Many people ask me about long term care insurance and wonder if it’s right for them. The first thing to realize about long term care insurance is that, in most cases, it’s not about you. “What do you mean, John?” I mean that in most cases, if you need care, you’re going to get it. The problem becomes, who’s providing the care and who’s paying for the care.
If you don’t have long term care insurance and you end up needing care, your family will most likely try to provide the care themselves. This could work but there are more than likely going to be some problems with this plan…
- If your spouse is going to be the one providing the care, they’re probably of a similar age which means they’re probably not going to be physically capable of providing the level of care you’ll most likely need.
- If your children are going to be the ones providing the care, they’re probably going to have to either quit their job or significantly decrease their hours at work to provide care. Are your children financially able to give up their income to care for you? What impact will that loss of income have on your children’s retirement goals? They won’t be able to save as much and, since their earnings will be reduced, their Social Security payments in retirement could also be reduced.
- When multiple family members are involved in care decisions but only one family member is actually providing the care, family conflict often results.
The question to ask yourself is “Would I rather have my family care FOR me, or would I rather have my family care ABOUT me while they’re managing the care the insurance is providing for me?”
SELF-INSURING
The cost of care is astronomical and it’s rising every year. I’ve had several people tell me that they’ll just self-insure instead of buying insurance. That’s definitely one way to do it but, if you have the many millions of dollars needed to properly self-insure, you can easily afford the insurance which will make the process so much easier for you and your family. So, even though you might be able to self-insure, why would you want to?
There are basically three types of Long Term Care Insurance solutions available.
1. TRADITIONAL LONG TERM CARE INSURANCE
The first is traditional long term care insurance. This is what you’ve probably heard of before. It’s what the industry was built on. Think of it like renting a house – it doesn’t build any equity, it’s only there if you need it and so it is the least expensive way to cover the need. It’s very flexible in it’s design. New York State even offers a 20% Income Tax Credit for the premiums on qualified policies, which is a very big deal. These policies are also often inflation protected so your benefit amount increases over time and you can even pay the premium using HSA (Health Savings Account) dollars. They’re very customizable. But traditional long term care insurance has a few issues to consider.
- Premiums aren’t guaranteed. I don’t see them increasing all the time, but it can, and probably will happen. The good news is that the New York State Department of Financial Services must approve any rate increases and the regulators in New York are very pro-consumer. It’s hard for an insurance company to raise the rate on an in-force long term care policy. It can happen, it has happened in the past, and it will undoubtedly happen again in the future though.
- You’re not building any equity. If you don’t use it, you don’t get anything back at the end. It’s kind of like your homeowners insurance – if you never file a claim, you don’t get your money back.
If those are concerns for you, I completely understand and that’s why we have two other solutions.
2. HYBRID LONG TERM CARE INSURANCE
The next is something called a Hybrid Long Term care policy. This is something that’s built on a life insurance chassis. This is a good solution if you don’t like the “use it or lose it” mentality of traditional long term care. If you never use the long term care part of the policy, a death benefit is paid to your beneficiary when you pass which may recoup all the premiums you ever paid in. The death benefit goes to your beneficiary tax free because it’s life insurance. So, that’s one reason people like hybrids. The other reason is that it develops equity – it’s like owning a house. If, after 20 years of owning a house, you move out and sell it, you’ve got some equity in it, right? This is similar. If, after having this policy for a while, you decide you don’t want it anymore for whatever reason, you can cash out the equity (or cash value as it’s called) when you cancel the policy. I call this policy the “win-win-win”. If you need long term care, you have some coverage. If you don’t, it pays a death benefit. And, if you change your mind for some reason, you can cash out the policy and get some money back. So, #2 is a good option if you don’t like #1.
3. LIFE INSURANCE W/ LONG TERM CARE RIDER
But, there’s a third option and that’s a life insurance policy with a long term care rider. “Well, what’s the difference between #2 and #3? They sound like the same thing.” At first glance, they may look the same but they’re actually quite different. Option #3 is really just a life insurance policy with a high death benefit and a high cash accumulation that, for an additional premium, you add a rider that will give you some of the cash accumulation back as a long term care benefit if you need it. It’s probably never going to grow; it’s just going to be what it is.
CHOOSING WHICH OPTION IS RIGHT FOR YOU
Option 1 will give you the most robust long term care coverage for the money. If you don’t like option #1, the question becomes, what’s more important to you? A higher Long term care benefit or a higher death benefit and cash value?
As you can probably tell, long term care insurance is not something you should buy without consulting with a qualified professional. There is a lot of planning and customization that goes into your decision. When you’re ready to get more information for your specific situation, please reach out to me at 518-877-7447 or visit our Contact Us page.
John Lofrumento, CFP®, FSCP®, RICP®
President, The Lofrumento Agency
Clifton Park, NY / Ballston Lake, NY