Assessing Long-Term Care Insurance Options by Scott Montgomery, CLU, ChFC
When most people think of retirement, they imagine spending their time traveling and pursuing the hobbies and activities that bring them the greatest joy. Few consider that according to the Department of Health and Human Services, more than 70 percent of Americans over the age of 65 will, at some point, require long-term care to assist them with daily living activities. Ignoring this reality puts many in the precarious position of giving up control over their quality of life and instead relying on family members without ample resources or forethought to manage their care and, in many cases, their finances.
According to the most recent Genworth Cost of Care Study, the national median annual cost for a private room in a nursing home is $92,378 and $46,332 for an in-home health aid. Medicare will only cover a limited number of days in a nursing home and similarly restricts approval of costs for in-home care. To prepare for the rising costs of long-term care (LTC) and ensure individuals continue to have a say in the care they receive, proper time should be spent budgeting and investigating the changing landscape of long-term care insurance options.
When to Get Started. When an individual should begin thinking about long-term care insurance will depend on his or her lifestyle and genetics. The annual costs for long-term care policies increase as individuals age and their health deteriorates. However, the younger the insured, the more premiums he or she will pay over a lifetime. Conversely, the longer one waits to get insured, the more likely he or she will have a medical condition that may make it more difficult to secure coverage. In most instances, it is prudent for individuals to begin thinking about their long-term care when the turn 50.
What Options are Available. There are two basic types of long-term care insurance: annual pay and asset-based policies.
With an annual pay policy, individuals pay annual premiums with the expectation that the policy will pay out benefits in the amount and for the amount of time outlined in the policy to meet their anticipated needs. In certain circumstances, policyholders may deduct a portion of those premiums from their taxes. Individuals should consult with a tax professional to determine how tax-deductibility applies to their specific situation.
Owners of annual pay policies who do not use their benefits, perhaps because they pass away before requiring long-term care, typically forfeit the premiums they paid into the plan during their lifetime. However, policyholders have the option to pay higher premiums and add a nonforfeiture benefit rider that guarantees a partial refund of premiums to themselves or their beneficiaries should the policy lapse due to death or stopped payments.
Unlike an annual pay LTC policy, an asset-based long-term care policy that did not pay out benefits during an individual’s lifetime may return the policyholder’s initial payment. With these hybrid annuity and life-insurance based plans, individuals make one or multiple large premium payments, typically of substantial value. These upfront payments are invested in life insurance or annuity contracts paying a guaranteed rate of return. When long-term care is needed, insureds may access the life insurance death benefit or annuity value free of income taxes to pay for qualifying expenses. Should policyholders pass away without incurring long-term care expenses, the full death benefits may ultimately be returned to their heirs. Moreover, should policyholders surrender their LTC insurance policies, they may get back a substantial portion of the initial payment they paid into the plan.
As the long-term care insurance industry continues to evolve, new products will be introduced to better meet the needs of an aging population. While these policies will not be appropriate for everyone, the topics of how individuals should be cared for, who should deliver the care and how should the care be funded are important for the vast majority of the population to consider. The guidance of an experienced financial planner is a good way to start the conversation and review the pros and cons of all long-term care options.
About the Author: Scott Montgomery, CLU, ChFC, is a director with Provenance Wealth Advisors, an independent financial planning services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
Long-Term Care insurance policies have exclusions and/or limitations. The cost and availability of Long-Term Care insurance depends on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long-Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.