Many clients have questions about whether they should buy long-term insurance or self-insure. If you are able to afford self-insure, based on your financial planning, the decision comes down to whether or not you want to share the risk with an insurer. If possible, the goal is to eliminate the worst-case scenario.
There are many long-term care options offered by insurance companies. These include annuities and LTC with life insurance. It is also important to decide what you want to cover and how much you can afford to pay for premiums. You don’t know what the future holds and there are many unknowns, such as when and if you will need care and how much the insurance company might raise premiums over the long-term. This decision is based on what you feel most comfortable with.
Also, you will need to ensure that you are eligible for long-term health care. You might be denied coverage if you are unable to bathe or dress yourself, or if you have Alzheimer’s disease or other serious illnesses. If you and your spouse decide to buy policies together, you may be eligible for a discount on your premium. State-specific differences in long-term care costs or increases in premiums may also apply.
You can use some policies in any way you like. For example, if you have a three year benefit option with a $6,000 starting monthly benefit, that means you have $6,000 total coverage for 36 months. That’s $216,000. As an example, if you started using the benefits in the current year and used the maximum benefit each month, you’d run out of money within three years. If you use 50% of the monthly benefit, your coverage will last for twice as long or even six years.
According to a study from Boston College, the majority of people buy a long-term policy that covers care at home. According to the study, there is a 44% and 58% lifetime risk of needing nursing care for older adults. The study also found that the average nursing home stay is shorter than expected: it takes 10 months for a single man, and 16 for a female.
There are many things to consider before you make a decision about whether or not you want to pursue a policy.
What length of time should you insure? What are the benefits and drawbacks of insuring for shorter or longer periods?
The Society of Actuaries’ studies about long-term care insurance claims showed that the average time it took for claims to last more than one year was 3 1/2 to 4 years in 2014. Two to four years is an average time frame. Three years is the norm. The policy buyer will pay more if the policy benefits are extended and the amount is higher. It is a compromise between using and accumulating the benefits or not using them at all. The LTC policy’s benefit period is the most important. Clients might pay thousands of dollars for premiums, but get nothing in return.
Will the premiums for insurance rise? If so, how much?
Insurance companies often increase premiums. You don’t know when or if this might happen. For example, you might pay $3,000 per year for a policy that lasts 15 years. The insurance company may decide to increase your premium to $5,000. You can cancel your policy if you feel that this is too expensive after 15 years. You may pay for peace of mind, but you will never be able to claim it, just like homeowners insurance.
Clients who are unable to afford self-insure right now due to insufficient assets may be able buy a LTC plan during their younger years. As the years go by, clients may reach a point in which their assets are sufficient to support long-term care. At this point they have the option of ending their policy or changing their coverage. Remember that LTC expenses can move laterally when one person enters it. If you do, you may sell your home and car to pay for care. However, if a couple goes into LTC, each spouse will still have their normal living expenses so you will be faced with higher costs.
Is it a cash plan or an indemnity plan?
Cash plans offer more flexibility because you receive a cash benefit that equals the entire daily benefit and not reimbursements for actual expenses. If the actual cost of care exceeds or equals the daily benefit, a reimbursement policy will not pay the full daily benefit.
Policies that provide cash benefits are more costly. You have the option to pay a relative or friend to take care of you if your cash plan is not available.
Does the policy reset if you leave care?
A restoration of benefits rider is an option on some policies that increases the amount of care your policy covers. The benefit will reset to the maximum amount if you are in care and you recover. If your lifetime benefit was $300,000. You used $150,000 and then you go into care, the benefit will reset to the original $300,000.
Is there a policy with compound interest?
While compound interest policies offer better inflation protection, they may also have higher premiums. Some policies pay a simple interest rate of 5%, while others have a compound interest rate of 3%. Simple interest, depending on the policy and rate, may be better over the long-term as the breakeven point might not happen until later. Inflation can be compounded. However, if an LTC policy uses simple interests, inflation will eventually surpass the simple interest so the policy’s actual costs are less.
Is there a waiting period for the policy?
The rider will be charged more for a shorter period. During the waiting period, you will be responsible to pay all costs.
LTC is often a poor investment. It is a personal decision. If you decide to buy it early, you will be able to make a better investment because you paid less upfront premiums and you are using the benefits. The policy’s return will be lower the longer you wait to use it. This can be very beneficial if you use the policy within the first five to ten years. The benefits are not as useful if you wait to use them. If you have the money, it might be worth saving up to get your own insurance. There is no way to predict when or if an event will occur.
