LTC Part 2: Everything You Ought to Know About Maximizing Long Term Care Insurance Coverage
22:58 Share

Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm tackling part two of our two-part series on long-term care. Specifically, I'm breaking down three big things. Number one, the types of long-term care insurance that's available and the pros and cons of each of them.

Number two, major pitfalls to avoid. And number three, resources to help you and your loved ones take action. So if you want to understand how to maximize your dollars and your coverage when buying long-term care insurance, today's episode is for you. For all the links and resources mentioned, head over to youstaywealthy.com forward slash 117.

As mentioned last week during part one of this series, just because you can self-fund for long-term care in retirement doesn't necessarily mean that you should skip buying insurance altogether. And there are two main reasons for that.

Number one, self-funding still carries risk. For example, maybe the cost of care increases by more than you or anyone could have predicted, or the timing of your long-term care event collides with a deep economic recession, or other expenses end up creeping into your life that you just didn't plan for, like caring for a child or grandchild.

Number two, just simply peace of mind. You know, given that the future is unknown, you might just sleep a little bit better at night and be able to enjoy retirement a little bit more if you had an insurance policy to kick in and help supplement your savings during a long-term care event.

And in case it doesn't go without saying, if you determine that you can't self-fund for long-term care, buying insurance is likely a smart move since most of us will experience some sort of long-term care event during our lifetime. Now, before we break down the long-term care insurance world, let's just quickly talk about when you would consider buying insurance.

Unfortunately, there's no perfect age for buying long-term care insurance and getting quote a good deal. Similar to a life insurance policy, you can buy long-term care insurance when you're younger and pay less, but pay for that insurance for a longer period of time. Or you can buy it when you're older, pay more for the insurance, but likely pay for the insurance for a shorter period of time before using it.

With all that being said, a Genworth study that I came across suggests that couples should shop for a policy at age 55 if they want the best combination of coverage and affordability. And single individuals should consider insurance between the ages of 60 and 65.

And for what it's worth, these suggestions reflect the actual purchasing behavior of people pretty accurately. According to the 2020 Milliman Long-Term Care Insurance Survey, the average age long-term care insurance policies are purchased is 58 years old. So right in the middle of those numbers shared by Genworth.

Now that we have a general idea for when to look into buying long-term care insurance, let's break down the two types of insurance options that are available. The first is traditional or sometimes called a standalone policy. And the second is a hybrid policy. Let's start with the first one, a traditional long-term care policy. This is very similar to your typical auto insurance policy.

You pay a monthly premium to purchase a certain amount of coverage. And just like an auto policy, your monthly premiums may be subject to increases over time. Also, like an auto policy, the goal is to never have to file a claim. On the flip side, if you never file a claim, you've essentially thrown money down the drain every month, every year for a long period of time.

So this sort of use it or lose it type of insurance policy, rightfully so, can make a lot of people pause, especially when it comes to long-term care insurance, given how expensive it can be.

Speaking of costs, one important thing to highlight is that the statistics you might come across online when doing your own research will often say that the average 55 year old female pays about $3,000 per year for a plain vanilla traditional insurance policy with an initial pool of benefits worth $164,000.

And the average 55 year old male will pay about $2,000 per year for that same policy. However, and this is really important, those statistics are usually based on policies that aren't optimized properly and don't typically include inflation riders or ideal elimination periods, which I'll talk about shortly.

For an optimized policy with an inflation rider, which is what we typically suggest to clients, we see people in those age groups paying closer to $5,000 to $7,000 per year for the same $164,000 of coverage. So about double the cost of what you often see floated around online, and sometimes more than that depending on the person and their unique situation.

Now, before we compare and contrast all of this to a hybrid long term care policy, let's talk through the pros and cons of a traditional standalone policy.

There are three big pros to consider. One is that the annual premiums, while not cheap, require less upfront money than a hybrid policy, which we're going to talk about next. So if you need or want long-term care coverage and you don't have a healthy lump sum of cash just lying around that you can part with, a traditional policy might be more feasible.

The second is that you can customize these policies to fit your exact needs. You can buy as much or as little coverage as you need and choose from a wide range of add-ons, also known as writers, to attach to your policy. As mentioned, one of the most important writers is an inflation writer because $1 today is not the same as $1 10 years from now, especially if inflation truly does start to creep back into the economy.

