“A 65-year-old male with a long-term care insurance policy has a 32% chance of letting the coverage lapse before he dies, with his female counterpart having a 38% chance of doing the same.” Time Magazine, October 6, 2015
I recently had three meetings in a row with new clients who were caring for aging parents currently in nursing homes. All of their parents are healthy enough to live long into the future, yet not healthy enough to care for themselves independently. This is never a fun topic, I can tell you, and all three were stressed and confused by the various long-term care (LTC) choices they have had to make on behalf on their folks.
But I can also report that this situation has had an upside for my clients; it’s been a wake-up call regarding their own futures. Still young and healthy enough to qualify, they’ve vowed to make arrangements for their LTC while it is still economically viable to do so and on their own terms.
With 10,000 or so Baby Boomers retiring every day I’m sure a few of you have already purchased some form of long-term care coverage. I’m guessing that probably a bigger group have at least thought about it. Sadly, most of you probably aren’t really prepared to age gracefully and comfortably. Here are a few of the FAQs I hear most often on the topic.
What exactly is long term care?
It may include home health care, an assisted living facility or the dreaded nursing home.
Does Medicare typically cover LTC costs?
Should I buy some type of long term care coverage?
Yes, with two exceptions: 1) if you’re dead broke and won’t be able to keep up with premiums or 2) if you’re Bill Gates and can pay out-of-pocket for any kind of medical care you want. The question isn’t whether you need LTC insurance (you do), but how much you need and what kind of coverage to choose. (For related reading, see: Long-Term Care Insurance: Who Needs It?)
Can you afford to keep the coverage, or more to the point, can you afford to not keep the coverage?
The options are complicated, policies often seem expensive and the premiums seem go up every year by leaps and bounds. That said, researchers at Georgetown University estimate that 70% of individuals 65 and older will need some LTC during their lifetimes.
Do people shoot themselves in the foot when making important LTC insurance decisions?
Boy, do they ever! Here are the six major LTC faux pas I see over and over.
LTC Mistake #1: Doing Nothing or Waiting Too Long to Act
Realistically if you are healthy, your early 50s is the best time to line up the LTC coverage that you may need. If you already have health issues or a family history of health issues, you’ll need to start even earlier and can expect to pay more for your premiums. (For related reading, see: What's the Best Time to Get Long-Term Care Insurance?)
Premiums generally increase 3% to 4% each year you delay applying for a policy. You may face further premium increases if your health deteriorates. Or you may not be able to get coverage no matter how much you are willing to spend. But it never hurts to ask—I’ve helped people even in their 80s get LTC coverage.
LTC Mistake #2: Choosing Your Policy Based on Price Not Value
All policies are not created equal. The value you get for your money can vary widely by policy. While the cost is important, if something is priced too cheaply you may face unaffordable premium increases later on down the line. I won’t name the company here (there have been quite a few who have done this) but many people have faced annual premium increases in the range of 40% or more on several occasions. This is one of the reasons I often look to other alternatives for clients looking for traditional LTC coverage. Other options may include LTC riders on life insurance or hybrid policies (more on this at another time). (For related reading, see: How Long-Term Care Riders on Life Insurance Work.)
LTC Mistake #3: Not Taking Advantage of Couples’ Options
I rarely see new clients come in with a joint LTC policy, but many companies offer spousal discounts for policies purchased by married couples. These can mean as much as 30% off the premiums per year. Couples policies can also be an inexpensive way to increase coverage or decrease premiums, as well as increasing the odds of getting some benefit from the policy.
Consider a couple that purchases a joint policy for two years of coverage each. Say the wife ends up needing care for three years. With a joint LTC policy, she uses her two years and one of her husband’s years. Obviously this leaves the husband with only a year of coverage, but they paid less in premiums, and decreased the odds of further out-of-pocket expenses. Most importantly they used more of the benefits from the policy.
Most LTC policies are use it or lose it, if you don’t need a nursing home and you pass away, the policy ends with no payout to an heir. With joint LTC coverage, the husband may end up paying out-of-pocket for additional care if he stays longer than one year in this scenario, but even then they would have had to pay out of pocket for the wife’s care anyway. (For related reading, see: Long-Term Care Insurance: You Have Options.)
LTC Mistake #4: Not Factoring in Inflation
What may sound like a lot of coverage now may not be adequate in 20 or 30 years after inflation. With the big wave of boomers retiring there will be further pressure upward on LTC costs, which may far exceed normal estimates of future inflation. Inflation riders on LTC policies can greatly increase you coverage down the road, but these riders can appear quite expensive and often get skipped.
LTC Mistake #5: Not Knowing Exactly What You’re Getting With Your Policy
These aren’t one-size-fits-all policies. Getting coverage is not a check-the-box type of thing. Make sure you are comparing apples to apples when looking at policies, and that they provide appropriate coverage for your situation and overall financial plan. Other fine-print types of things may limit things like home health care. If, like many, you want to stay in your home as long as possible, this would be a big issue. (For related reading, see: Long-Term Care: More Than Just a Nursing Home.)
LTC Mistake #6: Ignoring Hybrid Policies That May Save You Money or Get You More Coverage
So-called hybrid polices and been growing in popularity over the past few years. They often package LTC coverage with life insurance or sometimes even annuities. I think shoppers are attracted to these policies because they often increase the odds of actually seeing benefits. With LTC generally it’s use it or lose it. Personally I’d rather not use it, but I still want a great value from my policy.
If you look at a life insurance policy with living benefits like an LTC rider and death benefit, the question is whether you get LTC coverage first. They may even include a cash-value account which can grow tax-free and come out tax-free when handled properly. The upside is that life insurance has more protection from premium increases; the downside is you may end up with some extra fees to cover the life insurance cost.
Don’t put your head in the sand, if you are in your 50s or beyond at least have the LTC discussion with your trusted certified financial planner. I like to think of investing in your LTC plan now as guaranteeing yourself some TLC later. There is real a value in knowing that you and your loved ones are appropriately covered.
(For more from this author, see: How to Make the Most of Your RMDs.)