A Guide to Fund & Protect Your Long-Term Care Risk
Updated: Sep 23, 2020
For someone sixty (60) years old today, there is a 50% probability they will need long term care (LTC). Other studies show 70% of people over age 65 will experience a need for long term care during their lifetime. However, the real answer is your probability is either 0% (you will never need it) or 100% (you will need it). Applying statistical studies to your own situation is always difficult and often not very practical.
The traditional long-term care products have faced huge profitability problems. The number of carriers offing LTC products has been reduced by 90% since 2000, and the inforce policy providers have issued a number of price increases. Today, obtaining LTC coverage faces a number of obstacles: (1) the product is often not available or underwriting can be difficult, (2) questions are real about whether the claims will be paid in the future, and (3) premiums, as noted above, may increase forcing you to cancel the coverage in the future.
How should you fund the long term care risk?
Our firm recommends an investment approach to funding your long-term care risk. This approach provides liquidity to you, regardless of whether you actually need long-term care benefits:
Build a policy cash surrender value that can be invested in the market
If needed, you can use the policy for long term care benefits
If not needed, you can use the policy cash surrender value for retirement or other expenses
The policy pays a death benefit (or a portion less of the long-term care benefits received) to your beneficiaries
What type of insurance product?
We recommend using a life insurance policy with an LTC rider rather than acquiring, if you can, a traditional LTC policy. This new LTC offering from insurance carriers is referred to as a Life/LTC Hybrid product. Clients have the ability to properly fund a life insurance policy with an LTC rider to deliver liquidity upon a surrender, a death benefit, and/or long-term care benefits, if needed.
You want to use a life insurance product from a highly rated carrier offering a broad range of investment options. This flexibility gives you the opportunity to achieve tax-efficient long-term investment growth.
How should you pay premiums?
We recommend funding the life insurance policy in one of two ways. The first being the maximum 7-pay premium allowed for the policy. This funding approach reduces life insurance policy expenses to focus on tax-deferred accumulation. The second is a level premium funding approach if your primary objective is a death benefit for a potential LTC need. The length of the premium funding is generally tied to a target completion date in your mid 60's which coincides with retirement.
How does long-term care get paid from the life insurance death benefit?
Typically, the loss of 2 or more activities of daily living (ADLs) and/or severe cognitive impairment will trigger LTC benefits. The insured’s medical team will assist in determining that long term care is needed. The life insurance carrier will pay out the policy determined monthly benefits, up to a maximum, to you. The LTC payments are ultimately paid for from the policy death benefit upon the insured's death.
For example, the LTC rider pays $10,000 per month for a total of 60 months or 5 years.
3 Years: The length of long-term care needs in 87% of long-term cash insurance claims.
What type of long-term care rider?
We strongly recommend using an LTC rider with an indemnity definition. Indemnity means the carrier will send a benefit check each month for the full amount of LTC benefit you qualify for, even if your expenses are less. No bills, receipts or any other type of monthly paperwork is required to receive the benefit amount.
The LTC rider is designed to provide you with a safeguard against the financial burden of long-term care. LTC monthly benefit payments can give you the ability to maintain:
Your standard of living
Help fund your spouse’s financial security and independence
Additional inheritances for family, gifts to charities and/or business continuation
Funds some or all of your long-term care costs
You choose how and where to receive care
What happens when I die?
The death benefit will be paid to your beneficiaries less the accumulated long-term care benefits that have been paid out to you. If you never need to use the LTC benefits, your beneficiaries receive 100% of the death benefit.
The Bottom Line
This approach to funding and protecting your long-term care risk is that you have liquidity regardless of the outcome . . . cash that can be used today via a surrender or loan or provide LTC benefits with a death benefit paid upon your death.
We are here to help you evaluate funding long-term care based on a premium budget and/or a targeted level of LTC benefits.
This is not an offer to sell a security or insurance product. This information is provided for informational purposes only and should not be construed as legal or tax advice. You should discuss your circumstances with a financial professional before making any decisions. This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. https://www.trcfinancial.com/disclosure