Thanks to the efforts of organizations such as the American Association of Long-Term Care Insurance (AALTCI) and the LIFE Foundation, not to mention long-term care (LTC) carriers, more advisors and consumers are aware of the need for LTC planning.
In fact, in 2013 the U.S. Senate even convened an LTCi Commission to make recommendations on how to deal with long-term care in the country. One critical part of that commission discussed how to finance long-term care. Not surprisingly, the answers split along ideological lines, with some of the commissioners supporting a new entitlement program and others promoting private financing.
The truth is, both are necessary in a country with a widening wealth gap. Although it would be ideal if everyone age 40-plus owned a private LTC policy, almost half the country is unable to afford premiums. Some type of government solution (currently Medicaid) is necessary.
We’ve seen needed changes to the Medicaid LTC program in recent years, including a growing ability for people to receive care at home in many states. Medicare, which pays for some short-term care, could also play a larger role, as the so-called “dual-eligibles” — those who qualify for both Medicare and Medicaid — have better care coordination.
However, for many Americans, and especially affluent retirees, simply relying on the government programs is unacceptable. Even in countries with social LTC programs, such as Germany, there is a desire to pay privately to increase choice and quality of care.
Luckily, in the United States, we have many private LTC insurance solutions. Despite media perceptions, Americans have more opportunities than ever to plan for LTC through insurance.
The Four basic Solutions to Long-term Care Planning
There are four key types of insurance solutions: traditional health-based LTC insurance, Linked-Benefit life/LTC plans, Life Insurance with Chronic Care riders, and Annuity LTC plans.
Traditional health-based LTC: Traditional LTC plans continue to be the dominant LTC program sold. In 2012, according to LIMRA, there were more than 200,000 traditional LTC policies sold compared to well under 100,000 life/LTC policies. However, traditional policies have faced struggles in recent years because of lower than expected lapse rates and a low interest rate environment. Due to these factors, there have been many unplanned in-force rate increases that have caused consumer and advisor consternation.
However, once those advisors and policyholders find out what a new policy costs today (which is much higher), they normally are willing to pay the increased premium.
From a plan design perspective, the most up-to-date products allow a purchaser to select a total pool of money, say from $100,000 to $1 million. That pool can be used in the future for care, up to monthly withdrawal limits either expressed on a percentage of the pool basis or a monthly maximum. The most important differentiator is how claims will be paid.
One key difference is with the benefits for home care. Some plans allow for a “cash alternative” that can be used in lieu of the reimbursement benefit. Other plans offer expanded definitions of what qualifies as a home health care agency in order to support the newer private-pay home health care franchises that are rapidly growing throughout the country.
Another important difference in LTC plans is how they handle future inflation requirements. Today, inflation options abound on products. Options include:
- Policies that increase automatically with the CPI
- “Dial-your-own inflation,” from 1 percent to 5 percent in 0.25 percent increments
- Inflation that increases by 5 percent to age 61 and 3 percent from ages 61 to 75
- Step-rated increases that increase premiums and benefits each year
- A plan that increases benefits if the carrier’s underlying investment portfolio performs well
With so many options, how does someone decide what is best? One growing way to design a plan is focus on a premium budget first and then back into an appropriate plan design. You could call it the name-your-price option.
Who is most likely to choose traditional LTC products? There are four likely buyers.
- First, business owners or those who have a health savings account because they offer premium deductibility.
- Anyone who has had experience with a family member needing care or even using an LTC policy will be very interested.
- Those who like “pure protection” products like term life
- Those wanting automatic inflation adjustments also would be interested in traditional LTC products.
Linked life/LTC plans: Linked-benefit life/LTC plans have been available since 1987 but most recently have been growing in popularity and market share. One big reason: plans often offer guaranteed premiums. Because linked plans have the life insurance component, there is no use-it-or-lose-it mentality like there is with traditional LTC plans. If a policyholder dies before using any of the LTC premiums, the full life benefit goes to the beneficiary.
In addition, linked policies work as a form of leveraged self-insurance. The policyholder is accessing the life insurance death benefit first, through the acceleration of a benefit rider. Any portion of the death benefit not collected to pay for long-term care will eventually pass to the beneficiary. In come contracts, once all the death benefit has been accessed for long-term care, an Extension of Benefits rider is activated which provides for continued monthly benefits that triple or quadruple the original deposit and one carrier even provides lifetime benefits if needed.
These plans have been designed for the investor who is accustomed to addressing their financial issues by proper allocation and management of their portfolio. Most of these linked-benefit strategies are adopted by moving savings in the portfolio to a life insurance cash value account that supports the leveraged benefits with tax free interest.
Life insurance with chronic care riders: There is an explosion of carriers offering life insurance policies with living benefits. The concept is simple: those who need to access policy benefits to cover costs of care for a condition such as Alzheimer’s can accelerate the death benefit to do so. These are not true LTCi policies as the condition must be permanent in order to qualify for claim and most policies are unclear about the amount of benefit that can be accelerated until the point of claim. However, younger individuals who have need to provide a large amount of insurance for family protection should be sure that these riders are attached to their policy.
Annuity LTC plans: Annuity/LTC plans with tax-qualified benefits allow a holder of a non-qualified annuity to access benefits from the policy, tax free, to pay for long-term care. A few such plans include Benefit Extension riders that will double or triple the value of the annuity if long-term care is required.