Planning For Long Term Care

There’s a good chance you’ll need long-term care as you age. But if you’re like many, you likely don’t have a plan to pay for this sort of care. 

Although about half of adults turning 65 today will develop a disability that is serious enough to require assistance with daily activities of living, only 11% have long-term care insurance coverage that will help pay for the cost of care. Often, people don’t recognize the need for this sort of coverage because they underestimate the cost of care. And they mistakenly assume that Medicare and health insurance will cover long-term care.

The cost of long-term care insurance can be a deterrent to getting coverage. Traditional plans have a bad rap because there have been so many hikes in premiums. When people hear ‘long-term care insurance,’ they say - I’m not interested!

The idea of paying hefty premiums for coverage they might not need leaves a bad taste in people’s mouths. But there is an alternative to use-it-or-lose-it traditional long-term care insurance. Hybrid life insurance products provide long-term care coverage if there is a need, or a death benefit if the policy isn’t used to pay for care.

The High Cost of Long-Term Care - If you’re wondering why you even need to bother with insurance to help pay for long-term care, consider the cost of care. 2019 Cost of Care Survey, the median monthly cost of an assisted living facility is $4,051.

If you want to receive care in the comfort of your home, the median monthly cost of a home health aide is $4,385. The median cost of a private room in a skilled nursing facility is $8,517 a month. Those costs will almost double over the next 20 years.

So if you’re in your 50s now and will need care in your 70s, you might have to spend $100,000 to $200,000 a year. For those who need a high level of care, the average length of care is 3.9 years. If you fall into that category, your care could cost you several hundred thousand dollars.

How Hybrid Insurance Solve the Use-It-or-Lose-It Problem - Life insurance policies that include a long-term care benefit alleviate the concern about paying for coverage you may never use. They can be used to pay for long-term care expenses and will pay a death benefit when the insured person dies. That’s why these hybrid policies have become more popular than traditional long-term care insurance.

The top reasons people buy combination life products is to be economical with their resources, to alleviate anxiety over long-term care expenses, and to avoid the expense of two policy. That’s because the amount of long-term care coverage you get will depend on the type of coverage you buy. And your death benefit will be impacted if you tap the policy to pay for long-term care.

Linked benefit: This is a true hybrid policy that links a life insurance policy with a long-term care policy. Typically, the long-term care benefit amount is equal to about five times the premium you pay, Dona says. For example, a healthy 55-year-old man who made a $100,000 lump sum premium payment could get long-term care benefits worth nearly $523,000. The death benefit would be $174,000, based on a quote provided by Newman Long Term Care. 84% of long-term care protection purchased in 2018 was linked-benefit coverage. Just 16% was stand-alone long-term care insurance.

Long-term care rider on a life insurance policy: This feature allows you to add on long-term coverage to a life insurance policy at the time you buy the life insurance policy (it can’t be added later). Generally, the long-term care benefits are not as robust as with a traditional long-term care policy or linked-benefit policy.

Both of these products will pay out through reimbursement of the actual cost of care or an indemnity model that pays a certain cash benefit regardless of the actual cost of care. When you use the long-term care benefit, the death benefit is reduced. However, most of these policies still offer a death benefit of $15,000 to $20,000 if you use all of the coverage for long-term care.

Chronic illness or critical illness rider: This feature on a life insurance policy would allow you to accelerate the death benefit to pay for care if you have a chronic illness that will last for the rest of your life.

How and When to Buy a Policy - Most people who buy stand-alone long-term care coverage tend to be in their early 50s. Those who buy hybrid policies tend to be older, Dona says. Some hybrid life insurance carriers will even issue policies to people up to age 85.

One reason hybrid insurance policy buyers tend to be older is because these products were originally designed to be purchased with a large lump-sum payment of $50,000 or $100,000. Older adults are more likely to have that sort of cash in savings or an annuity.

Options - If you already have a permanent life insurance policy you might be able to convert it to a hybrid policy. You must qualify health-wise for the new policy, and you must have built up enough cash value in the existing policy to fund the new policy.

You also could use a cash value life insurance policy to pay for long-term care. You can take a loan, withdraw cash or fully surrender the policy for the cash value. 

You could sell a permanent life policy to a life settlement broker for cash if you’re age 65 or older. You’ll get less than the death benefit but more than the cash surrender value. Be careful because the payout might be taxable.

If you have a term life policy, you might be able to access a portion of the death benefit while you’re still living to pay for care. Term policies typically have an accelerated death benefit rider that lets you use up to 50% of the death benefit amount if you’re terminally ill.

And if you’re considering a hybrid policy or a stand-alone long-term care policy, work with an agent who specializes in long-term care coverage. One-size certainly doesn’t fit all. So you’ll need an expert to help you weigh your options.