When long-term care insurance (LTCI) was first introduced more than 40 years ago, the first baby boomers were in their early thirties. Back then it was a popular product because it was a reasonably priced way for young and healthy boomers to protect their assets against likely need for long-term care.
LTCI Out of Reach for Many Retirees
Then reality set in. When the time came for benefits to be paid, insurers suddenly realized that they dramatically underestimated their actual costs. Premiums spiked across the board and many carriers jumped ship. Today, LTCI policies are more expensive with skimpier benefits and the premiums for more comprehensive coverage are out of the reach of the people who need it most. People with preconditions or any serious health issue need not apply.
There has always been the risk that, if you were lucky enough to never need the coverage, you would be out all of the money you spent on premiums for the rest of your life. For most retirees, that is a sizable amount of money to part with for nothing in return. Still, boomers are facing longer life expectancies with increasing odds they will require long-term care at some point – a very real prospect that threatens their financial security. They know they need a plan, but they need a plan they can live with.
The Appeal of Hybrid LTCI Plans
To deal with the high cost of LTCI and the reluctance to spend money on something that might never be used, insurance companies started offering combination or hybrid products that combined multiple needs. The first to be introduced was the life-insurance-LTC policy, which provides a death benefit in addition to scaled down LTC coverage. The problem is older clients or clients with health conditions have a more difficult time qualifying for life insurance.
How Long-Term Care Annuities Work
Next came the long-term care annuity (LTCA), a combination annuity-LTC product that addresses the issues of health underwriting (very minimal) and throwing away your money on something you may never use. It requires a lump sum premium which is used to fully fund the LTC benefits at a multiple of 200 to 300 percent of the premium amount. If LTC benefits are never used, it provides a guaranteed cash payout when the annuity contract matures. While it is possible to access a portion of your cash before the contract matures, the withdrawal will be subject to surrender fees and it will proportionately reduce the LTC benefit amount. If you don’t need the cash during your lifetime, it can be passed on to your heirs outside of probate.
After choosing the benefit multiple (200 to 300 percent of premium), you can then choose whether you want inflation coverage and how long you want the coverage to last (two to six years). If you add inflation coverage, it will shorten the benefit period or reduce the benefit multiple For example, if you choose 5 percent inflation coverage, it could limit the benefit multiple to 200 percent.
An attractive feature of the LTCA is the tax treatment of the benefits payout. If you meet the minimum requirements for receiving LTC benefits – the inability to perform at least two of the six activities of daily living – eating, dressing, bathing, toileting, transferring and maintaining continence, or cognitive impairment – you can start receiving payments to cover any type of care you choose. The payments are federally tax-free and can be used to pay a caregiver, a home health care nurse or a nursing home.
Leveraging a Rainy Day Fund into LTC Protection
Paying a lump sum premium of $50,000 or more may be a high hurdle for some retirees. But, for those who have planned their retirement well, it may be the perfect use for a “rainy day” fund that has been set aside for emergencies or unexpected expenses. Fifty thousand dollars from an emergency fund can be leveraged into $150,000 of long-term care coverage while still providing liquidity to cover periodic unexpected expenses. While there would be surrender charges to overcome in the early years, they decline over time. Withdrawals would also reduce the amount of benefits available.
When it comes to protecting your assets against the costs of long-term care, there are no great options. However, with a seven out of ten chance of needing long-term care, it is as close to a certainty as any risk you ever face. You need a plan. Even as premiums continue to increase by eight to 10 percent a year, LTCI is still a very efficient way to transfer that risk. But, if you can’t stomach the possibility that you could pay tens of thousands of dollars for coverage you may never need – with no return of that money – then a LTCA may be a more attractive option.