Lastly, traditional policies typically provide better bang for your buck when compared to a hybrid policy, and you'll better understand why here in a minute. You might think of a stand-alone traditional policy much like a term insurance policy, where there are very few bells and whistles and you can buy exactly what you need for as long as you need it. Very straightforward and allows you to maximize your dollars and your coverage, which is important when buying insurance.

Now let's look at some of the cons of a traditional policy. There are three big ones to take into consideration here. First is the cost of your insurance, aka your annual premiums, are not guaranteed and can be increased by the insurance company. In fact, in 2019, Blue Cross Blue Shield of Florida

notified their policyholders that their annual premiums were going to increase by an average of 94%. And this is mostly due with the issues that long-term care insurers ran into in the late 90s and early 2000s when they priced their long-term care policies too low.

The result, in addition to premiums being increased, is that the popularity of these products just plummeted. In 2002, the market for these traditional policies peaked when over 750,000 consumers bought traditional long-term care policies. Well, compare that to 2019 when only 54,000 policies were purchased.

It's possible that long-term care traditional policy issuers have now figured out the pricing and newer policies won't see huge premium increases, but nothing is guaranteed, which is certainly a con to take into consideration.

The second con is that you may never need the insurance benefits that you're paying for, meaning you could be paying, let's say, $5,000 per year for 20 or 30 years and get nothing back. That's six figures that you likely could have put to better use somewhere else.

But like we've already talked about, there are so many unknowns and a long-term care event can not only cause a lot of stress and worry and sleepless nights, but it can also jeopardize a retirement plan. So just like your auto insurance, it might be one of those things that you just have to come to grips with pain, even though there's a chance you don't ever see that money again.

Lastly, with a traditional long-term care policy, you have to submit receipts for reimbursement. In addition, you have to be cared for by a licensed medical worker and aren't able to compensate friends or family members who might be willing to provide care for you.

Being cared for by licensed medical workers will inherently increase the cost of your care and submitting those receipts can be a frustrating process, especially when you're going through a long-term care event that has essentially disrupted your life.

Let's stick a pin in this one and we're going to revisit it towards the end of the episode so that you can take everything into consideration. Let's now talk about hybrid long-term care policies, which unlike traditional policies have skyrocketed in popularity, but not necessarily for good reasons, which I'll touch on shortly. First, what is a hybrid long-term care insurance policy?

A hybrid policy combines the long-term care benefits with a life insurance policy. They are essentially, as you might know, indexed universal life insurance policies with long-term care benefits added as a rider to the policy.

These policies are funded with a single lump sum of money and you don't make any other recurring payments. So for example, a healthy 55 year old man could buy a hybrid policy for let's say $100,000 and potentially get long-term care benefits worth $500,000.

He might also get a death benefit around $150,000 or $200,000. In other words, if he buys this hybrid policy today and dies tomorrow, his heirs will receive the life insurance death benefit of $150,000 or whatever he was approved for.

that $100,000 premium isn't flushed down the drain. However, if he does tap into the policy while he's alive for long-term care expenses, that death benefit can get reduced, in some cases down to zero. In other cases, there is a minimum guaranteed death benefit no matter how much of the policy is used for long-term care expenses.

To summarize, your long-term care benefits are essentially being funded in part by the life insurance death benefit that's part of the contract. Again, you're essentially buying a universal life insurance policy that allows you to pay for long-term care expenses. In some cases, long-term care expenses might be above and beyond that death benefit, but the insurance companies have done the math and they know that on average across a large pool of people, they're going to come out ahead.

As shared last week, a small percentage of people will have a high six-figure, catastrophic long-term care event, and that's what the insurance company is banking on here. Now, a few things to note.

Number one, some or all of that $100,000 that this hypothetical man used to buy this hybrid policy can actually be returned to him if he changes his mind a year down the road or even 10 years down the road. The $100,000 is losing money to inflation every day and it's not earning any interest, but it's comforting to know that you can get some or all of your premium back if you ever decide that you no longer need or want this policy.

