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Strategies to Pay for Long-Term Care

Last update on: Dec 27 2018

Are consumers doing the right thing by not purchasing long-term care insurance?

Insurers long have been frustrated by the small number of people purchasing LTC insurance. Though more people enter the target age group for the policies, few buy. In 2004, 326,000 new policies worth $700 million were sold. That was a 25% decline from the previous year. The good news for insurers is that the purchasers’ average age now is in the early 50s instead of the late 60s and 70s.

Perhaps consumers are studying the data on long-term care needs and making rational decisions.

The most widely-quoted statistic on LTC is that about half of us will need long-term care at some point. But most of that need is short-term rehabilitative care after an injury or illness. The need for extended long-term care is much lower.

A new study to be published in the health care journal Inquiry and reported in The Wall Street Journal concludes that during their lives 69% of those who are 65 years old today will need long-term care. But much of that need is assistance with one daily activity and can be provided by a family member at home.

The study also concludes that while 37% of 65-year-olds will need long-term care in either a nursing home or assisted-living facility, most of those stays will be for no more than two years. Only 8% of the group will incur the dreaded and potentially financially ruinous stay of five years or more.

The study also puts a cost on the care. About 11% of the 65-year-olds will incur long-term costs of $100,000 to $250,000. About 5% will incur more than $250,000. Those are not out-of-pocket costs; they include amounts paid by the government and insurers.

The data show that while the odds of incurring major long-term care expenses are fairly low, they are not negligible and can deplete your estate rapidly.

Take the analysis one step further. Who is most likely to incur extended long-term care? Older women generally fit the bill. Usually they were able to care for their husbands, who passed away first. That leaves no one to take care of them. The longest-term nursing home residents tend to be single women in their late 70s or 80s.

Congress is frustrated by the small number of people purchasing long-term care insurance. It has enacted laws to encourage more people to purchase the policies, and more laws probably are on the way.

The reasons most people do not purchase long-term care insurance are obvious. The policies are expensive, on average about $2,000 annually per person. The premiums tend to be volatile, with some insurers sharply increasing premiums.

Also, as the data show, most people won’t need the coverage and will die without receiving any tangible benefit from their premiums.

Of course, a number of people still mistakenly believe that Medicare or Medicaid cover long-term care treatment.
Insurers are responding with new types of policies that try to meet at least some of the concerns of consumers.

  • Combination policies are becoming widely available. These policies combine features of annuities or life insurance with long-term care insurance. There are many variations of these policies. In one, the insured buys a permanent life insurance policy with a death benefit of, say, $200,000. The policy also carries a long-term care benefit with a monthly payout of $8,000. If the insured needs long-term care, the insurer advances the death benefit at a rate of $8,000 monthly up to $200,000. The payments are tax-free. If long-term care still is needed after the death benefit is exhausted, the policy will pay an additional $200,000 of long-term care expenses at $8,000 per month.

    When the insured dies, the beneficiary receives the death benefit minus the amounts paid for long-term care.

    A problem with these policies is that they are difficult to analyze. Consumers cannot be sure how much they are paying for long-term care insurance and how much for life insurance. At least a few analysts believe it is cheaper to buy separate policies.

  • Policies for couples are available. Instead of two separate policies, one long-term care policy covers a couple. That increases the odds that the premiums will provide a benefit to at least one of the spouses. Of course, it also is possible that the first spouse uses the policy’s benefit limit.

  • longevity insurance is the latest innovation, also known as retirement income insurance. In these policies, the consumer gives a lump sum to an insurer after age 55. The policy starts paying income for life to the insured at age 85. For example, $25,000 at age 60 guarantees a man $23,300 a year for life starting at age 85. There is no death benefit to these policies.

    The insured is guaranteed income late in life even if no long-term care is needed. The income can pay for nursing home care or for regular living expenses. Other assets also can be spent earlier, knowing the income will kick in. A potential downside is the insured could need long-term care early and exhaust his other assets before the policy payments begin.

    The old-fashioned substitutes for long-term care insurance still might be the best choices.

  • Cash value life insurance provides a lot of flexibility. If long-term care is needed, loans from the cash value can be taken tax free. The loans reduce the benefits paid to the beneficiary. If the policy is not needed to help pay for care, then the beneficiary gets the entire benefit, after possible estate taxes. Life insurance also is cheaper than long-term care insurance.

    The downside of using life insurance is that a large policy might be needed to generate sufficient cash value to cover likely nursing home expenses. Also, the cash value could be exhausted when care still is needed.

  • Annuities provide a guaranteed stream of lifetime income. You receive the income whether you need long-term care or not, and the income continues if you are in a nursing home or assisted living facility. An annuity does not provide something for heirs, but it might protect other assets from nursing home expenses. Another disadvantage is that the income is taxed, while payments from long-term care policies and loans from insurance policies are not.

These are the best options for providing for long-term care expenses at this point. For most people, a combination of strategies will work best. April 2006.



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