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When it comes to protecting your financial future as you age, one of the most crucial items to plan for is how you’ll pay for long-term care when you’re no longer able to care for yourself. There are several options to consider, including getting assistance from family or friends, cash savings, home equity, and insurance.
That’s why I interviewed Jessica Dunn, an independent insurance broker who specializes in extended care coverage through PM Financial.
Click below if you'd like to watch my video interview with Jess.
1. What is long-term care?
The National Institute on Aging (NIH) defines it as a variety of services designed to meet a person's health and personal care needs during a short or long period of time. These services help people live as independently and safely as possible when they can no longer perform everyday activities on their own.
The most common type of long-term care is personal care—help with everyday activities, also called "activities of daily living." These activities include bathing, dressing, grooming, using the toilet, eating, and moving around—for example, getting out of bed and into a chair.
It’s important to know that long-term care might be needed not only for situations where someone is cognitively impaired, like Alzheimer’s, but for conditions that go beyond a hospital stay like needing rehab for a serious injury or a longer-term recovery from a heart attack, stroke or other disease.
2. What’s the typical cost of long-term care? What are the chances someone will need it?
Every year, insurance provider Genworth puts together a long-term care cost of care survey by state. The screenshot below shows that monthly costs for various types of long-term care in metro Denver, Colorado isn’t cheap.
The information shown above is based on a specific scenario generated by the Genworth 2021 Cost of Care. Future years are calculated by assuming an annual 3% growth rate.
According to the NIH, more than 70% of people over age 65 will need some form of long-term care, and 75% of women will go on a long-term care claim. Unfortunately, Medicare, Medicare supplemental insurance policies or most any health insurance plan will cover this type of care.
3. Can’t a person go on Medicaid if they need long-term care?
Medicaid for long-term care is only available to those with $2,000 or less in assets and $30,276 or less a year in income in Colorado. And while your home isn’t counted as an asset, it is included as part of Medicaid’s estate recovery program.
4. Beyond cash and investment savings and or tapping into home equity, what types of long-term care insurance policies help pay for long-term care?
Policies cover a wide range of benefits in a variety of settings, including the person’s home, an assisted living facility, or a nursing home. The most common policy types are:
Traditional long-term care policies
These standalone policies provide coverage for a range of long-term care services, including in-home care, assisted living facilities, nursing homes, and adult day care centers. Policyholders pay premiums and receive benefits based on the policy terms and coverage limits. Like home or auto insurance, this type of insurance is a “use it or lose it” policy.
Hybrid or linked long-term care insurance policies
Policies that offer a combination product that includes both life insurance and long-term care insurance are growing in popularity. Many of these policies include an "accelerated death benefit" which will provide tax-free cash advances for long-term care while the person is still alive. The money used is taken out of death benefit, with the remaining going to that person’s heirs upon their death.
Annuities with long-term care riders
An annuity is a financial contract between an individual and an insurance company where the individual pays a lump sum or a series of payments to the insurance company in return for regular payments from the insurance company. A long-term care rider is an optional feature that can be added to certain annuity contracts to cover the costs associated with long-term care services.
Most annuities serve a dual purpose by providing a potential income stream for retirement while also offering financial protection against long-term care costs. Many also offer tax advantages, such as tax-deferred growth of the investment.
5. Can you describe some of the most common features and benefits that can be customized in a long-term care insurance policy?
Coverage amounts and duration - The coverage amount refers to the maximum benefit the policy will pay out over the course of your long-term care needs. This amount varies depending on the policy you choose and can be expressed as a daily, weekly, or monthly benefit. It's essential to select a coverage amount that aligns with your anticipated long-term care expenses.
Elimination period - The elimination period, also known as the waiting period or deductible period, is the amount of time you must pay for your long-term care expenses out of pocket before the insurance policy starts covering costs. Common elimination periods range from 30 days to 90 days or more. Longer elimination periods often result in lower premium costs.
Inflation protection - Inflation protection is an optional feature in long-term care insurance that helps account for the rising cost of healthcare over time. There are typically two types of inflation protection options:
a. Compound Inflation Protection: With this option, the policy's benefit amount increases annually by a fixed percentage (e.g., 3% or 5%) to keep pace with inflation. This ensures that your coverage amount grows over time.
b. Simple Inflation Protection: Under this option, the benefit amount increases by a fixed dollar amount each year, regardless of the inflation rate. While it provides some protection against rising costs, it may not keep up as effectively with healthcare inflation
In Summary: Don’t Go It Alone When it Comes to Long-Term Care Planning
Many companies sell long-term care insurance, and the policy benefits, features and costs vary widely. That’s why it’s a good idea to shop around, preferably with the help of a financial planner and an independent insurance broker. They have the expertise to help their clients determine the funding options that make the most sense depending on an individual’s or family’s goals, financial situation, healthcare needs and estate planning strategy.
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Disclosures
No investment strategy assures success or protects against loss. Investing involves risk, including the loss of principal. The information in this post is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.
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