The exact amount you can get back depends on the insurance company and the policy that you buy. So be sure to get a good understanding of what's referred to as the return of premium if you end up going this route.

The other thing I want to note is that these policies are often sold by insurance salespeople who tell consumers that there is no cost to you to purchase them. There's no upfront transaction fee and you can get your money back anytime or after you've owned the policy for a certain amount of time. That's typically the sales pitch.

However, and I hope this goes without saying, nothing is free. And as you might be able to figure out, your cost to buy the policy is baked into the economics of the contract. While you might not see a line item on your first statement that says, you know, $10,000 transaction fee paid to the insurance agent, the overall coverage that you're receiving has been reduced by whatever it costs the insurance company to issue these contracts and

market these contracts and pay out large commissions to salespeople who sell them. I'm not saying that you shouldn't buy a hybrid policy because of this, but just don't be fooled into thinking that these are free products.

Speaking of fees, the last thing I wanted to highlight here, which is that financial advisors and insurance salespeople are very incentivized to sell these products. The commissions they receive can be upwards of 5% to 7% or $5,000 to $7,000 for every $100,000 policy that's sold.

Perhaps that's why almost 500,000 hybrid long-term care policies were sold in 2018 compared to only 50,000 traditional policies. I'm speculating, but just something to think about. Also, if you can't already tell, hybrid policies are a bit more confusing than traditional policies. The list of pros and cons is quite large given all of the nuances, but let me highlight some of the most important ones for you to consider.

Let's start with the pros. The first is that these policies are flexible and don't typically have large minimum purchase requirements. Not only does it make these policies more accessible, but it also allows you to buy multiple policies to provide even more flexibility. For example, instead of $100,000 policy, perhaps you buy four $25,000 policies.

Assuming the policies you buy are for a full return of premium, you could always cancel one of these $25,000 policies if you needed some extra cash or decided that you had too much insurance. If you only had one $100,000 policy, well, you wouldn't be able to cancel only a percentage of it. You would either have to keep the $100,000 policy intact or cancel the entire thing. So the first pro is that there's a lot of flexibility here.

The second pro is that hybrid policies can be funded by a 1035 exchange. A quick reminder, a 1035 exchange allows you to transfer funds from one insurance product to another while also deferring any capital gains. For example, maybe you bought a whole life insurance policy 10 years ago and you know you don't need it because most people don't need one, but you're not really sure what to do with it, especially since you'd have to pay capital gains if you canceled it.

One option might be to consider exchanging it into a hybrid long-term care policy, which might end up being more useful to you than a plain old whole life insurance policy that you don't really need. This would allow you to defer the capital gains and buy long-term care coverage without having to dip into your cash savings.

The third pro is that hybrid contracts can be sometimes easier to qualify for because underwriting is typically less stringent. Remember, not just anyone can buy long-term care insurance. In fact, last year, 22% of long-term care applicants between the ages of 50 and 59 were declined coverage. 22% of them declined coverage. And 33% of people between 65 and 69 were declined.

In some cases, a percentage of those who were declined might be able to get approved for a hybrid policy, which would be a huge win for somebody who really needs coverage. The second to last pro is that you can pay a family member to be your caregiver or a friend in some cases, which as I mentioned, you cannot do with traditional policies.

Some hybrid policies don't even require receipts and just issue cash to you rather than reimbursing you for the actual cost of care, which is what happens with a traditional policy. So if you think you might want a friend, a neighbor or a family member who isn't a licensed medical care worker to be your at-home caregiver during a long-term care event,

it could bring down your overall cost and you might consider a hybrid policy for that reason. Lastly, your premium is guaranteed on a hybrid policy and won't be at risk of an increase like a traditional policy. When you make that single premium payment, you'll know the exact coverage you're getting in return, no questions asked.

While no questions will be asked of you, you will likely have a lot of questions for the provider when you try to decipher all the fine print of your contract, which leads nicely into our list of cons. Before you get too excited about hybrid policies, don't forget that there's not any magical solution. And like everything in life, you can't have your cake and eat it too. So the

The first con and the biggest one to take into consideration is that when compared to a similar traditional long term care policy, a hybrid policy is more expensive. In other words, you're not getting the best coverage for your money with a hybrid long term care insurance policy. And that's because you're bundling two different products into one, which inherently is going to create more risk to the insurer and just cost more money.

