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Long Term Care Financing Options

October 09, 2017

Combining life insurance with long-term care can maximize investment returns while minimizing portfolio risk.

The statistics are quite overwhelming. Approximately 70% of the elderly population will require long term care during their lifetimes. The average couple turning 65 can expect to spend, at a minimum, over $250,000 for out of pocket long-term care expenses during their retirement years. Combining life insurance with long-term care can maximize investment returns while minimizing portfolio risk.

What is long-term care insurance?

Long-term care insurance covers expenses associated with activities of daily living that people with chronic illnesses, disabilities and other conditions need over an extended period. It generally covers home care, assisted living, adult daycare, nursing home and Alzheimer’s facilities.

Financing Long-term care

Long-term Care Insurance became very popular in the 1990s with people becoming concerned about their ability to pay for long-term care in retirement.

Today, most major life insurance companies no longer underwrite individual standalone long-term care coverage because of adverse claims experience.

There are a myriad of reasons for their withdrawal from the marketplace; including

  • Underestimating the length of time on claim,
  • Overestimating their projected investment returns in a declining interest environment, and
  • Minimal lapse rates compared to other insurance products.

While major providers like John Hancock and Metropolitan have announced that they have stopped selling long-term care, they continue to request and receive price increases from state insurance commissioners on their existing LTC policies.

Any alternatives to long-term care insurance?

Financing options for long-term care besides insurance include the government programs of Medicaid, and self-funding.

  • Medicaid, a joint federal and state program, requires eligibility requirements including low income and stringent maximum asset level tests.
  • Self-funding is certainly a viable option for many wealthy families but asset allocation, tax and investment diversification requires a significant portion of their assets to remain liquid to pay expenses.

Hybrid Products – the Wave of the Future

Some individuals look askance at long-term care policies because if they never end up needing long-term care, they feel they have unfairly lost money by paying the premiums.

A number of highly rated life insurance companies have recently introduced a hybrid product to solve this issue; which includes a long-term care rider attached to a life insurance policy. This allows the insured to receive reimbursement for long-term care expenses if needed. The death benefits are reduced, dollar for dollar, for any reimbursement of long-term care expenses, with a limitation on both the maximum monthly benefit and the number of months the benefits will be paid. Suffice to say that there is a wide variation between companies on the contractual guarantees, flexibility and options with these hybrid policies. Unlike traditional long-term care policies, these policies are not a “use it or lose it” proposition. If the long-term care insurance is never needed, the policy will pay a death benefit upon death.

A hybrid life insurance policy with a long-term care rider is an excellent way to leverage your dollars and protect yourself from the possibility of long-term care expenses which could severely deplete your assets.

If you would like to learn more about these policies or funding long term care, please contact us.

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