Long-Term Care Insurance
Understanding Long-Term Care Insurance
One of the primary fears many of us have as we enter retirement is outliving our income. For those of us who need it, long-term care costs are becoming an increasingly large portion of our annual budget. The chances of needing some kind of nursing care are higher than you may realize. A long-term care event can cause distress for you and your family by significantly impacting finances, careers, lifestyles and emotions. With such a high probability of needing some form of long-term care, it’s important to protect your family by investing in long-term care insurance.
WHAT IS LONG-TERM CARE?
Long-term care includes skilled nursing care — such as the rehabilitative care needed after an extended hospital stay. But that’s just one of the many types of care available.
Long-term care also includes assisted living facilities. These are environments for individuals who can no longer function independently but don’t need daily care. These facilities offer occasional help with what are referred to as “activities of daily living.” These include help bathing, dressing, eating, transferring—getting in and out of bed or wheelchair—and walking.
It can also include home health care, that is, occasional help with the activities of daily living we just listed, as well as help with meals, budgeting, house cleaning, medication management, and even transportation. In this case, however, the help is offered by hired assistants who come to your home on a regular basis.
Long-term care even includes respite care—that is an occasional break for family members who provide long-term care services.
What are your options for long-term care? There are many, however your primary choice is between two options: self insure or purchase long-term care insurance
Self insure involves depending on personal savings and investments to fund any long-term care needs. This would give you complete flexibility but require that you be prepared for the potential expense. In fact, self insure is a choice many make by default-simply because they haven't planned for long-term care expenses at all. Another primary option is to transfer the financial risk of long-term care to insurance company through long-term care insurance. A long-term care policy can cover all levels of care, from skilled care to custodial care to in-home assistance. Many find it to be an appropriate way to protect themselves and their love ones from the potentially devastating cost of long-term care.
TYPES OF LONG-TERM CARE INSURANCE
There are three main types of long-term care coverage: • Traditional long-term care policies. • Hybrid insurance policies. • Long-term care riders on a tax-deferred insurance investment vehicle.
TRADITIONAL LONG-TERM CARE INSURANCE provides you a stated daily or monthly benefit should you have severe cognitive impairment or be unable to perform at least two of six daily living activities (eating, dressing, bathing, transferring, toileting, retaining continence). Long-term care policies are usually reimbursement based, meaning they will reimburse you for actual costs paid. Other features include:
• Elimination Period is the period of time you will pay costs out of pocket until the long-term care insurance pays benefits. Typically this is a 90-day period, but it can be adjusted to as short as 30 days or as long as 365 days. The shorter the elimination period is, the higher the cost.
• Benefit Period is the period of time you will receive benefits. This is typically three years, but it can be as short as one year or as long as lifetime benefits. The longer the benefit period is, the higher the cost.
• Inflation Protection is an option to have the stated benefit increase over time at a specified rate. Generally you can choose 3% or 5% and simple or compound interest. The higher the inflation protection is, the higher the cost.
• Partnership Plan may be an option if it exists in your state. A partnership plan requires a minimum level of benefits which will vary by state. By choosing the partnership plan, you are only required to spend down your assets to the value of the insurance purchased, instead of poverty levels, before state benefits will apply. Only traditional long-term care qualifies for a partnership plan.
The costs associated with traditional long-term care are not fixed and the premiums may increase over time.
HYBRID INSURANCE policies combine a permanent life insurance policy with a long-term care benefit. These policies can be indemnity (a set check amount each month/day, no matter the cost of care) or reimbursement based. These policies are attractive because they feature a fixed premium and should you not need long-term care insurance, they generally provide a death benefit to be paid to the listed beneficiaries. Hybrid insurance does not qualify for a partnership plan and elimination periods may still apply.
LONG-TERM CARE RIDER can be purchased or may be included on a tax-deferred insurance investment vehicle. This option typically guarantees a percentage, normally 150% to 200%, of a living benefit withdrawal amount. It is important to note that a long-term care rider does not generally require any underwriting, but you are drawing down assets from your own investment account and must still be unable to perform two of the six daily living activities or have a cognitive impairment. Long-term care riders do not qualify for a partnership plan and holding and elimination periods may apply. Long-term care insurance is a very important part of an overall financial plan. Should you have a long-term care event, it could significantly impact your finances or the finances of your family. Long-term care can help mitigate that cost and relieve the stress on your budget. A full financial analysis will help ensure protection from potentially detrimental long-term care costs by working to reduce gaps.