The takeaway: With or without insurance, long-term care could cost you a bundle. This post is designed to help ensure you don’t spend money to protect against something Uncle Sam might pay for. However, if Uncle Sam won’t pay, this post can help you decide if long-term care insurance is worth it. Should you decide it is, the post tells you what your insurance choices are.
Ahoy, Boomers! This is the sixth post in the series on long-term care. (Hey! You’ve got a lot of money riding on this issue. It pays to have all the facts.) Having read the series, you’ve discovered the motto for the long-term care industry: spending your kids inheritance so they don’t have to.
You haven’t read the series? (It’s listed at the end of this post. Read it and save.)
Today’s post will consider your current assets, which will in turn drive whether you should even consider the insurance. And if you decide to buy, it’ll describe the choices available to you.
First things first: your money
Let’s make sure that you don’t:
- spend money to protect against something Uncle Sam might pay for anyway;
- buy too much insurance if Uncle Sam won’t pay; or
- kill yourself because you’ve had to read one more post about long-term care.
Boomer, please!!! That last bullet should read: that you don’t miss an opportunity to self-insure if you have the means to do so.
Guidelines to eliminate–or at least reduce–your long-term care insurance costs
Boomer, before deciding if you should buy long-term care insurance, or how much, decide where you fall on the money continuum below. Use this continuum and let these guidelines direct your course of action.
Guideline #1. You think you might qualify for Medicaid, whose requirements are discussed here, because:
- you’re single and your monthly income is less than $2,382, or
- you’re married with a combined income less than $4,764; and
- your total assets, whether married or single, are less than $130,380.
MediCAID is like ‘welfare.’ It pays for nursing home care. MediCARE is senior health insurance you buy at 65. As a rule, it does not pay for long-term nursing home care.”
Guideline #2. Your assets are between $131K and $1M. You might need to buy insurance, but not for as much coverage as you think. Consult (only) an elder law attorney for help with “Medicaid planning.” Medicaid planning is code for shielding your assets. Want details? Again, check-out the Medicaid post. (This post is best enjoyed with a stiff adult beverage.)
Guideline #3. You have money flying out the Wazoo. “Wazoo,” from the Latin meaning: a purse or wallet containing over $1 million in assets. If this is you, you likely can self-insure two people. (2 people x 5 years of care x $100,000 annual nursing home costs = $1 million.) Not sure how I got these numbers? Check out this post for calculating your costs as well as your odds for needing long-term care.
Consider the above before making any decisions about buying long-term care insurance. Then make sure you understand the three major types below.
Three major types of long-term care insurance
- traditional (i.e., stand-alone) policies;
- hybrid policies; and
- policies as part of a Continuing Care Retirement Community package.
Look at the different types, weigh the advantages and disadvantages, and figure out which option most closely aligns with your preferences. (None are perfect.)
Traditional (stand-alone) long-term care policies do not require the initial cash outlay of hybrids.”
Traditional Long-Term Care Policies
- how old you are when you buy;
- the length of the “elimination period” (i.e., how long you must wait for the policy to start paying once it’s determined you need long-term care); and
- whether the policy provides inflation protection and increases with the rate of inflation, which you can find here.
Advantage of a traditional policy.
The main advantage of these policies is that, while expensive, they don’t require the initial cash outlay of newer products offered by the industry. (These products are discussed in the next section.)
Disadvantages of a traditional policy.
First, while L.T.C. stands for long-term care, it’s also the motto of traditional policies: Losing The Cash.
I’m kidding. (Call off the lawyers!)
Seriously, if you never need long-term care, you lose all the money you’ve paid in premiums. For example, if you buy a policy that costs $5,000 a year in your sixties, when you reach your eighties, you’ve paid $100,000. If you drop dead playing pickle ball, you paid a big chunk of change for a product you never used.
