Pricing Long Term Care Insurance
November is National Long-term Care Insurance Awareness month, so in memory of my father who had Alzheimer’s, I thought I’d dedicate an article to this important subject.
What is the cost of long term care insurance?
As always in any complicated transaction – the answer is always “It depends”.
There are four primary determinants that I will address: Which company, What type of policy, the Owner’s personal factors and how much coverage.
Which Long Term Care Insurance Company ?
Insurance companies value risk pools differently from one another. They often are looking to segment the market of potential buyers and focus on attracting one group versus another.
This means there are some companies that are more advantageous to younger people in their 50s whereas other companies target older people over 70. Also, they can price policies differently based on single vs married couples. Additionally, some are more accepting of certain pre-existing health conditions than others. What this means is that as a buyer you want to make sure you evaluate your options and use a broker that works with multiple companies in order to vet the best long term care insurance policy for your situation.
What type of policy?
Historically the market started with “Traditional” stand alone long term care insurance policies. These worked much like term life insurance wherein you paid a premium for coverage and only benefited from the policy if you needed it. Over the years these policies have become very expensive as costs of care have escalated and life expectancies have extended.
Rising costs of traditional long term care insurance policies has led to the creation of “Hybrid” Policies sometimes called “Linked Benefits”. These are stand along polices combined with life insurance or an annuity. These policies require more of an investment, but if never used the policy is paid out at death. Often depending on your personal situation, they also include a return of premium on demand making them very flexible.
The hybrid policy can be purchased using funds available or by exchanging an existing life insurance or annuity policy in a tax-free exchange. One policy allows you to use money from your IRA or 401k to invest coverage. Additionally, the pension protection act from 2006 clarified that benefits paid from a hybrid policy are tax-free as long as the benefit doesn’t exceed the greater of the actual cost of long- term care or that year’s daily benefit cap prescribed by HIPAA for taxation purposes.
All else being equal, Insurance companies price risk-based on how soon and how long one may need to rely on a long term care insurance policy to pay benefits. How soon: Younger people will pay less for coverage. Healthier persons will also pay less. How long: Married couples will pay less than singles as the partner will often take care of their disabled spouse for some time before using the policy benefits. Women will pay more than men as they statistically live longer and spend twice as many years in a disabled state. It is largely because of these “How long” issues that long-term care insurance planning is more of a woman’s issue. According to AARP more than 70 percent of nursing home residents are women.
How much coverage
The amount of coverage needed requires understanding the benefits provided by a policy. Policies can have subtle differences that add up to large out of pocket costs if you have a claim. Below are some questions you should understand before purchasing coverage.
What is the monthly benefit the policy will pay when care needs are triggered? Will the benefits be tax free? Does the benefit differ if you are receiving home care versus moving to a facility? Does the policy include an inflation rider that increases the amount available each year? Is the increase based on a compounding or a simple interest rate? Are the annual increases automatic or are they contingent upon evidence of your insurability? What is the total amount that the insurance company will pay out for your care? How long is the elimination period before receiving benefits?
Buying insurance is never an enjoyable exercise, but as with any expensive purchase, you need to educate yourself before making a decision. Stess-test your retirement plan to see the impact long-term care could have on your success rate of meeting your goals. Maybe you can self-insure with minimal impact or maybe a hybrid policy can help you meet multiple goals with minimal cost. Understanding your options and thoughtful planning can help you maximize your benefits while minimizing your costs.
Gardner Sherrill, CFP, MBA is an independent wealth manager with Sherrill Wealth Management. To learn more visit sherrillwealth.com. This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not consider your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs.