A Guide to Long-Term Care Coverage

Steve Soja, Wealth Manager, First Republic Investment Management, and John Williams, Insurance Associate, First Republic Securities Company
June 27, 2017

As healthcare costs and life expectancies continue to rise in tandem, so, too, does interest in long-term care (LTC) insurance.

And for good reason: Nearly 70 percent of people over age 65 will, at some point require assistance with basic daily activities — and the cost of that assistance is rising. Today, for example, the average monthly cost for a private room in a nursing home is $7,698 a month, according to the insurance company Genworth Financial. By 2046, however, that price tag is projected to rise by almost 150 percent to $18,685. Similarly, the cost of a homemaker health aide could very well jump from $3,861 a month to $9,372 in the next 30 years, and a private bedroom in an assisted living facility is set to more than double over the same time frame.

These figures become all the more daunting when one considers that Medicare doesn’t provide for long-term care in nursing homes or at home, and most health plans from employers do not include these benefits either. LTC policies can be a safeguard for your finances if chronic illness, diseases and other conditions require the need for long-term care.

Adding an investment component
LTC policies have been around for decades, but the nature of this type of insurance has changed significantly to keep up with the demands of the ever-shifting health care landscape.

Historically offered as a standalone policy, these traditional policies have some similarities to automobile insurance in which you pay premiums on a continual basis and the premiums are not returned if you never need the benefits. While no one wants to require care, many potential purchasers don’t particularly love the idea of paying thousands ofdollars in premiums and receiving nothing in return.

In recent years, a new type of coverage has evolved to address this issue. Hybrid, or combination insurance, bundles LTC plans with a life insurance policy which can build up a savings investment component over time. If the LTC component is never needed, the policies pay out as a death benefit. If you only use part of the LTC benefit, the remainder can be payable as a death benefit.

Policy with guarantees
Hybrid LTC policies possess a second key advantage: If you keep up your premiums, you have a contractually guaranteed death benefit, cash value and amount of LTC coverage.

In contrast, traditional or stand-alone LTC policies don’t provide these guarantees. In fact,insurers can petition state departments of insurance to raise the premium, which could make a policy prohibitively expensive to keep.

Another upside to hybrid policies is that the benefits can be drawn the moment a person cannot perform two of six “activities of daily life” such as bathing or dressing. With a standalone policy, benefits often cannot be drawn until 90 days after the person is provided with care, potentially leaving its holders with several months' worth of expensive bills.

People often need a variety of care
Benefits may not be utilized for many decades, so guarantees and the protection against inflation are two important considerations in selecting an LTC policy. In addition, you should be sure policies allow for care in a variety of settings, including in-home, nursing homes, assisted living facilities, and hospices.

It’s not unusual for someone to receive care at home for several months, followed by two years or more at an assisted care facility, followed by a stay at a nursing care center. Because it’s impossible to predict what the future will bring, you want coverage that is comprehensive.

Determine your coverage needs
The cost of an LTC policy is determined by many of the same factors as other types of insurance — primarily the age of the person, the amount of coverage offered and the maximum number of days covered.

For example, a 50-year-old man who purchased a Lincoln Moneyguard II hybrid LTC policy may immediately be eligible for $5,000 a month in LTC, with a total of $388,105 in benefits. Both those amounts could rise three percent per year to account for inflation. By age 70, he would be eligible for $8,768 a month in care, with $680,544 in total benefits.

The death benefit in the first year of the policy would be $126,870; by age 70, it would be $26,870. The cost of coverage would be $157.08 a month.

A 50-year-old woman could receive the same amount of LTC benefits and inflation protection. The death benefit in the first year of her policy would be $215,642; by age 70, it would be $155,835. The cost of the policy would be $256.92 a month.

Who should consider an LTC policy?
Realistically, anyone under the age of 60 should consider getting an LTC policy. But there are no hard-and-fast rules regarding age which means people in their late 60s and early 70s may opt for LTC coverage. That's why it's important that you balance your long-term care needs with the specifics of the policy.

Some people who have substantial assets and could “self-insure” still seek out LTC policies for the peace of mind. In fact, about a third of LTC policy buyers surveyed by the industry trade group America’s Health Insurance Plans indicated that protecting their assets and estate was the single most important reason for purchase.

Others opt to exchange an existing life insurance policy for an LTC hybrid plan. Such “section 1035 exchanges” can be executed on a tax–free basis.

The rules regarding an LTC hybrid policy can be complex. Be sure to discuss your specific situation with your financial and insurance advisors to ensure you have the security you want and need for the future.

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