Considerations For Long-Term Care Coverage

Bob looked over the long-term care (LTC) material his financial planner had given him earlier in the day. He looked at the cost of the policies that the financial planner had recommended to him, and did not relish having to pay the cost of those premiums for many years. If both he and his wife need any form of care, they will be in trouble without coverage, but if only one of them does, then their savings might be sufficient to cover the necessary expenses without having to pay premiums. Of course, if they get lucky and incur little or no LTC expenses of any kind, then they will save thousands of dollars.

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This is a common dilemma among older middle-class workers. The question of whether they should go ahead and spend money on LTC insurance, or just assume the risk themselves is a difficult one. Read on to find out how several variables relating to health and finances must be considered in order to find out the answer. (For background reading, see The Evolution Of LTC-Insurance Plans and Long-Term Care: More Than Just A Nursing Home.)

Factors to Consider
Health and longevity will dictate the necessity for coverage. For individuals with families that have a history of health conditions, such as Alzheimer's disease, obtaining coverage at an earlier age, when they are still insurable, may be of paramount importance. Regardless of whether the need stems from longevity or illness, if the odds are historically, or statistically, likely that LTC will be necessary, then anyone with assets, that they would like to protect, better be adequately insured. However, those with no family history of disease may play the odds and save their money instead.

Health issues are not the only consideration for those in the middle class. LTC insurance, generally, only makes financial sense for those who have sufficient assets to disqualify them for Medicaid. The opportunity cost of paying for premiums, can also play a major role in determining whether carrying LTC insurance will be cost effective. For example, some of the best policies offered through an insurance company, that covers a variety of care options, sufficient financial payout and with inflation protection, may cost around $3,000 per year for a 50-year-old and $5,000 per year for a 65-year-old in 2006, according to the AARP.

Therefore, if the insured is placed in a nursing home for two years, a total benefit of $127,750 will be paid out, assuming the benefit pays out $175 per day. But the premium outlay for this coverage would total approximately $60,000 over 20 years for the 50-year-old. So, the benefit received, in this case, would only be about two times what the policy owner paid in premiums to begin with. The national daily average for a private room in a nursing home in 2006 is $206 per day. That means without any insurance coverage, you would be looking at $75,190 annually. Therefore, if the insured has been paying premiums for two years and then files a claim, he or she will come out further ahead.

Generally speaking, the odds that someone in his or her 50s, or even their 60s, will need extended LTC are fairly low, assuming the person is relatively healthy when coverage is obtained. For those who do not anticipate that they will need extended LTC, the premium payments may not be worth the opportunity cost.

Example - Premium Cost Vs. Opportunity Cost
A 50-year-old buys a 20 year paid-up policy. The benefits provided by the coverage must be weighed against the return that can be gained by investing the cost of the premiums over the same amount of time. If $3,000 is invested annually, with an average annual growth rate of 7.5%, that will grow to a hypothetical balance of around $130,000 over 20 years. While these numbers will obviously be depleted if LTC is necessary, they will remain as cash balances for the investor if it is not.
If the investor, in this case, feels reasonably certain that care will not be necessary until after age 70, then investing the premiums may make more sense than purchasing coverage. This leaves the investor with the funds to use towards other expenses, or pass on to heirs if extended care is unnecessary. (For further reading, check out Long-Term Care Insurance: Who Needs It? and Taking The Surprise Out Of Long-Term Care.)

A Critical Mistake
One compromise that may make sense, to those seeking to cut the cost of their LTC coverage, is to buy a cheaper policy that excludes critical features such as the inflation rider, or a choice of care options. Most experts recommend that it is better to go without LTC insurance than to pay for a policy with inadequate coverage. A policy that does not contain these provisions, is, in many cases, a waste of money, because the major provisions of most competitive LTC policies are what provide the real protection from LTC expenses.

For example, because the cost of LTC can increase as a result of inflation, an inflation rider is almost imperative. Without it, the policy's protection will become inadequate within a few years, as inflation will push the price of adequate LTC well beyond what is provided by your payout. Furthermore, being able to choose the method of care received, by the insured, is also important, as few people want to be put in a nursing home to receive services that could be provided by in-home care.

Balance Sheet Considerations
Another issue that those contemplating LTC must consider, is whether their post-retirement budget will sustain the cost of LTC premiums. Many workers can expect their incomes to drop substantially once they retire. So those who purchase coverage, during their working years, must factor this eventual reduction in their future incomes into their long-term budgets. Most planners recommend that a client, with limited means, focus on saving for retirement rather than paying for LTC coverage. Of course, those who will have smaller budgets, once they retire, may not have enough assets to require insurance. The requirements to qualify for Medicaid differ from state to state, but in order to qualify, elderly individuals, and couples, are restricted to the amount of assets that can be owned. Therefore, lower income retirees, with relatively fewer assets, may qualify for Medicaid. Those with higher net worth, should take note that some states have established partnership programs with the federal government that enable their residents to shelter a certain amount of their assets from the Medicaid spend-down process, if necessary. This, of course, allows them to retain a portion of what they own, and still qualify for Medicaid. (For more insight, read Medicaid Vs. LTC Insurance and What's The Difference Between Medicare And Medicaid?)

Finally, there are alternative sources of LTC funding available through annuities and universal life insurance products that offer accelerated benefit riders for LTC and disability. (For more information on universal life insurance, see A Multipurpose Future Planning Tool.)

Conclusion
The LTC equation has two main components: medical and financial. Both issues must be evaluated, realistically, using some combination of personal preference, probability and statistics in order to determine a sensible course of action. There isn't one right answer for any couple or individual; many will have several options to choose from based on their risk tolerance, and personal situation.

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