Paying for long-term care: Here's how it's changing

Traditional long-term care insurance policies have two main problems. One is that they are “use it or lose it” plans. If the total premiums you pay for the policy exceed the cash benefit you receive, you lose that money. And speaking of premiums, they go up every year. You may rightly point out that this is the case with any type of insurance - you pay premiums you don't get back.

But, the net result of paying tens of thousands of dollars into traditional long-term care policies is that there has been a stunning decline in the number of policies sold and the number of companies selling traditional policies.

According to Forbes, the trend in long-term care insurance has resulted in the following: “While fewer people bought traditional insurance last year, more purchased policies that combined life insurance with long-term care benefits. More than twice as many consumers bought policies that add long-term care benefits to annuities or whole life plans than purchased stand-alone coverage.”

The other potential complicating issue with traditional long-term care policies is the criteria. Even though other hybrid policies may have the same criteria for qualifying for benefits, individual companies vary in terms of how strict they are. For most policies, you must be unable to perform at least two of the following without assistance:

1. Bathing - the ability to get in and out of the shower or bath, shave and brush one's teeth.
2. Eating - the ability to feed oneself by getting food from a receptacle such as a plate, cup or table. Or if you have a feeding tube.
3. Dressing - the ability to put on and take off clothes and use buttons or zippers. This also includes putting on and taking off braces or artificial limbs.
4. Transferring - the ability to walk and get in and out of bed or chair.
5. Toileting - the ability to use and get on and off the toilet and use good hygiene.
6. Continence - the ability to control one's bladder and bowel functions. Or when not able to perform these functions, the ability to care for a catheter or colostomy bag.

Some insurance companies will send out a nurse to evaluate these ADLs; others will accept documentation from a facility, hospice or home care company to support the claim. Most traditional policies require a 90-day waiting period where you have to pay out of pocket before the benefit begins.

If you regain the ability to perform these functions, you will be suspended from receiving payments. But, in most cases, if an individual cannot perform at least two of these, they are probably in decline.

Traditional long-term care insurance policies: You get to choose how much coverage you want and the maximum benefit. You will pay a higher monthly premium for a higher monthly payout. Typically, you pay an annual or monthly premium for life. Once you begin receiving the cash benefit, your premiums will be suspended. Many insurance companies no longer offer these policies, and depending on your age, the premiums could be high when you opt-in.

Hybrid policies: Most hybrid insurance offers life insurance and long-term care. Once you need care, the policy will pay out a cash benefit. If you use none of the benefits, the policy will pay your beneficiary a life insurance death benefit.

When you have long-term care needs, you can draw down the death benefit to pay for your care, but there would be a maximum monthly amount. However, the insurance company would still provide additional long-term care coverage even if you used up the entire death benefit.

A hybrid life insurance long-term care policy combines a life insurance policy with a long-term care rider option. There are numerous policies available. Speak with your financial professional about which policy is best considering your financial situation.

Universal life policy

Universal life is insurance you can use to pay for long term care. A universal life insurance policy has the option of adding long-term care. It also helps protect the family in the event of the insured individual's death, and there is typically no deductible or waiting period like traditional policies.

Linked-benefit policy

A linked-benefit policy links long-term care benefits with a life insurance policy or an annuity. A linked-benefit policy is a true hybrid policy, and the names are used interchangeably. It provides money for long-term care if you need it, but also, if you don't ever need care, your heirs will receive a death benefit or cash value of the annuity. In summary, a life insurance policy with a long-term care rider has these characteristics:

• A hybrid long-term care policy is a life insurance policy with a long-term care rider.
• Hybrid life insurance covers partial costs of assisted living, nursing home care or in-home care if you need it.
• Payments permanently decrease the death benefit and may only be available for up to five years.
• It won't pay for costs that your health insurance would typically cover.

There are several linked-benefit policies available, so make sure you compare the details of each policy to see which one is right for you.

A long-term care rider on a life insurance policy

When you buy life insurance, you may have the option of adding a long-term care rider at the time of purchase, but you won't be able to do it later. Keep in mind that the long-term care benefits will not be as generous as those of traditional long-term care or linked-benefit policies.

The coverage a policy provides will depend on the benefit period and benefit amount you choose. Most policyholders choose three to five years. A typical plan pays out $3,500 to $5,000 monthly. Considering the cost of in-home or assisted living care, that amount can go a long way toward supporting care for years, depending on the benefit time period.

To get an idea of the hybrid long-term insurance costs, you can review the American Association for Long-Term Care Insurance website to get pricing and coverage. Many plans have a single prepaid premium.

With hybrid policies, the amounts spent on care are subtracted from the policy's death benefit. The remaining amount goes tax-free to the policyholder's heirs. The federal estate tax (as of 2022) does not apply unless your estate is worth $12.06 million or more. It is highly advised that you work with a financial professional to understand the tax implications of your particular plan.

For hybrid policies that separate their long-term care and life insurance premiums, you can deduct just the long-term care insurance premiums but not the life insurance premium, depending upon your age.

Another type of hybrid plan is a long-term care annuity, which also provides long-term care insurance. The investment grows tax-free at a fixed rate of return, and gains will be tax-free if used for long-term care expenses. The coverage amount will reduce the account value if you qualify for long-term care benefits under the long-term care annuity. Once your account has been exhausted, the insurer will provide the remaining long-term care benefits.

The other option is to use annuity payments toward your long-term care premiums with no taxes, but if you use your annuity payment toward long-term care costs, there could be tax consequences.

What you decide about a hybrid long-term care policy depends on how you make the decision. There are so many individual factors to consider there is no right answer for everyone. The most critical part of evaluating policies is examining the details - and there will be many of them. Meet with your financial professional before signing the dotted line. Some of the pros and cons of hybrid long-term care insurance plans:

Pros of hybrid long-term care insurance

• A hybrid policy could be good for people who want to ensure their heirs get some death benefit. If that is important to you, make sure you choose a policy that leaves something even if you exhaust the care benefit.
• You might be eligible for a return of your premium if you change your mind later.
• Some hybrid plans allow you to pay family members to provide your care.
• Benefits are guaranteed if you pay your premiums. There are no premium increases.
• You could cash out the policy, but there will be tax consequences.
• Some hybrid companies are less stringent with their underwriting policies, and it is not unusual for people in their 80s to opt for hybrid policies.
• You could consider selling your policy if you need the cash. The company that buys your policy pays a percentage of the policy's value.

Cons of hybrid long-term care insurance

• You will likely have to make a lump-sum payment in the tens of thousands of dollars upfront. The better the long-term care benefits and the more robust the death benefit, the more you will have to pay. For some people, this isn't possible.
• Consider what you would be losing by not investing your cash into possible higher rates of investment returns.
• Long-term care payments reduce your life insurance cash value and/or death benefit.
• In the end, the benefit amount may not be enough to provide for your long-term care needs.

The fact is that most people do not have any kind of long-term care insurance policy. Savings, investments, home equity and retirement income are the primary sources for paying for care. Understanding the costs of care, having a robust estate plan and evaluating your insurance and what it will cover are the first steps to planning for the future. At least with more flexible long-term care insurance plans, you have several choices.