In my experience, the least-held type of retirement asset is a long-term care policy. Most clients I meet have some combination of retirement assets – a 401(k) or some other tax-deferred account, life insurance on themselves or a spouse, perhaps a pension from their former employer, and legacy-planning products such as a trust.
A long-term care policy is an agreement with an insurance company that outlines what the company will financially assist with if the policy holder is unable to perform any two of the six activities of daily living (ADL). The six ADL’s are: bathing, eating, toileting, dressing, transferring and continence. If the policy holder is unable to perform any two out of the six, the insurance company will then provide a pre-determined daily allotment to use for care for a pre-determined amount of time. In exchange for this coverage, the policy incurs a yearly premium. These premiums, which can be substantial, are likely why many retirees opt out of purchasing a long-term care policy – this, paired with the “it won’t happen to me” attitude that many of us can be guilty of.
To say that this need is grossly under invested is an understatement. An individual who is 65 years old today has nearly a 70% chance of requiring long-term care in their lifetime. Despite this fact, long-term care insurance remains underutilized among retirees when compared to other assets. The need for long-term care is very real and if not properly planned for, could end up putting the financial burden and emotional stress of care on your loved ones.
Older traditional long-term care plans demanded a non-refundable yearly premium. This meant that if the policy owner never used the plan, the premiums they had paid into it were lost. Many long-term care options were quite reasonably priced in the late 90’s and early 2000’s but as the general population aged and began to utilize their plans, insurance companies began to run into trouble handling the payouts. The benefits being paid out were far higher than the new premiums that were being brought in. In order for companies to keep up, they began to raise plan premiums substantially, some as much as 50%, year after year. In the most severe cases over the last decade, I have seen plans more than triple in cost in the space of just a few years.
Upgraded Long-term Care Plans
In order to combat this drastic rise of premiums, as well as eliminate the public’s fear of investing money into a plan that goes to waste if unused, a new and improved long-term care plan was created. This new long-term care plan works first and foremost as a life insurance policy. This means that money put into the plan would have a guaranteed tax-free death benefit for the insured’s heirs if the owner never needed to use the long-term care benefits. If the insured did meet the condition of needing assistance for any 2 of the 6 ADL’s, then the insurance company would pay an increased amount of benefits than their initial investment, from 200% to 600% more than what was initially invested.
Most clients I meet with who don’t have long-term care state that they “don’t want to pay high prices for a plan they may never use.” These clients are what we call “self-insuring” and may end up putting themselves and their family in a much worse position financially and emotionally than if they had purchased a long-term care policy. These upgraded plans are much easier to understand than their predecessors, and most importantly, will always return the unused funds to the policy holder’s beneficiaries.
Highlights of the Upgraded Long-Term Care Plans
No longer will the client need to worry that their premiums will skyrocket. The premiums of these new plans are locked in at the rate and benefit they will ultimately pay out. These plans can be purchased as single premiums or can be spread out over a number of years and are guaranteed not to rise.
Care in-home or in-facility
Many older plans offered great daily benefits if you were to go into a nursing facility but would cut 50% or more from that daily allotment if you opted to age in-home instead. These new plans, however, will allow the same payout for in-home care as in-facility care. When presented with these two options, most individuals will choose to stay in their homes as long as possible. It’s more convenient, comfortable, and can be retrofitted to accommodate any new needs at a much lower cost than what a facility would charge.
Upgrade out-of-date life insurance plans
Many of our older clients have large cash-value life insurance plans they don’t need. These types of plans can be quite costly, and can be transferred into a newer, upgraded long-term care plan without incurring the income tax applied if they were to surrender the policy. By doing this, the owner has more care protection for their lifetime and can still leave a tax-free inheritance to their heirs if the policy is never needed.
Many of these newer plans require less underwriting in order to qualify. Underwriting is the process of determining if you are eligible for insurance or not. This is great for clients who do not want to undergo a full health exam to qualify for long-term care.
Return of Premium
Many of these new polices allow the owner to take back all or most of their investment after a certain amount of time while they are alive, should they desire. This option is great for someone whose need for long-term care diminishes and wants their investment back at a later date without having to pay any penalties.
The benefits that are paid out can be even higher in the future if the policy has an attached inflation rider. An inflation rider will add a certain yearly compounded percentage to the payment from the insurance company. This will help cover more in the future as costs for care are sure to continue to rise.
At the end of the day, protecting yourself from rising long-term care costs will benefit everyone around you including yourself. As I say during my monthly retirement workshops, “you don’t buy long-term care for yourself, you buy it for the ones you love.”
To learn more about what new options for long-term care could work for you, please don’t hesitate to contact us. Click here to schedule a complimentary consultation.