Last posted by Ryan Wibberley | forbes.com
You’ve worked hard to build your wealth, so that you and your family will enjoy a special quality of life. Yet, what would happen to your financial independence if you were to suddenly fall ill and require long-term care? How would these unplanned expenses impact your financial well-being? Could the cost of care, bankrupt a spouse who is still healthy? These questions are on the minds of the 70 million baby boomers in the United States.
According to Genworth Financial, a private room in a nursing home averaged $92,378 in 2016, and a home health aide averages $46,332. In areas of the country where the cost of living is much higher than the averages, these figures can double. Many people commonly make the mistake of assuming that Medicare and other types of health insurance will cover the costs of long-term care. Medicare will only cover skilled nursing care other therapy services following a 3-day stay in a hospital. The first 20 days are fully covered Medicare, the next 80 days are partially covered by Medicare, and after that no benefits are paid by Medicare.
When faced with the decision to buy long-term care insurance coverage, I often see clients try to weigh the costs of the insurance vs. the cost of paying for the care out of pocket or “self-insure.” For example, a typical insurance policy for a couple in their mid 50’s can run about $3,200 per year, and there is no guarantee that these premiums won’t rise in the future. For the typical retired couple in the United States, $3,200 a year is a meaningful expense. Especially when they are paying for something that they might never use. Many people who are entering retirement typically are much more budget conscious than they may have been during their working years. Given this point, the idea that one would be paying for something that there is a possibility they might not use, is very unattractive. Why not just save the money and invest it, and then use the money for care of needed? is a common question I often hear.
How is the industry changing?
In the last several years, the insurance industry has realized that people really do need this coverage, but don’t buy it because of the use-it or lose-it feature of the traditional long-term care insurance policy. As a result, we have seen the introduction of hybrid or “linked-benefit” life insurance products. The main appeal for these products is that they combine life insurance with long-term care benefits by adding a long-term care rider to the policy. Whether or not you use the long-term care benefits, your policy will pay out some sort of payment as a death-benefit. Also, these policies have a much lower level of underwriting requirements, so it’s easier to get the coverage over the typical long-term coverage. Another attractive feature is that there won’t be any unexpected spikes in costs to the consumer, since the rate is fixed at the time of purchase.
Long-term care annuity products have also hit the scene in recent years. This is where a traditional fixed annuity investment is combined with a long-term care rider, that will provide an inflated income benefit for long-term health care expenses. These can be very attractive and easy for someone to obtain, that may have health issues and might other wise not be able to obtain other insurance coverage.
Other ways in which a life insurance policy could be leveraged to cover long-term care expenses include purchasing a policy that allows for an accelerated death-benefit. The policies have a feature that allows you to get an advance on the death benefits to pay for care while you are still alive. These policies are always permanent policies like Whole Life Polices or Universal Life Polices, and not Term Life Policies.
For many, having a plan to address the potential costs of care in their later years makes good financial sense. Ignoring this issue or somehow thinking that the government or your heirs will take care of these costs is likely not a good choice. The examples of long-term care insurance alternatives listed here, in my opinion, are great options for those individuals who are considering the “self-insurance” option. I do not believe that they are superior to a traditional long-term care insurance policy, but they make a lot of sense for those who are considering no coverage as an option.
If you have already decided not to purchase a long-term care policy, then I highly suggest that you speak with a financial planner and take a look at these alternatives. If you are considering purchasing a long-term care policy, then ask your financial planner about these alternatives, and weigh the benefits of each, before you make your final decision. The value of Long-Term Care insurance goes beyond financial considerations. Long-Term Care insurance is a vital part of future planning. If planned for correctly, it will make certain you maintain your financial independence.