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Long-term care can be an emotionally charged topic. After all, no one wants to think about themselves or their loved ones being incapable of living on their own. But if you want to make a smart financial decision and protect your nest egg, long-term care insurance is a must.
Take Bob and Mary, for example. They weren’t always smart with money, but they worked hard and built up a nest egg of $300,000.
When Bob was 67 years old, he developed Alzheimer’s disease. At first, it wasn’t too bad. Mary used some of their nest egg to hire a homecare specialist to help with Bob a few hours every day. But as his condition worsened, Bob had to go into a nursing home.
Sadly, after five years in the home, Bob passed away. Mary, now 72, is healthy as can be for her age, but she has to work full time because her husband’s stay in the nursing home devoured most of their nest egg.
While owning a nursing home for 15 years, I saw first hand that Bob and Mary’s story is not unique; it happens to many people every year .
With long-term care insurance in place, you can keep it from happening to you. My husband and I purchased long-term care insurance for ourselves many years ago. The benefit for us included being able to have our business pay the premium as a deductible expense.
What Is Long-Term Care?
As people age or become ill, they sometimes need help doing daily tasks like getting dressed, bathing and more. Long-term care (LTC) provides people with those non-medical type services—but it’s expensive and most often needed by those suffering debilitating medical conditions like strokes, Parkinsons, or Alzheimer's. According to the Alzheimer’s Association, the estimated cost for end-of-life care in 2016 ranged between $217,820 and $341,651. Most health and disability insurances won’t cover long-term care, but long-term care insurance will.
What Does Long-Term Care Insurance Cover?
Why You Need Long-Term Care Insurance
Did you know that the American Association for Long Term Care Insurance predicts 68% of people turning 65 today will need long-term care at some point? That's over two-thirds of all seniors. It may be unsurprising then that 10 million Americans already have long term care insurance.
The cost of care has been rising over time. Estimates currently range from an average annual cost of $43k for care in an assisted living facility, to $92k for a private room in a nursing home. In 20 years that price is projected to increase to an annual cost of roughly $131k- a 42% increase.
Purchasing long-term care insurance can help you have peace of mind. You’ll know that if you become ill, you can afford the care you need and still have enough money for you and your spouse to eat. Plus, your kids won’t be burdened with huge payments for your care.
Now you may be thinking: What about government programs? Can’t they help? Don’t make the mistake of believing Medicare will cover long-term care costs. It doesn’t. Medicare will only cover up to 100 days of skilled care while in a nursing home. And while Medicaid—the government program designed for people who truly don’t have any money—will cover long-term care expenses, it should never be your first choice.
Types of Long-Term-Care Insurance
Traditional Long-Term-Care Insurance
The median cost of a semiprivate nursing home room nationwide is $85,775 per year, according to Genworth’s 2017 Cost of Care Survey. Assisted living runs $45,000 annually, and home health aides charge $135 per day. Traditional long-term care insurance ensures that no matter where you need care, you’ll have the money to cover at least a portion of the bill. A lengthy stay at a nursing home is less likely to drain your savings or wipe out your estate.
According to a LifePlans, Inc. survey, the average annual long-term care insurance premium is $2,727. That provides a benefit of $161 per day for nursing home care for a set number of years (four is most common). Even better, you can include an inflation rider that increases your daily benefit over time, typically by 3% a year. The policy is triggered when you can no longer perform two out of six activities of daily living such as dressing, bathing, eating, transferring to a wheelchair, etc., or suffer from severe cognitive impairment. Benefits start after a waiting period of 30–90 days.
Hybrid Life and Long-Term Care Policies
Another increasingly popular option is a policy that combines life insurance with long-term care coverage. With a hybrid policy, you can access the death benefit—the money that your beneficiaries would receive in the event of your death—while you are still alive to pay for long-term care . And if you end up not needing care, your heirs get the full payout. Rates are considered “noncancellable,” which means premiums are fixed for life (and often paid all at once up front). Hybrid policies should be a last resort and only used if you can’t qualify for a traditional long-term care insurance policy due to medical underwriting.
A single premium means you’ll have to come up with tens of thousands of dollars at once—money you could have otherwise invested for retirement. You may also be buying life insurance you don’t need. And, unlike traditional long-term care insurance, the premiums for hybrid policies are not tax-deductible.
Similar to whole life insurance, the biggest risk of these hybrid policies is that you could forego thousands of dollars in potential earnings on your investment. The policies don’t guarantee that you’ll earn market rates; the benefit paid is only the face value of the policy. Those lost earnings could end up making hybrids the most expensive long-term care policy of all.
When to Buy Long-Term Care Insurance
First, it’s best to get long term care insurance when you’re young. As with life insurance or health insurance, the older you are, the riskier your policy is considered, and the higher your premiums.
Getting a policy at age 45 compared to age 60 can save you $440 a year on premiums for a standard 3-year long term care policy. Not only that, but if you wait to apply for long term care insurance once you know you need it, you’re likely to get denied.
That being said, you don’t want to be too young (most life insurance companies won’t even let you apply if you’re under 30). A good way to evaluate the value you’re getting for your long term care insurance is to compare it to self-insuring through savings over the same period of time.
The situation is different when you compare it to that of an eligible 45-year old married man, who would pay $88 a month for the same policy, and would receive only $41,507 in a mutual fund by age 65. A substantial sum still to have for savings, but a third as much coverage for long term care.
The main trade off between LTC insurance and self insuring is is how much you value the flexibility of being able to spend your own savings, compared to the peace of mind of knowing you’ll get a higher coverage amount should you need long term care.
Income level is the other main determinant. If you have, or project to have a net savings of over $1M, you probably can pay for own care. Similarly, if you make below $22,000 a year, long term care insurance likely is out of your reach, and you may qualify for medicare and medicaid services.
However, the vast majority of Americans will fall between these two income thresholds.
If you're looking to buy long term care insurance, you should always consider a few things. First, do you perceive needing long term care, and are aware of what it entails, and how it differs from health insurance? Second, do you think you can pay to self insure, and are you aware of how much your policy costs compared to savings towards a specified amount yourself?
When you have evaluated those decisions (hopefully with a financial advisor) and made sure long term care insurance is right for you, the next step is to determine what level of premium cost and coverage you're comfortable with.
The best way to buy long-term care insurance is to go to an independent insurance broker. They will shop among several different insurance companies to find you the best price based on your particular location, situation, age, health, etc. Long-term care is an important decision, so make sure you get a professional on your side.
If you need a financial advisor, or are interested in learning more about long term care insurance: contact me at 740-618-2559 or email me at email@example.com.