By Robert Klein, CPA
An unexpected uninsured or underinsured long-term care event can significantly reduce the longevity of assets and disrupt the flow of income during your retirement years, not to mention the physical and emotional consequences experienced. Without proper planning, you may find that funds earmarked for retirement or other financial goals suddenly need to be diverted to handle the challenges brought on by such an event.
What is a Long-Term Care Event?
There are two types of long-term care events that can trigger coverage by long-term care insurance: (a) inability to perform activities of daily living (ADLs) and (b) severe cognitive impairment. Both events require medical necessity, or certification by a doctor that long-term care is necessary.
Activities of daily living are basic tasks a person needs to be able to do to live independently. There are six types of ADLs. They include bathing, dressing, transferring, eating, toileting, and continence. You must be unable to perform at least two ADLs in order to qualify for coverage under a tax-qualified long-term care insurance policy.
The second type of long-term care event that can trigger coverage under a long-term care insurance policy is a severe cognitive impairment or dementia. Alzheimer’s disease is the most common cause of dementia, accounting for 60 – 80% of dementia cases.
Cost of Long-Term Care
Self-funding for long-term care in addition to planning for sufficient assets to provide adequate retirement income is extremely challenging, if not impractical in most cases given the potential cost of an extended long-term care event. Even for those of substantial means, a sizeable out-of-pocket long-term care expense can deplete assets intended for other purposes, especially if paid for from fully taxable assets such as retirement plans.
Excluding adult day care, the annual median national cost of long-term care per Genworth’s 2021 Cost of Care Survey ranged from $54,000 to $108,405 depending upon the type of care and location. The median national cost of in-home care, which includes homemaker services and home health aides, was approximately $60,000, representing an increase of 10.6% to 12.5% over 2020.
Two Long-Term Care Insurance Solutions
There are two types of long-term care insurance that can be used to pay for long-term care expenses. Both types are subject to an elimination period, which is the number of days you must need long-term care before your policy pays benefits. Elimination periods generally range from 0 to 180 days with an associated decrease in premiums for longer elimination periods.
The two types of long-term care insurance are traditional and hybrid policies. Traditional, or stand-alone, long-term care insurance is a good solution for people who can afford today’s premiums and potential future rate hikes. This type of insurance requires a lifetime commitment and the ability to pay the ongoing premiums in order to receive benefits and avoid lapse of your policy.
Hybrid policies offer two types of insurance bundled into one product. They combine long-term care insurance with life insurance or an annuity. The life insurance version either links a life insurance policy with a long-term care insurance policy, often referred to as a linked benefit insurance policy, or includes a long-term care rider on a life insurance policy. Long-term care annuities are deferred annuities with a long-term care rider.
Long-term care benefits paid by a hybrid policy reduce the death benefit or annuity benefits that would otherwise be payable from the policy.
Hybrid long-term care insurance solves the use-it-or-lose-it problem. Both types of hybrid policies generally require a sizable lump sum investment. The amount is dependent upon whether the policy covers one individual or two spouses, the age(s) and health of each applicant, and the amount and duration of long-term care, life insurance, and/or annuity benefits.
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Finance Long-Term Care for 10 Years
For individuals who prefer traditional long-term care insurance over a hybrid solution or don’t have the lump sum generally required to fund a hybrid long-term care policy, there’s another option available from several insurance carriers — limited-pay long-term care insurance policies.
Limited-pay long-term care insurance policies are traditional long-term care insurance fully paid after a fixed number of years, usually five to 10, with 10 being typical. Some of these policies have a rate guarantee whereby the premium is guaranteed to never increase during the payment term, e.g., 10 years for a 10-pay policy.
Limited-pay policies remove the lifetime commitment associated with annual-pay traditional long-term care insurance policies. They can also avoid unpredictable, potentially sizable premium increases to the extent that the premium is guaranteed to never increase during the payment term.
Annual premiums for 10-pay long-term care insurance policies are approximately 2.5 times the initial premium for comparable annual-pay policies. The value of a 10-pay vs. an annual-pay policy becomes more apparent over time as premiums on annual-pay policies increase.
Benefits of All Long-Term Care Insurance Policies
Although premiums for all types of long-term care policies aren’t inexpensive, they can be well worth it when compared to the potential cost of a long-term care insurance event such as dementia. In addition to being tax-free, long-term care insurance benefits provide peace of mind since they negate the need to liquidate assets reserved for retirement and other financial planning goals.
Furthermore, care can be provided by qualified professionals instead of family members. When care is provided by a family member, this can be devastating to the entire family since it negatively impacts family dynamics, disrupts the caregiver’s life, and often impacts the health and wellbeing of the caregiver.
Can you place a price tag on peace of mind knowing that a long-term care plan will preserve the emotional, physical, and financial well-being of those you love and care about? I don’t think so.
About the author: Robert Klein
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. The firm’s motto is Planning, Managing, and Protecting Your Retirement Income™. Bob is the creator of FINANCIALLY InKLEIN’d™, a YouTube channel featuring tax-sensitive, innovative strategies for optimizing retirement income. Bob is also the writer and publisher of Retirement Income Visions™, a blog featuring innovative strategies for creating and optimizing retirement income that Bob began in 2009.
Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies, including fixed income annuities, Roth IRA conversions, HECM reverse mortgages, and charitable remainder trusts, to optimize the projected longevity of his clients’ after-tax retirement income and assets. Bob does this as an independent financial advisor using customized holistic planning solutions determined by each client’s financial needs.
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