirement, RMD pitfalls and legacy planning.