Prepare for Your Care

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Most Americans — the affluent included — cite major medical expenses not covered by their insurance as a major financial concern. As health care costs rise, long-term care insurance is increasingly becoming a greater part of the financial planning process.

 

At least 70 percent of individuals over 65 are likely to require some form of long-term care service during their lifetime, according to the United States Department of Health and Human Services. Such costs can be substantial. The national median cost for a home health aide for an eight-hour day is more than $45,000 annually; full-time nursing home care has a median cost of roughly $80,000 annually; and it is expected that in 30 years, one year of care alone will cost $250,000, according to the American Association for Long-Term Care Insurance Sourcebook, 2012, and a Genworth 2015 Cost of Care Survey conducted by CareScout.

 

By helping provide for your care in cases of chronic illness or disability, you can help ensure your care and estate plans will be carried out according to your wishes. 

Without planning, a long-term care event can potentially wreak havoc on a retirement portfolio or estate plan, says Tim Dona, Insurance Group Product Manager at U.S. Bank.

 

One of the biggest mistakes is being unrealistic about how long the benefits should last and how much will be needed. Advancements in health care have allowed us to live longer, but living longer can have insurance policy implications. “The old school of thought was you only needed two to three years of long-term care benefits,” Dona says. “Now, it is recommended that you consider planning for three to five years.” He suggests talking to your financial advisor, as individual needs will vary based on your unique situation.

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Failure to Plan

A common misconception is that purchasing long-term care will cover every expense should something happen, Dona says. In reality, there isn’t a way to entirely plan for a long-term care event. That’s because no one definitively knows if they will face a life-altering illness or a situation that requires long-term care. If they do need long-term care, there is no guarantee on how long they will need that coverage. Many people fail to plan because they don’t like to think about a potential long-term care event like serious illness.

 

It’s all about deciding the level of risk you are comfortable accepting. Do you want to help cover the bulk of the exposure with insurance? Or would you rather buy less insurance and use liquid assets and cash to cover costs?

 

“You can’t always mitigate the risk of full long-term care expenses,” Dona says. “The decision becomes how much of the risk you want to try to mitigate by minimizing potential exposure or if you want to rely on your assets.”

 

Cutting Through the Confusion

If you find the process of purchasing long-term care insurance confusing, you’re not alone.

 

 

Fifty-seven percent of respondents to the Genworth survey didn’t purchase long-term care insurance because it’s too bewildering. “Every company has coverage that is similar but not identical,” Dona says. “Different carriers have different riders and opportunities to help build out the policy."


For example, in addition to a traditional policy with an annual premium that you may lose if you don’t need the benefit, some carriers offer a single premium hybrid product that combines whole life and long-term care access or coverage. This type of policy allows you to transfer an asset as a single premium to a new contract that may eliminate future rate increases. Such plans may be attractive because they typically provide access to cash values as well as a death benefit, and they can offer some coverage to the insured in case of a long-term care event.

 

“One of the concerns clients have today is that long-term care insurance is like auto insurance,” Dona says. “If you don’t need the benefit, you lose the premiums paid into it. With these hybrid long-term care products, that’s not necessarily the case.”

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That’s because a hybrid policy approved by the Health Insurance Portability and Accountability Act combines the long-term care benefit with a policy based on an annuity or life insurance.

 

If it’s used for qualified long-term care, there’s a favorable tax treatment on the money received, and you may use a portion of life insurance or annuity — up to its entire death benefit, as an advance on those benefits, Dona says.

 

“But if you never use it on qualified long-term care, then you may have the full annuity or life insurance benefit. It’s about leveraging the initial purchase to a greater benefit,” Dona says, which means the death proceeds may also avoid income tax by the beneficiary.

 

Deciding the Type of Coverage

The product you choose depends on your health, assets and care priorities (whether you want to age at home or in a care facility, for example), says Bob Provencher, a Wealth Management Consultant with The Private Client Reserve of U.S. Bank. He adds, however, that not all long-term policies are approved in every state. The National Association of Insurance Commissioners recommends selecting a comprehensive policy that includes the following features, among others:

  •  At least one year of coverage for nursing home or home health care
  •  Coverage for Alzheimer’s disease
  •  Inflation protection
  • A guarantee that the policy will not be canceled due to deterioration in health

 

When to Purchase a Policy

To qualify for a comprehensive plan, it’s preferable to purchase a long-term care plan early while you are healthy and of less risk. If your health is good, qualifying for coverage shouldn’t be difficult.

 

According to the American Association for Long-Term Care Insurance, if you buy a policy at age 55, your average premium for up to $305,000 worth of benefits will range from $1,325 to $2,550 per year, compared with the average annual premium of $3,250 for first-time policyholders 65 and older. If you wait until your 70s, you may not be eligible for a policy at all: Forty-five percent of applicants 70 to 79 were denied long-term care coverage.

 

The Power to Choose

Long-term care affords the power of choice and makes it possible for you to be in control of your health care decisions. While private or government health insurance plans can cover medical costs in later life, such plans generally do not factor in coverage for assistance with daily living needs, which might include bathing, dressing, meal preparation and transportation.

 

“Even for families with substantial assets, long-term care insurance may be a good investment”, says Marvin Feldman, President and CEO of LIFE, the non-profit insurance education foundation. “It gives families the option of not having to liquidate assets to pay for long-term care,” he says. It can help protect future inheritances and “may prevent a tremendous number of family arguments.”