Americans are living longer lives than their parents or grandparents, sometimes much longer lives. Americans born in the 1920s expected to live until sometime in their 50s. The advent of the Social Security system in the 1930s was designed to provide retirement income to people who lived into their 60s, which was considered a long life. Likewise, when Medicare was created in 1965, it was designed to help pay for health care for people for only a few years into their mid-60s.
All that has changed, however. Today, people can expect to live well into their 80s, and even living into their 90s is not unexpected. With longer lives, however, has come a drastic increase in chronic and debilitating illnesses. Since the 1980s, there has been a tremendous rise in the need to for long-term care. This kind of care can be very expensive. Planning for and protecting against the cost of long-term care is an essential part of any well-planned retirement and estate strategy. Modern “asset based long-term care insurance” is a specialized and useful tool to help pay for long-term care.
Most people who need help with long-term care need it because they’ve become unable to physically care for themselves. This kind of care typically becomes necessary when a person is unable to perform two or more activities of daily living (ADLs). There are six basic ADLS, including:
Note that inability to perform these tends to be the result of medical conditions, but they themselves are usually not medical conditions. In other words, difficulty performing the ADLs is a result of age, illness or both. A 2013 study showed that more than 60% of seniors needed some level of assistance with ADLs.
When people can’t perform two or more ADLs, they generally have to receive nursing care, either in a facility or from in-home care. This care is very expensive. The average national cost for a semi-private nursing home room is over $7,000 per month. When you consider that the average Social Security check is just over $1,400 per month, you can see why there is such a huge need for long-term care insurance.
It’s important to understand that Medicare will not help pay for long-term care. Medicare will help pay for health care costs that are incurred in a nursing facility, but it won’t help pay for your room and board. Even private Medicare insurance options like Medicare supplement insurance or Medicare Advantage won’t pay for room and board or other care for ADLs.
While federal Medicare is of no use for long-term care costs, state-run Medicaid may be able to help. Medicaid is designed to help pay for the cost of long-term care. Importantly, it will pay for the room and board at a long-term nursing facility. That’s the good news. The bad news is that to receive this benefit you need to qualify for the program. Each state has its own eligibility requirements, but in all cases, this benefit is means-tested. In other words, there is a limit to how much income you earn and how many assets you have. If you exceed these limits, you won’t qualify for Medicaid coverage unless you enter into a “spend-down” agreement with your state Medicaid program.
In a spend-down agreement, you are required to systematically spend most of your assets and or income in order to attain Medicaid long-term care eligibility. While it’s nice that there is a provision for people who wouldn’t otherwise qualify for this coverage, it can be distressing to watch your hard-earned savings become rapidly depleted for your care. This bad feeling can be tough to stomach, but it also impacts your ability to pass on an estate to your family. Money or assets that were earmarked for your heirs may have to be spent on your health care. In this way, what was once a large estate can be sucked dry to pay for your long-term care.
Insurance companies began offering long-term care insurance in the 1970s, but it really became a viable product in the 1980s. This insurance is designed to help you afford the cost of long-term care. It’s also designed to allow you to keep your assets. In other words, with the right long-term care insurance, you don’t have to spend down your assets. Theoretically, your insurance coverage will pay for most or all of your long-term care, allowing you to keep your estate intact.
Early forms of long-term care insurance were structured as indemnity policies. With indemnity coverage, your policy pays you a stated amount of money for every day that you’re receiving care in a covered facility. With this type of policy, you’re paying the full cost of the facility up-front, and the insurance company is paying you the per-day amount specified in your policy.
This kind of coverage was a step in the right direction, but many people’s experiences have been problematic. For one thing, these kinds of policies typically impose elimination periods before coverage begins. During an elimination period, you have to pay the full cost without reimbursement. Typical elimination periods can be as long as 90 or 100 days, or more.
The premiums for traditional long-term care insurance tend to be high and subject to increase. Many people experience significant increases in premiums over time. The average annual premium more than doubled from 1990 to 2015. These increases can be unaffordable to people, forcing them to cancel or reduce their coverage. This of course means that if they do require long-term care, it will be an even greater burden since they gave up or reduced their coverage. Another shortcoming of early long-term care insurance is that you never receive a benefit if you didn’t need long-term care. They were “use it or lose it” products – and expensive ones at that.
