How do I determine if long-term care insurance or life insurance is better for my family?
Great question! Life insurance is a tool that leaves a lump sum of money to your family when you pass away. Long Term Care insurance is used to help pay for long term nursing care. Both can help your family should something happen to you. Typically people will purchase life insurance first, and then addingn long term insurance later. A good way to determine which you should buy first and how much you need is to have the analysis done in a financial plan that is not product driven, thus it is objective and will educate you on your options.
Selecting an insurance policy that fits your needs is a very personal decision and you need to consider many factors such as health, budget, age, family medical history, temporary need (think college or pay off the mortgage) or long term need, etc. Temporary needs can be satisfied with a term policy or coverage for a certain time frame, 1, 5,10, 20, 30 years. Term policies are usually very inexpensive when you are younger and get progressively more expensive over time. Generally, the term policies are not available for people over 70 or maybe up to 80 years of age. A policy for your entire life can be covered by a permanent policy such as, Whole life, Universal life, Variable universal life to name a few. Permanent insurance, once you have a permanent policy and pay your premiums, the company cannot cancel it or change your premium, unless they change the premiums for all the people that hold that type of policy. A thought to remember is that underlying insurance for all policies gets more expensive as you get older. So in a very basic way, a 10 year level term policy adds up your 10 annual premiums and divides by 10 years to get the average cost that is charged each year for a level term policy. A permanent policy acts the same way, but over the expected lifetime of the insured. The cash build up in the earlier policy years in a permanent policy is used to offset the higher costs much later.
The traditional Long Term Care policies coverage became effective if you needed assistance in your home or other type of facility when you could not perform at least 2 activities of daily living. The policies were just to cover these chronic types of situations and most would not cover you for death. They are/were expensive for the chance of probability you needed the coverage. If you did not use the benefits, you did not get a return on your investment. Similar to car insurance, if you never had an accident or crashed your vehicle, you just paid your premiums on the chance that you might need collision coverage.
For several years, there has been a hybrid or newer generation of policies that cover not only cover death, but LTC, with the thought that one way or another you get a benefit. The differences are the benefits paid are capped so the insurance company can put a limit to their liability.
Which one is better for you really depends on what you want to achieve over the short and long-term. If you want coverage in case of death to cover your family and if you have a long life and are worried about the possibility of needing some assistance with the ADL's at home or at a facility, a hybrid policy may be more appropriate. I suggest you research and look at the hybrid policies. Contact a few different life insurance companies and get a few quotes. Research the policies and prioritize what you want, why, and match it to the policies and compare the features, benefits, and costs.
Costs can vary, so shop many companies. When dealing with insurance, matching a person to a company or product is an important factor that can be reflected in cost. One company may be willing to take more of a chance for less cost.
Life insurance is the only form of insurance intended to protect your family. When you pass on, the insurance company will give your family the exact amount of money they need, exactly when they need it. You just have to make sure your policy is in force on the day you die. When will that be? Good question.
You could buy term insurance, which will guarantee the premium for 10, 15, 20, or 30 years. If you die within that time, then your family will indeed get their benefit. But suppose you live past that guarantee period. Then, you drop the policy because the price went up exorbitantly. What will happen when you die? No benefit will go to your family, because you had terminated the coverage. This is the reason to buy permanent life insurance. If you really want your family to get that money, the policy has to last as long as you do.
Long-term care insurance will not protect your family. It will pay for nursing home or home health care, so you don't have to liquidate any funds to cover those costs. It protects your assets. When you die, the policy will, of course, terminate. Your family will get nothing.
Long-term care insurance is designed to protect you against the high cost of a stay in a nursing home, or home care. There are statistics that say 60% of us will spend time in a nursing home or need home care. When you purchase long-term care, you are typically buying a daily coverage amount. For example, you might buy a benefit of $150/day that, if/when needed, will go towards the cost of the nursing home, or having someone come to your house to provide care. Some policies also allow for a family member to get compensated for providing that care for you. The higher the daily amount that you purchase, the higher the premium you pay. There are also many optional features that are part of the decision-making process, so I recommend discussing with a professional that you can trust.
Life insurance is designed to provide cash to your family in the event of your death. The main purpose for purchasing life insurance is to provide replacement income to your loved ones if you were to die. There are more advanced planning strategies that utilize life insurance, but the main idea is that it provides a death benefit.
The long-term care insurance industry is in flux and we are seeing a lot more of what are called "hybrid" policies. They are basically life insurance policies, that provide a death benefit when you die, but also provide a "living benefit" that allow you to access the death benefit before death if you need long-term care in either a nursing home or your home. Again, I suggest discussing with a professional who can properly explain all the features, benefits, and costs.
Long Term Care may be more appropriate if you're worried about a period of heightened expenses (due to LTC) eroding a significant portion of your assets that you had planned to be able to leave to your family. This means that the outcome to your family is uncertain because you may or may not require the policy, and the remainder provided to your family would largely be determined based on the investment performance of your assets.
Life insurance guarantees that a payment will be made at your death, but it doesn't help protect your assets.
Then, of course, there are life insurance policies with long term care riders. There are some elements to this structure that can be attractive and some that are not, but as the old saying goes, "there's no such thing as a free lunch." I would encourage you to remember that any potential benefit has a cost.
Lastly, depending on your situation, you may not actually need either policy. I have had a lot of clients come to me with the idea that they absolutely must have these insurance policies in place, only to find out later on (through some diligent financial planning and cost/benefit analysis) that self-insuring these risks is the more prudent way to go.
Of course, if I can provide any clarification or further insight, please feel free to reach out.
Adam C. Harding, CFP