Long term care planning is one area that individuals often overlook when creating a financial plan. This is usually due to them being in the best of health and not looking down the road for the next 50 years. Although medical technology and advancements are paving the way for longer lives, it could also give a false sense of security that there would not be a need for long term care. It will not surprise me if there comes a time when people easily reach age100. However, it would also not be a surprise if these individuals would require assistance with at least two of the six daily living activities.
It amazes me the number of people who think they will never need skilled nursing care and if they do, they think that Medicare will take care of it. Medicare covers long term care for a limited period of time. It will pay for skilled nursing care services if you meet certain criteria. For example, you must have a recent hospital stay for at least three days prior to admission to a Medicare certified facility within 30 days after your previous hospital stay to receive skilled care. Once an individual meets these criteria, Medicare will pay 100% for the first 20 days, then you are co-responsible to pay for days 21 – 100. After day 100, you are 100% responsible and expected to spend down your assets before Medicaid will pay for skilled nursing care services if you do not have a plan for long term care.
People learn this lesson the hard way because they do not completely understand the limitations of Medicare and the difference between Medicare and Medicaid. Medicare is a federal health insurance program that we pay into while working and qualify to receive coverage at age 65. Medicaid is the federal and state joint public assistance healthcare program for the poor and they are the largest payor of long-term care services in the country. One must qualify for Medicaid and that qualification consists of having little to no assets for Medicaid to pay for long term care services.
We are living longer and by 2030, seven out of ten people will need long term care services during their lifetime. The chances are high that you may need long term care services and would have to spend down your retirement savings and/or sell your home to meet qualifications for Medicaid without a plan. This could impact your spouse’s or children’s lifestyle and retirement. One medical crisis could wipe out the legacy that you had hoped to leave your children. However, you can mitigate the impact of a long-term care event and preserve your assets if you plan properly with the appropriate long term care insurance.
There are insurance products that can protect your assets or leverage your assets that you for a long-term care event. These contracts will provide a benefit if an individual cannot perform two or more of the activities of daily living or have a serious cognitive impairment. Typically, they have a 90- day elimination period that you will cover the expenses before the insurance kicks in on the 91st day.
Let us discuss the types of long-term care insurance available in the market. Please research or speak with an insurance professional such as me to learn more.
Traditional Long-Term Care Insurance
Provides a low-cost benefit to cover long term care services. The benefit period is typically two to five years, and a three to five percent cost of living adjustment rider is an additional option. The downside of this type of solution is that if you do not use it, you lose it. In other words, you will lose all of your premium payments if you never trigger a need for long term care.
Hybrid or Asset Based Insurance
The hybrid and asset-based insurance contract have become more popular in recent years. It has a cash value and a death benefit if the owner never uses the long-term care benefits. These solutions consist of a permanent life insurance policy or an annuity with a qualified long-term care policy. It can provide a lifetime benefit along with a three to five percent cost of living adjustment rider. People can set aside assets to “self-insure” and leverage those assets to provide a larger benefit. This long-
term care product death benefit and cash value are secondary benefits. Also, the owner can elect to have their premium dollars returned if they decide to surrender the contract. The downside is that the cost can be expensive as a single premium or up to a 10 year pay.
Permanent Life Insurance with a Qualified Long-Term Care Rider
This is similar to the “asset based” or “hybrid” solution because it also utilizes a permanent life insurance policy. The difference is that the primary purpose of the policy is the life insurance death benefit, and the qualified long-term care rider is the secondary benefit. This is the just the reverse in comparison to the “asset based” insurance. The qualified long-term care rider accelerates typically between two to four percent of the death benefit each month until the death benefit is exhausted, or the insured dies and the beneficiary receives the residual death benefit. The advantage is being able to use one product that takes care of two needs, but it also can be a disadvantage and leave the beneficiary with no or a reduced life insurance benefit.
Life Insurance with a Living Benefits Rider
Living benefit rider is now available on permanent and term policies. How the company pays out the benefit can vary greatly. They can operate in a similar fashion to a qualified long term care rider where between two to four percent of the death benefit is accelerated each month until the death benefit is depleted, or the insured dies with the residual death benefit paid out to the beneficiary.
There are other insurance products that use a lien or discounting method to determine how much of the death the benefit you could accelerate for a chronic, critical, or terminal illness. The advantages and disadvantages remain the same as the qualified long term care rider. The advantage of the lien or discounted method is that there are no monthly charges, and the rider is not morbidity underwritten. The disadvantage is that the cost of the rider is on the back end and the cost and benefit amount is unknown until time of claim. This could leave the beneficiary with no or a reduced death benefit.
All these solutions have their advantages and disadvantages and can be used together to mitigate them. They may not fully cover 100% of all long-term care needs; however, if it covers 80% or even 50%, it is better than having zero percent (0%).
It is important to have a long-term focus when planning for your retirement years with an understanding that long term care is no longer just for the elderly. Increasingly young people are experiencing debilitating chronic diseases without a long-term care plan. It is the reason I advise all of my clients to make long term care a priority in their financial plans as you never know what may happen in the near future.