Should You Buy A Long Term Care Insurance Policy ???

Long Term Care insurance is somewhat controversial. More so than most other insurance solutions, the decision as to whether you should own such coverage is somewhat up for debate. Just like most financial decisions, this should be addressed on a case by case basis.

For many of us, one of our biggest fears would be ending up in a nursing home. Or perhaps needing to go to one but not being able to afford the place you’d like. The harsh reality is this type of care is expensive. According to the 2015 Genworth Cost of Care Survey, the median annual cost of a room at an assisted living facility in the U.S. is $43,200. That same private room at a nursing home averages almost $91,250 per year. In more expensive regions of the country such as the state of New York, the cost of care jumps to $49,200 & $136,437 respectively. As a result, the average individual should at least educate themselves as to what options might best serve them.

Covering the Costs of Long-term Care…There are four main ways that you can pay for long-term care. They are…. Medicare, Medicaid, self-insuring (covering the cost yourself), or purchasing a long-term care insurance policy. Many people seem to believe that Medicare is the solution. However, Medicare only covers long-term care costs under very limited scenarios. Medicaid will cover these costs, but it is a needs based program that essentially requires you to be both sick and indigent in order to be eligible for aid. Many spend quite a bit of time planning their estate in advance as to help protect assets they would like to leave to their heirs. This is becoming increasingly more difficult as asset transfer look back periods have been increased to 5 years. It is quite possible that this time frame may be extended further in the future, and the ability gift assets out of one’s estate in advance may be more difficult. As demographics change over time in an aging population, it is likely that it will become more and more difficult to qualify for different forms of government assistance. Medicaid is typically a last resort for someone who needs care, but has already spent through the majority of their personal assets. Because Medicare and Medicaid are not the best of solutions, it is important to have alternative plans to cover the costs. Some may have the resources to self-insure. For others, purchasing a long term care policy may make more sense.

How Does Long-term Care Work….Long-term care policies typically pay a specific dollar amount for each day of care that is covered by the policy. Services can include home health care, adult day care, respite care, care in an assisted living facility, or in a nursing home. The policy benefits are typically triggered when you need help performing the normal activities of daily living (ADL), such as bathing, eating or dressing. In the United States there are currently about 10 million people who need help with these types of daily tasks. As life expectancies rise, you can expect those statistics to grow. The President’s Council of Economic Advisors estimates that 70 percent of people who reach the age of 65 will require long-term care in one form or another before they die.

Is a Policy Right for You...LTC policies can and usually are quite expensive and are not for everyone. If you simply can’t afford to pay the annual premiums, you don’t have sizeable assets, or social security is your only source of income, long-term care insurance will most likely not be a suitable purchase for you. If, however, you want to protect personal assets for heirs and can afford the premiums, purchasing a policy is worth the look. Some of us may purchase a policy simply for the peace of mind, as to not be a burden to your relatives. In some cases a policy is purchased simply to be able to get into your choice of facilities or even to be cared for at home as long as possible. Whether or not it makes sense to purchase a policy is most certainly a case by case scenario.

What to Look for in a Policy…If you conclude that a long-term insurance is worth considering for your circumstance, there are a few things you should consider when purchasing a policy. Some policies exclude certain pre-existing conditions. Most have an elimination period once you enter a facility before benefits will commence. You should be sure that the insurance company offering the policy is reputable and financially stable. Many policies have benefits that max at a certain level. The policy should cover a broad spectrum of services from home care to assisted living and nursing home care. Preferably, it should be an indemnity reimbursement policy once you qualify for benefits rather than an itemized bill submitted for costs that have to be subsequently approved.

Another consideration that should be looked at is the possibility of coupling life insurance with a LTC policy. While we generally do not look at permanent life insurance favorably as an investment instrument, policies with a LTC rider should be considered. In this type of policy the LTC benefits can be paid in advance of the death benefit of the policy. It is essentially an advance on death benefit proceeds, and often pays more in aggregate LTC benefits than the death benefit. This is typically done with a cap on the monthly benefit. The advantage is simply that a traditional LTC policy can be a sizeable expense. However, you may die suddenly and have never utilized the benefit, effectively leaving substantial assets to the insurance company. While this is no different than car insurance or homeowners insurance, the difference is LTC policies often carry a sizeable premium. When coupling the life insurance policy with a LTC rider the total cost of coverage is often even more expensive, but you can guarantee that some form of a benefit will be distributed. If the LTC rider is never activated, your beneficiaries will receive the death benefit as an alternative. Additionally, the underwriting process to determine insurability may be more stringent, as the insurer must weigh the risks of not only a LTC need, but the certainty of death. Those upfront costs associated with these policies are typically more expensive. However, because many offer a fully refundable premium at any point in time, they may seem attractive to an individual holding a heavy cash position which is earning a nominal interest rate in a liquid savings account. Transferring that cash into such a policy will continue to provide liquidity along with insurance protection.

When and How to Apply...Being approved for long-term care insurance becomes more difficult as you get older. As a result the average purchase age is 57. According to the American Association for Long-Term Care Insurance, about half of those waiting until age 70 will be declined due to health reasons.

It is a good idea to look not only at the insurance company’s credit rating, but also its track record in this field of insurance. Many insurers have left the LTC insurance market because they found it too difficult to make actuarial projections on the viability of such an insurance product. Many still offer policies that are subsidized at the state level for part of the cost. In New York State there is the “NYS Partnership for LTC”. One downfall is that subsidies such as the NY state plan precludes you from utilizing the policy benefits out of state. With so many of us relocating in retirement, these policies while more cost effective, may not be viable. However, many states with similar partnerships have agreed to meet the obligation of another state plan for those who have relocated. Some companies have had substantial premium increases after the policy is issued. In some cases you can purchase what is known as a “Ten Pay Policy”. This allows you to pay increased premiums for 10 years and the policy is considered to be paid up and no longer subject to policy increases. Other policies such as those coupled with permanent life insurance allow you to pay for a policy at an increased premium up front, and in return you can request a full refund should you change your mind and never utilize the benefit.

Tax Benefits…One little known benefit is that existing annuity contracts that are Non-Qualified (purchased outside of an IRA or employer based plan) are permitted to take a tax free withdrawal on any gains as long as the proceeds are utilized to fund the LTC premiums. This can be done on a monthly basis or as a lump sum through a 1035 exchange. However, the annuity payments must be made payable directly to the insurer of the LTC policy. (It should also be noted that not all policies accept 1035 transfers).

As you can see, there are many different things to consider before purchasing long-term care insurance. Deciding which option is the best solution can be difficult, but receiving proper council and doing some research will allow you to make an informed decision. Some forms of coverage make sense for those who are concerned with protecting the value of their estate. Others who may have no heirs to be concerned with may see no issue with spending through their assets in order to provide for their care. In such instances, acquiring coverage may not be such a strong priority.