Just like it's cheaper to buy term insurance and invest the difference, buying a traditional long-term care policy on average is likely going to make more sense if you're looking to maximize your dollars and your coverage.

The second con is that hybrid policies aren't as customizable. For example, elimination periods, this is the amount of time until insurance starts paying out when you have a long-term care event, elimination periods can often start at 90 days for hybrid policies. Now, 90 days might not seem like a long time, but if the cost of care is $7,500 per month, that's over $22,000 out of your own pocket before insurance kicks in.

Perhaps you can get over that, but many hybrid policies also don't include an inflation protection option, which is a big concern with the rising cost of long-term care. The third con is that these policies require a relatively large sum of money in order to get proper coverage. Again, a single premium of $100,000 to $200,000 is not uncommon, and not everyone just has six figures lying around to throw at a long-term care policy.

Even if you do, you might determine that taking that money, putting it in a separate investment account that's earmarked for long-term care and retirement, and then investing it for the next 10, 20, or 30 years is maybe a better solution than handing it over to an insurance company.

Lastly, as you're already picking up on, these policies can be very confusing to navigate and understand. Also, with the right salesperson in the picture, the benefits can often appear to outweigh any of the drawbacks, making it seem like a no-brainer without really understanding the nuances and limitations of the policy that you're buying.

Okay, I know that was a lot, but there's still a few final things I want to share with everyone while long-term care is on your mind. First, one of the biggest challenges that is often overlooked with long-term care is that you're most likely going to need to use your long-term care policy when you're older and perhaps not as sharp as you are today.

Insurance companies are really good at making policyholders jump through a lot of hoops in order to tap their benefits and file a claim, especially with traditional policies, leading many people to just give up and pay for expenses out of pocket.

One solution to consider for yourself and for any loved ones in your life is what's known as a long-term care advocate. This is a person that will work with the insurance company on your behalf until your benefits are paid out. There are two patient advocacy groups that I'll link to in the show notes. One is the Alliance of Professional Health Advocates and the other is the Professional Patient Advocate Institute.

I will also link to a long-term care partner of ours who I've worked with for years who not only sells long-term care insurance policies, but she's also a long-term care insurance advocate. Her name is Linda Yonke at Yonke Consulting and Long-Term Care Alliance. I'll put her information in the show notes. Mention my name to her and she'll take good care of you and get you in the right hands if she can't help.

The second thing I want to leave you with is that given that long-term care insurance can get expensive quickly, some couples decide to only buy insurance on the female spouse because women have longer life expectancies and are more likely to need long-term care than men.

In fact, 64% of long-term care claims were paid out to women in 2018. So if you're looking for a way to cut down on some of the costs, this is one path to consider as long as you're okay taking the risk by leaving one spouse uninsured. Or perhaps you determined that you could self-fund for one spouse but need insurance for the other in order to avoid jeopardizing your retirement plan.

Lastly, in a recent study by Lincoln Financial, 65% of people said that they would rely on Medicare to pay for a long-term care event if needed. However, as you might already know, while Medicare Part A might pay for a portion of a nursing home or rehabilitation center stay, long-term care expenses are not covered by Medicare.

Medicaid does cover long-term care expenses, but most of you likely know that you need to show a very small amount of income and assets in order to qualify for Medicaid.

So with that, I will end this series exactly how I started it by saying everyone, and I mean everyone, needs to have a plan for long-term care. It's impossible for me to cover every little nuance of long-term care in these two short podcast episodes, and I'm sure you're left with dozens of questions still, but I hope I've inspired you to take action and create a plan for you and your loved ones.

even if it simply means earmarking a chunk of your existing savings to self-fund for long-term care when and if you have an event in retirement. And if you do still have questions about long-term care after listening to this series, please do send me an email at podcast at youstaywealthy.com. And if I get enough of them, perhaps I'll do a follow-up Q&A episode so everyone can benefit from the answers and all learn together.

As a reminder, the links and resources for today's episode can be found by going to youstaywealthy.com forward slash 117. Thank you as always for listening, and I will see you back here next week. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.