November is National Long-Term Care Awareness Month, so in memory of my father, who had Alzheimer’s, I thought I’d dedicate this column to this important subject.
There are four primary determinants that I will address: which company, what type of policy, personal factors and amount of coverage.
Insurance companies value risk pools differently. They often are looking to segment the market of potential buyers and focus on attracting one group versus another. This means there are some companies that are more advantageous to people in their 50s, whereas others target those over 70.
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Also, they can price policies differently based on single vs. married couples. Additionally, some are more accepting of pre-existing health conditions.
As a buyer, you want to make sure you evaluate your options and use a broker who works with multiple companies to vet the best policy for your situation.
WHAT TYPE OF POLICY?
Historically, the market started with traditional standalone policies. These worked much like term life insurance – you paid a premium for coverage and only benefited from the policy if you needed it. These policies have become extremely expensive as costs of care have escalated and life expectancies have extended.
Rising costs of traditional policies have led to the creation of hybrid policies sometimes called linked benefits. These are standalone policies combined with life insurance or an annuity. These policies require more of an investment, but if never used, the policy is paid out at death. Depending on your personal situation, they also can include a return of premium on demand, making them flexible.
The hybrid policy can be purchased using funds available or by exchanging an existing life insurance or annuity policy in a tax-free exchange. One policy allows you to use money from your IRA or 401k to invest coverage. Additionally, the pension protection act from 2006 clarified that benefits paid from a hybrid policy are tax-free as long as the benefit doesn’t exceed the greater of the actual cost of long- term care or that year’s daily benefit cap prescribed by HIPAA for taxation purposes.
All else being equal, insurance companies price risk-based on how soon and how long one may need to rely on the policy to pay benefits.
Younger people will pay less for coverage, as will healthier persons.
Married couples will pay less than singles, as the partner often will take care of their disabled spouse for some time before using the policy benefits.
Women will pay more than men, as they statistically live longer and spend twice as many years in a disabled state.
It is largely because of these issues that long-term care planning is more of a woman’s issue. According to AARP, more than 70 percent of nursing-home residents are women.
HOW MUCH COVERAGE?
The amount of coverage needed requires understanding the benefits provided by a policy. Policies can have subtle differences that add up to large out-of-pocket costs if you have a claim.
Below are some questions you should understand before purchasing coverage:
▪ What is the monthly benefit the policy will pay when care needs are triggered?
▪ Will the benefits be tax-free?
▪ Does the benefit differ if you are receiving home care versus moving to a facility?
▪ Does the policy include an inflation rider that increases the amount available each year?
▪ Is the increase based on a compounding or a simple interest rate?
▪ Are the annual increases automatic or are they contingent upon evidence of your ability to be insured?
▪ What is the total amount that the insurance company will pay out for your care?
▪ How long is the elimination period before receiving benefits?
Buying insurance is never an enjoyable exercise, but as with any expensive purchase, you need to educate yourself before making a decision.
Stess-test your retirement plan to see the impact long-term care could have on your success rate of meeting your goals. Maybe you can self-insure with minimal impact, or perhaps a hybrid policy can help you meet multiple goals with minimal cost.
Understanding your options and thoughtful planning can help maximize your benefits while minimizing your costs.
Gardner Sherrill, CFP, MBA, is an independent financial adviser with Sherrill Wealth Management. To learn more visit sherrillwealth.com.