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Do You Really Need Long-Term Care Insurance?
Published Tuesday, May 9, 2017

Many people caring for a parent struggle with the decision of when to seek outside help. In the past, families often cared for the elderly at home, but this is not easy or even possible for many people. Advances in medical care are keeping us alive longer and making the need for care more likely.

Unfortunately, care is expensive at any level, and can deplete most people’s assets quickly. Statistics show that 70 percent of those who reach age 65 will need some form of care in their lifetime.

Long-term care (LTC) or assistance becomes necessary when a person needs help with at least two of the six activities of daily living: bathing, dressing, eating, continence, transferring and toileting. The inability to perform at least two of these without assistance is the determining factor for benefits in most long-term care insurance policies.

Most long-term care policies will cover the cost of such care (up to the policy limit) whether the care is received at home, in an assisted living facility, community-based care, hospice or in a nursing home. But note long-term care insurance is intended to help pay for custodial care, not medical treatment.

What's the Cost of Long-Term Care?
Many people assume that long-term care insurance is too expensive to even consider, but it can save an individual and their family from financial devastation.  Consider these three real-life examples:

• A longtime client called me from the nursing home in the final stage of his life to say thank you for my role in helping him get LTC coverage. He purchased a policy while in his 50s and never expected to use it but fell ill at a young age. He died knowing that his wife had enough money to live comfortably in retirement.

• Another client who purchased LTC coverage developed Alzheimer’s disease. His son called to tell me that the staff at the assisted living facility were very impressed with the quality of his LTC coverage. This man eventually passed away, but his wife could continue in her customary lifestyle because her assets were protected and not spent on his care.

• An executive passed away without using his LTC benefit, and his daughter was surprised to learn that she was his beneficiary and would receive a $180,000 tax-free death benefit.

The cost of skilled care in NH starts at approximately $250 per day, or  $91,000 annually. Home care is somewhat less costly but still expensive.

The cost of long-term care insurance varies widely depending on age of the insured and policy design. A 60-year-old in NH in good health with a typical policy design might pay $3,000 to $4,000 annually. Younger people may pay as little as $2,000 and an older or less healthy person might pay $6,000 or more. Rates are lower for couples when both obtain coverage. The average premium might be $3,500 annually.

The next question is, how do you plan to pay for care?  

• You can use your own money, but this is generally not preferred as it will deplete your savings.

• If you are thinking the government will pay, know that you must first use your own money until it is depleted and your choice of a facility is limited to what Medicaid allows.

• Use an insurance company’s money and retain freedom of choice. This takes a little advanced planning of course, requiring the purchase of LTC insurance. The important thing is to act at the right time. The ideal time to apply for coverage is typically in your 50s or early 60s while you are still healthy and young enough to qualify for a lower premium.

Types of Long-Term Care Insurance
In general, there are three types of LTC policies:

• Traditional: This is the most common type of LTC insurance. It addresses the cost of care, but nothing more. If the LTC benefits are not used, there is typically no death benefit. Premiums are generally paid over the insured’s lifetime with benefits triggered when one is unable to perform at least two of the six aforementioned daily activities.

Policies can be customized to one’s needs and budget with either a daily or monthly benefit amount and a benefit period from two years to unlimited. The typical benefit term chosen is three to four years.

• LTC/Life hybrid: This policy not only addresses LTC cost if needed but provides a tax-free death benefit to a beneficiary if the benefit is not used. The challenge is that it requires either a single lump-sum payment or a short installment period but is then paid in full with no further payments required.

LTC benefits are generally robust, and the death benefit will exceed the premiums paid. One way or the other this type of policy will pay a benefit. There is also some latitude for LTC design, similar to a traditional LTC policy.

• Life Insurance with a “living benefits” rider: This policy can pay a monthly sum if the insured is chronically ill and unable to perform certain daily activities.  It is usually paid over the lifetime of the insured. The “living benefits” rider is intended more as protection against a disability and income replacement, and may not be sufficient to provide a large enough benefit to fully protect against long-term care expenses.

Benefits are fixed and can’t be customized; however, this coverage would be better than nothing.

Tax Benefits
Most traditional LTC policies are tax qualified, meaning that premiums are itemized as medical expenses within certain limits. The Life/LTC style plans are typically not tax qualified. Benefits paid for LTC are generally not subject to federal income tax.

“C” corporations are allowed a full tax deduction of premiums paid by the company on behalf of any employee. Those premiums are not counted as taxable income to the employee. This opens the door to some tax leveraged bonus arrangements for these types of companies.

As with any complex financial product, you will need the help of a trustworthy and knowledgeable advisor. The person must be licensed for life and health insurance and preferably conversant with a range of LTC policies. Most attorneys who do estate planning can refer you to an agent, as will many CPAs.

The advisor should not only help you to design a plan, but guide you through the application and underwriting process.  Medical records, an interview and sometimes an exam are typically required.

It is important to remember that not everyone can qualify for coverage, as you must be in overall good health. Once a chronic illness or impairment happens, it may be too late, and no amount of money can buy you coverage.  

Nobody likes to envision themselves in an assisted living facility; however, the future is often outside of our control. Use the present to prepare for your future and whatever it brings.

Dave Trudo, LUTCF, is director of Life and Health Insurance at HPM Insurance in Amherst and Bedford. For more information, visit HPMinsurance.com.

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