Second, traditional policy premiums increase at unpredictable rates, as discussed here. These increases have at times been so high, they’ve forced some policy holders to cancel their insurance. (The National Association of Insurance Commissioners suggests your premiums never exceed 7% of your income. (p. 34)
The long-term care industry has sought to overcome these disadvantages by introducing a new type of policy, called “hybrids.”
Hybrid policies deliver a nuclear hit to your wallet. However, if you never need the policy, your heirs can get some of your money back.“
With hybrid policies, you typically make one lump sum payment, such as $100,000, to the insurance company. (Some companies let you finance the lump sum payment for a limited time.)
As with traditional long-term care insurance, hybrids:
- cover you for two to five years;
- require a 30- to 180-day elimination period, and
- offer optional inflation protection so that the amount you’re covered for increases by 3% to 5% a year.
There are two main types: life insurance hybrids and annuity hybrids.
- Life Insurance hybrids. These policies combine long-term care and life insurance. If you never need long-term care, your heirs receive the value of the policy’s death benefit when you die. But if long-term care is needed, the policy covers your care, instead of paying a death benefit. Bud Boland over at Kiplinger describes a situation where one of his clients paid $110,000 for a life insurance policy that had a $144,000 death benefit but provided $432,000 in long-term care coverage.
- Annuity hybrids. Investopedia’s Amy Fontinelle described a situation where a 65-year old woman purchased a single premium $100,000 deferred annuity, with a 5% compound inflation provision. If she ever needed long-term care, the annuity could be used to roughly fund the following long-term care benefits: $300,000 at age 66, $400,000 at age 70, $500,000 at age 75, $600,000 at age 80, and $700,000 at age 85.
Advantage of hybrid. An advantage of both life insurance and annuity hybrids is that if you never need the insurance, your heirs get back much of the money you put in. (As of this writing), hybrids eliminate the unpredictability of traditional policies, discussed above.
Disadvantage of life insurance and annuity hybrids. The disadvantage of hybrids are the opportunity costs you pay For example, say you buy a $100,000 life-insurance or annuity hybrid earning 4% a year. At the end of 20 years, you’ll have earned $219,112. Not bad, savvy Boomer.
But had you deposited $100,000 into an index fund earning a very typical 7% a year, you’d have had $386,968 at the end of 20 years. Your opportunity cost is the difference between these two alternatives–roughly $167,856.
(Ouch!) Everything in life has its price.
Still another disadvantage, is that hybrids deliver a one-time nuclear hit to your wallet. In contrast, if you pay, say, a $5,000 premium each year on a traditional policy, you have money left for other things—like investing in index funds or visiting your grand kids.
Don’t let the fear of eventually needing long-term care insurance rush you into a product that might not be right for you.“
Which do you buy: a traditional or hybrid policy? Here’s the bottom line.
Go with the traditional policy if:
- you don’t mind year-to-year unpredictability in your rates and
- you don’t want to make the six-figure payment required of hybrid policies.
Go with the hybrid if you:
- want your heirs to get back the money you paid in, should you never use the policy and
- you don’t mind a one-time six-figure insurance payment for the policy.
Still not loving your choices?
Then consider a Continuing Care Retirement Community.
Long-term care via Continuing Care Retirement Communities
Hold it right there, Boomer! Do.Not.Move.
We’ve covered a lot of ground today. To discuss Continuing Care Retirement Communities in any detail would exhaust you and kill me! 😯
For now, understand that they’re housing developments that let you age in place, while also providing on-site long-term care. In some communities you can use your hybrid or traditional policy and in others you don’t need either one.
The next column in this series will give you all the details: the good, the bad, and the step-barefoot-on-an-ant-hill ugly.
Sit tight for now. And in the meantime…..
Ignore the fear
Don’t let the fear of needing long-term care insurance rush you into a product that might not be right for you. Contemplate your health history. Weigh the odds, look at the costs, and don’t be intimidated into making a decision that’s not right for you.
After all, you weren’t born yesterday.
You got this.
Long-Term Care Series
- Continuing Care Retirement Communities – Four Ways to Figure Out if They’re Worth the Money