Long Term Care – How to Plan & Pay For it?

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Have you ever wondered if you will be financially wiped out if you have a debilitating stroke or get dementia (Alzheimer’s) in your old age? Maybe you know of someone that went through this kind of illness.  The personal and financial devastation that followed is usually brutal. Don’t wait, prepare today.

Potential Long Term Care Costs are a Massive Hole in Your Retirement Plan…..

Who will take care of you and how will you pay for it?

Chances are more than 50/50 that you will need help getting along later in life.  The cost is prohibitive (Nursing Home Costs by State)and someone (not Medicare) will be stuck paying the bills.  Home health care is expensive and nursing home care is REALLY EXPENSIVE (Average cost $7-9,000/month).  Medicare does not pay for home health care and only after 3 consecutive days in the hospital will they help pay for skilled care. If you qualify the maximum number of days is 100.

The bills could add up to a few hundred thousand dollars!

Your options:

1. Do nothing and hope you never need care – very risky should you need care – good luck finding a nice place to stay or getting quality care unless you have deep pockets
2. Save money for it just in case – you’ll want to save a few hundred thousand
3. Long-term care insurance – it should cover you, but it’s expensive and a “use it or lose it” proposition
4. Life insurance with a chronic care rider – not cheap, but large, leveraged lifetime benefit and if not used, your heir inherit death benefit

Long-term care insurance has turned out to be a real loser for many people that bought policies to solve this need. 

Many buyers have  seen shockingly high premium increases since they bought their policy. In the past, many insurance company underwriters seriously under priced this insurance and it has led to most insurance companies to stop offering new policies and to substantially raise prices on their existing policies.  The ever-rising cost of long-term care insurance

Paying for long-term care insurance is hard to swallow. It’s a very expensive for insurance you don’t want to ever need. It’s hard to imagine yourself in a chronic care health state.  If you end up never needing or qualifying for the benefit, all those premium dollars are gone. That is what insurance is all about.  USE IT OR LOSE IT.

A Potentially Better Way to Insure for This Potential Need

USE IT OR PASS IT TO HEIRS

Believe or not, life insurance companies have figured out a terrific way to address this potential, but unpredictable need.  For people that are interested in passing money to their heirs. Take a look at creating a new bucket of money that serves a dual purpose.  The bucket I am referring to is created by the purchase of life insurance.  You may no longer have a dependent need, but the insurance serves a dual purpose. It creates an immediate pot of money to draw from for chronic care and the death benefit for heirs. This means the premium you take from your portfolio (out of one pocket) is used to create a future asset in the form of a death benefit (other pocket).  Life insurance has long been the asset of choice to pass to heirs. In part because of its guarantees and the fact that the death benefit is income tax-free.

The new twist is the addition (there is cost for this) of a long-term or chronic care rider that allows the insured to take an Accelerated Death Benefit if they qualify* for long-term or chronic care.

This means if the insured qualifies for care they can take an advance on their life insurance death benefit. So, you have a life insurance death benefit and you have the ability to pull from the death benefit while you are alive if you qualify for chronic care.

For example, a 72-year-old widow obtained a $400,000 life insurance policy and pays an annual insurance premium of roughly $13,000 per year. If she lives twenty years, she would have paid $260,000 in premiums and her three children would receive the $400,000 life insurance proceeds tax-free at her death.  That is a pretty decent return for a guaranteed future value and the ability to know that if she gets sick and qualifies for the chronic care benefit, she has the $400,000 benefit to draw from as needed.
If she qualifies for LTC any time along the way she can take up to 2% ($400,000 x 2%) or $8,000 per month from her policy. There are no restrictions as to how she spends the money once she qualifies. The monthly benefit would last at least 50 months.  Whatever she does not use will be passed on to her children.

My Plan:

Last year, I bought a $300,000 life policy with a chronic care rider. There is a lot of flexibility in your premium design. I designed my plan so that my premiums are a guaranteed fixed amount, $8,000 for 15 years and then I’m done with premiums. So I’ll invest $120,000 ($8,000 x 15 years) over 15 years and whenever I die, my beneficiaries receive $300,000 income tax-free. If I ever qualify for the policies chronic care benefit, my policy’s chronic care rider allows me to take up to 4% of the death benefit every month until I have spent the entire death benefit. There are no restrictions on how I spend this money. No receipts needed. I can spend the money on a trip around the world or pay one of my daughters to take care of me.

If I never need the care or only spend some of it, whatever I don’t spend is part of the life insurance death benefit and passes to my beneficiaries.

USE IT OR PASS IT TO HEIRS

I think this is a pretty nifty retirement planning strategy for people who have the means to do this.

“Failing to Plan is Planning to Fail”

 Some Statistics:

National Average Long Term Care Costs

Average costs for specific states are also available. $225 a day or $6,844 per month for a semi-private room in a nursing home. $253 a day or $7,698 per month for a private room in a nursing home.

How to pay:

Medicare: In order to receive 30 days of benefit from Medicare, beneficiaries need to have a stayed in a hospital for three days just prior to entering a nursing home.  This seldom occurs.  Medicare does not provide a home health care benefit.

Self- Insured: Roll the dice and hope you never need care.  While the odds may not be in your favor, many people are doing this, some consciously others unconsciously.  At what potential expense? Depending on how long and at what cost, needing care could devastate your financial legacy.  For some people, it is worth the risk.

Long-Term Care Insurance: For those that would rather share the risk with an insurance policy, they have another set of concerns. The cost of long-term care insurance is not cheap! The policies offered today can do a very good job of paying for future potential care related expenses. They are pricey and like all insurance, use it or lose it (have a claim, or lose those paid in premiums).

Those that bought these policies a while back are finding out that the rates are not locked in. Existing policyholders of almost every long-term-care insurer has raised rates at least once. Many are on their second round of price hikes.

Why are insurers raising rates?

A John Hancock study found that the number of claims. The length of claims and the use of benefits from 1990 to 2010 were much higher than the company had expected. Particularly the open-ended expense of providing lifetime benefits to an aging population with an increasingly long life expectancy.

These pricing increases have made it doubly hard to purchase this type of insurance. Especially when there may be more price increases and buyers may never make a claim on the insurance.

*Activities of daily living are routine activities people do every day without assistance. There are six basic ADLs: eating, bathing, getting dressed, toileting, transferring and continence. Usually if you cannot perform two of the six, you qualify for benefits. Check with your contract’s language.

I get asked about long-term care insurance and filling this critical hole in people’s long-term retirement plan. I hope this explanation helps you with your planning.

Please share this with others.