Do You Need a Long-Term Care Policy?

A long-term care (or LTC) insurance policy is a contract that helps cover the costs of care when you have a chronic medical condition.  These conditions mainly occur later in life and include disabilities and disorders such as Alzheimer’s Disease.  Most policies offer care in various places, including your home, a nursing home, an assisted living center, and an adult daycare center.
In 2019, an AARP study concluded that 63% of adults had $0 long-term care expenses.  Also, that 13% spent over $150,000 on long-term care expenses.  Below is a highly beneficial article showing many statistics on LTC in the US.

https://www.morningstar.com/articles/1013929/100-must-know-statistics-about-long-term-care-pandemic-edition

So, where do you fall?  There are a few items to think about before purchasing a policy.

  1. Can you self-fund?  To self-fund, you might retire later, thus saving more money to cover these expenses.  Or you can reduce your current expenses to save more money.  Lastly, you can downsize your home and lifestyle.
  2. Determine the amount of time needed.  Women live longer than men.  If they put money aside in an investment account for LTC expenses, they can self-fund.
  3. Look at the cost of care.  There are many calculators on the internet that can help calculate what your specific situation will need.
    https://www.genworth.com/aging-and-you/finances/cost-of-care.html
  4. Run a retirement analysis including the costs of LTC expenses and see if your current assets will allow this new expense item.
  5. Plan for the worst-case scenario.  What happens if your assets are wiped out? Do you have to care for children or grandchildren?  Will your children or grandchildren help you out if you need to have LTC either at a facility or in your or their home?

These are some things to think about, and maybe buying a small policy will help you sleep better at night.  But when should you start to shop for an LTC policy?  Couples should start searching for a policy at age 55.  If you are single, you can wait until 62.  There are two types of LTC policies.  Both have pros and cons.

TRADITIONAL LTC POLICY

A traditional LTC policy has a monthly premium per a specific amount of coverage.  Premiums can increase, and this is a use it or lose it policy.

Pros:

  1. Annual Premiums – this helps with less upfront money.
  2. Customize the amount of coverage and insurance riders like an inflation rider to your needs.
  3. Better bang for the buck like a term life insurance policy

Cons:

  1. The cost of the annual premiums can increase.  In 2002, there were 750,000 policies sold, and in 2019 there were only 54,000.  The insurance companies realized how much they were losing on this product as healthcare prices have soared thus they increased premiums.
  2. Get nothing back.  Much like term life insurance, if there is no claim, you paid for no benefit.
  3. All receipts must be submitted and tracked by you.  Also, you must go to licensed medical workers and have them approved.

HYBRID LTC POLICY

A hybrid LTC policy is funded with upfront money.  There are no monthly premiums like a traditional policy.  For example, a person would pay $100,000 and receive $5,000 a month until the $100,000 is extinguished.  You can get some of the premiums back if you cancel the policy.  However, these policies usually come with a 5-7% sales commission on their sale.

Pros:

  1. Very flexible. You can determine the amount of money you want to put into this policy from the start.
  2. They can be funded by a 1035 exchange from an old or existing life insurance policy.  You can trade a life insurance policy for an LTC policy.
  3. They are easier to qualify.
  4. A family member can qualify as a medical worker.
  5. Guaranteed premium will never go up.

Cons:

  1. More expensive. Hybrid policies are two products rolled into one.  It is a whole life insurance policy and an LTC policy rolled into a Hybrid policy.  You fund it up front, and it pays out a specific amount each month.  But you pay for both policies.
  2. It is not customizable as far as the terms of the contract.  They have 90-day elimination periods (consider this as a deductible), and no inflation rider is allowed.
  3. A large sum of money is needed to fund this policy.
  4. The terms of the policy are hard to decipher.
  5. Remember, LTC is not covered by Medicare and can only be covered by Medicaid once most of your assets have been liquidated.

In conclusion, there is no right or wrong answer to owning an LTC insurance policy.  Some people will need an LTC policy for the reasons mentioned above.  However, others can self-fund their LTC needs or can have family help them.  Whether you get one or not depends on many variables that life presents to you, but it should be considered if your health and assets determine it makes sense.

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