17 May October 2018 – Long-Term Care Insurance

“To Buy or Not to Buy (Long-Term Care Insurance): that is the question”

To buy or not to buy long-term care insurance (LTCi) is a question William Shakespeare would likely be asking himself if he were alive and well today. The exorbitantly high costs of long-term care are a risk we all need to address in our planning. Perhaps Mr. Shakespeare’s literary brilliance could have helped him amass a fortune in today’s day and age, and another question he may be pondering is, “Should I just self-insure the risk?”

As part of his evaluation process, I imagine he would want to understand what types of policies are available in the market place and what the pros and cons were to different policy designs. This would be no easy task as there are many viable options to evaluate.

Below you will find a high level description of a few of the options currently available:

“Traditional” LTCi Policy: You pay an annual premium over your entire lifetime or until you qualify to receive benefits. To qualify to receive benefits you must be unable to perform 2 of the 6 activities of daily living (bathing, dressing, transferring, toileting, continence, eating) on your own or without substantial supervision OR you must have a cognitive impairment such as Dementia or Alzheimer’s. With a Traditional Policy, you must make several decisions around the design of the policy. A few of these decisions include:

1. Amount of the monthly benefit.
2. Number of years to receive benefits.
3. Elimination Period: How many days must you qualify for care before the benefits are paid? The options are typically 30, 60, 90 or 180 days.
4. Inflation Protection: Do you want your monthly benefit to grow with inflation?

Each of these decisions have a meaningful impact on the cost of a Traditional LTCi policy.

Statistics show that 70% of people turning age 65 will need some form of long-term care during their remaining lives (Source: LongTermCare.gov, Who Needs Care?). But for how long and how much will it cost? Will it be a short-term need that could be handled by existing assets or could it be a longer-term need that could cost millions? Unfortunately no one knows the answer to these questions ahead of time.

Purchasing a policy that may never pay any benefits creates justifiable concerns for some consumers. In response to these concerns, insurance companies developed Hybrid/Combination Products that combine the benefits of a long-term care policy with the benefits of a life insurance policy, thus guaranteeing that either the insured or a beneficiary of the insured will receive a benefit from the policy.

Here are a few of the attributes of a Hybrid/Combination Policy:

1. Long-Term Care benefit: Similar to a Traditional Policy, you make decisions around the amount of monthly benefit, how many years to receive benefits, elimination period and inflation protection.
2. Cash Values: These hybrid/combination policies grow cash values that you can utilize while you are alive. The growth of the cash value can vary significantly from policy to policy depending on the design.
3. Death Benefit: In the event that the long-term care benefits were not fully utilized and the cash value was not taken out of the policy, the beneficiary receives a death benefit from the policy. The death benefit can also vary significantly from policy to policy depending on the design. 

The Hybrid/Combination policy design is a good fit when an individual wants to help alleviate their long term care funding risks and also has a desire to have a death benefit in force and/or has desire to have a safe place for cash to sit and grow tax deferred.

Both the Traditional designs and the Hybrid/Combination designs can be appropriate depending on an individual’s goals and objectives.   A combination of a Traditional policy with a Hybrid/Combination policy can also be an appropriate solution.

So let’s get back to Mr. Shakespeare’s second potential question, “Should I just self-insure?” For many this is a viable option. However, the question itself is difficult to answer with confidence because we never know in advance how much the cost will be.

For most individuals, LTCi does not need to be an all or nothing proposition. For many, keeping some of the financial risk on their balance sheet while offloading some of the risk to the balance sheet of an insurance company can serve as a happy medium. One can create piece of mind by removing some of the risk while not breaking the bank by having a premium that has a major impact on lifestyle.

If and when an individual does decide to purchase a LTCi policy, another important consideration is determining how best to pay the premium. The Pension Protection Act of 2006 created the ability for individuals to do a 1035 Exchange with gains from a non-qualified annuity or from a life insurance policy to pay for Traditional LTCi policies with tax-free dollars. This benefit is impactful but often overlooked (or unknown). Business owners also have the ability to take an age-based deduction for Traditional LTCi premiums and this deduction can create a meaningful reduction in the overall cost of the policy.

So the question still remains…”To buy or not to buy?” As you can imagine, the answer will vary from person to person and from situation to situation. Please let us know if you need help with pondering this important question.

Stephen Ratcliffe, CFP