Many people are choosing to make a plan for the cost of long-term care by using some of the oldest insurance products around – life insurance policies and annuities. This kind of coverage is known as “asset-based” long-term care insurance because the basis for your coverage is an asset that has value apart from your requirement for nursing care. In other words, you can use an insurance policy or annuity that accumulates value (and potentially pays your beneficiary a death benefit upon your death) to help cover the cost of your care. In this way, your insurance policy or annuity does “double duty.”
Whether you choose a life insurance policy or an annuity as the basis of your asset-based strategy, they share the same key feature: even if you never need long-term care, you still own a financial asset that will be available to pass on to your heirs.
Life insurance is normally used to provide a death benefit to your beneficiary when you pass. This might seem to be a poor fit to help pay for your long-term care needs. However, life insurance policies can also provide “living benefits” that can enable you to benefit from your policy while you’re still alive. Living benefits are also known as accelerated death benefits. There are three kinds of living benefits, including:
The chronic illness accelerated death benefits are what you’d use to pay for long-term care. The specific benefits paid vary from one insurance company to another, but typically you’ll receive a percentage of the death benefit on an accelerated basis.
An important point to consider is what kind of life insurance policy asset-based Long-term care Insurance calls for. Given that you’re likely to need long-term care later in life, you will want to avoid term insurance. Instead, whole life insurance or indexed universal life insurance is more appropriate. By using life these kinds of policies, you’re guaranteed that your coverage will be in force at the ages that you’re most likely to need long-term care. In the case of the indexed universal life, you’re also able to earn higher interest crediting based on the performance of the stock market; but, you’re protected from any market losses. Best of all, if you never require long-term care, your entire life insurance policy is available to pay a death benefit to your beneficiaries. It hasn’t gone to waste.
If life insurance is not an appropriate asset for your long-term care coverage, you can use an annuity. An annuity is a contract issued by an insurance company that promises to make a monthly payment to someone for a specific period of time.
Generally, annuities make payments for your entire life. Annuities are excellent tools for generating safe streams of income because they’re guaranteed by insurance companies. The payments are guaranteed, regardless of how the stock or bond market performs in any given year, or series of years. In this way, you can say that the insurance company takes all the investment risk off of your hands.
Annuities can be funded in either of two ways:
Generally, annuities accumulate interest over the years before you start taking income from them. This is called the “accumulation phase.” During this phase, your annuity will earn interest on a tax-deferred basis, so you won’t pay taxes on the interest you’re earning during these years. Some annuities are geared toward helping with long-term care and come with LTC-specific riders that enhance the value of your annuity. These kinds of riders literally multiply the value of your annuity when you have to pay for long-term care. When medical necessity requires you to receive long-term care, your annuity will begin paying a monthly benefit to help cover the cost of long-term care. Importantly, these payments can be made on a favorable tax basis.
As with life insurance, your annuity remains a valuable financial asset even if you don’t need long-term care. You would have complete flexibility to either use your annuity, or pass it on as a part of your estate. As part of your estate, it could go to your heirs or a favored charity. You retain complete control. And, if the need for long-term care does arise later in life, your annuity is there to help you pay for it.
It’s important to think about long-term care in the context of your overall retirement and estate planning strategy. It’s important to work with a financial professional who understands the complex factors involved in retirement and estate planning. Long-term care is a very serious subject, and it demands a serious solution. On the other hand, you don’t want to plan for long-term care at the expense of saving for retirement and estate planning. Because of its “double-duty” nature, asset-based long-term care could be a great tool for helping you accomplish all of your financial needs.
It’s important to remember that both life insurance and annuities are sophisticated products that require a long-term plan. You don’t want to rush into them without understanding what their purpose is, how they work, and what fees and charges are associated with them. Once you begin an asset-based long-term care strategy, you’ll want to stick with it to avoid paying surrender charges. By working with a seasoned advisor, you can find the best assets for your needs, and be prepared to stay the course. By doing so, you’ll be protected if you should ever need long-term care.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.