If you are 65 years old, you have a 70 percent chance of needing long-term care. Can you afford $90,000 per year? If not, you may want to include LTC insurance in your financial plan. Or, you can take the chance of being in the lucky 30 percent!
The U.S. Department of Health and Human Services estimates the average 65-year-old has a 70 percent chance of needing long-term care during his or her lifetime. And, according to Genworth, the average daily cost of a private nursing home room in Indianapolis is currently $244 per day. That's $89,060 per year! Is that enough to convince you to begin researching long-term care insurance options?
Being knowledgeable of the available insurance options will help you determine the plan that's right for you. Here's what you need to know to get started.
What Is Long-term Care?
Long-term care is assistance required when someone cannot perform at least two of the six activities of daily living (eating, bathing, transferring, toileting, dressing, and continence). The level of help can range from custodial to skilled care.
Long-term care insurance covers the expenses associated with this assistance, where health insurance (including Medicare) does not. If you can't afford to pay out-of-pocket, then it is important to consider buying long-term care insurance to pay for at least a portion of the cost.
The basic components of long-term care insurance policies are:
Daily/monthly benefit: The amount the insurance company will pay for the cost of care.
Benefit period: The number of days/months that the policy will pay benefits.
Elimination period: The amount of time one is receiving care before benefits are paid. (Typically 0-100 days.)
Inflation protection: Benefit amounts will increase at a specified rate of inflation. Since claims are typically made 20+ years after purchasing a policy, inflation protection can make a significant difference: $89,060 today equates to $236,303 in 2037 at a 5 percent inflation rate!
Traditional versus Hybrid: What's what?
Understanding the difference between traditional and hybrid policies and determining the best policy for you isn’t an easy task. So what's the difference?
Traditional Coverage: In exchange for a premium, a “traditional” policy will pay benefits according to the terms of coverage. Care could be received in your own home, nursing home, and/or assisted living community depending on the policy. Traditional insurance has a “use it or lose it” concept, the same as your homeowners or auto policies. There are no refunds, even if you never receive care. That can be an uncomfortable concept to stomach!
Hybrid Coverage: Hybrid long-term care policies combine long-term care coverage with life insurance or a deferred annuity. With a hybrid policy, you or your heirs are guaranteed to receive some type of benefit. If you require care, the long-term care insurance will kick in. If you never require care, then the death benefit of the life insurance will pay out. If you require care for only a short period of time and don’t exhaust your coverage, your heirs could still receive a portion of the death benefit.
Typically hybrid policies require a large, single premium upfront, and potentially on-going payments, depending on the type of coverage purchased. Note: If you have a life insurance policy with significant cash surrender value, you may be able to fund a hybrid policy with the cash value via a 1035 exchange.
Which Policy Is Best For You?
The first step in selecting a long-term care policy is to determine what you are trying to accomplish. Does a comprehensive and customizable traditional policy that focuses exclusively on long-term care give you peace of mind? Or, does the guaranteed benefit available through a hybrid policy better suit you?
It is important to also take into consideration your health status, as well as your family’s health history. Both traditional and hybrid policies require a health and cognitive evaluation, but underwriting for the two policies is not the same. Underwriting for a hybrid policy is primarily based on life expectancy, while underwriting for traditional long-term care insurance is more focused on your physical and cognitive health. Therefore, you may be insurable for one policy and not the other. Preexisting conditions may limit your traditional coverage options, but not necessarily hybrid.
There's no "one size fits all" solution to long-term care insurance. Because this is an important financial decision, it is recommended that you work with your financial advisor to determine whether you need coverage and if you do, the amount and type of policy that is best suited for you.
Sarah Mahaffa, CFP is a Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Sarah.
By Ryan Collier Director of Investment Management, Bedel Financial Consulting Inc.
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