18 April 2016

Structuring a Long-Term Care Policy You Can Afford

It’s expensive…It’s hard to get approved for coverage…It’s possible I might never use it.  Right?  Right?  Well, maybe not…

These are very typical comments about long-term care (LTC) insurance.  But let’s look at each of these on a deeper level, and then finish up with a recommended strategy to structure a LTC policy that fits your pocket book.  For additional context on this topic, please reference our 1/15/16 blog post titled How Low Interest Rates Could Help Long-Term Care Policyholders.

Isn’t It Expensive?

You sure can buy an expensive LTC policy, if you set it up that way.  For several decades, it was common for an insurance agent to quote LTC policies with 5% compound inflation and an unlimited benefit period.  Nowadays, 5% compound inflation is incredibly expensive, and unlimited benefit periods are no longer offered (in a traditional LTC policy).  So, now what?

If compound inflation is being considered, we like 3% compound inflation for two reasons:

  1. 3% compound inflation is quite a bit less expensive than 5% compound inflation.  In our current low interest rate environment, insurance carriers must price 5% compound inflation at a significant premium.  Focus on 3% compound inflation.
  2. The overall growth rate for long-term care services is not as high as you think.  With so many options for coverage — including adult daycare, informal and formal home healthcare, assisted living, and nursing home care — there is a wide range of growth rates in the cost of care between these options.  You can reference the Genworth Cost of Care survey that is completed each year to find the typical cost for long-term care services in your area.  In most cases, you will see annual growth rates for the care ranging from 1-5%.  With most care being received now in a home setting, this growth rate is commonly in the 1-3% range (again, depending on your area).  This is why we like 3% when compound inflation is being considered.

As far as the benefit period, we like a 3-year or 4-year benefit period — but don’t be afraid to go with a 2-year benefit period (some coverage is better than none).  Most care is needed on average around 3 years, so this is a good starting point when looking at LTC insurance options.  If longevity or dementia/Alzheimer’s is common in your family, you may want to consider a 4-year or 5-year benefit period.

Lastly, the benefit amount is also a critical component of the policy pricing.  We recommend a benefit amount in the $4,000-7,000/mo range ($5,000/mo is the most common amount we see).  Depending on the LTC services you receive, this may cover 100% of your needs, or a smaller percentage — but the goal is not necessarily to cover 100% of the need.  Your LTC insurance premiums would be much higher if that was the goal, because your benefit amount would likely need to be higher than $7,000/mo.  The idea here is to cover a good chunk of the cost with LTC insurance (around 50-75%) and self-insure the remainder.

Isn’t It Hard to Get Approved for Coverage?

Medical underwriting is part of the process to obtain LTC insurance.  Pre-existing conditions can cause you to be declined for coverage, or receive a more expensive offer.

We feel the best way to address this is by taking the time to essentially pre-qualify those seriously interested in LTC insurance.  We do what is called “field underwriting” to the best of our abilities, which involves completing a questionnaire with you ahead of time.  We will not submit an insurance application for you without first understanding your current health status.

Doing this legwork on the front-end not only results in more accurate quotes, but helps avoid wasting your time.  If we determine you would be declined for coverage, we won’t suggest you go through the underwriting process.  If we don’t feel you are a Preferred underwriting risk (which we rarely assume for LTC insurance applications), we will quote you Standard rates.

We strongly feel that managing expectations is an important part of the LTC insurance quoting and underwriting process.

What If I Never Use the Coverage?

Congratulations!  We sincerely hope you never have to use your LTC insurance policy.  Just like other types of insurance (homeowner’s, auto, health insurance, etc) — if you use the insurance, it means something negative has occurred (i.e. house fire, auto accident, health treatments/surgeries).

Insurance is about the “what if” and providing peace of mind.  Having LTC insurance will provide peace of mind, and be there with a reimbursement check each month if you are on claim.

Are you comfortable with the consequences of not having LTC insurance?

Structuring a Policy You Can Afford

The Isn’t It Expensive section above addressed how to setup your LTC insurance policy, based purely on the nuts and bolts.  Continuing with that foundation, this section will speak to how to design your policy, based on your age at the time of purchase.

If you are purchasing LTC insurance prior to age 60, you should consider compound inflation on your policy.  You could own your policy for 20-30 years and the impact of LTC inflation must be addressed.

If you are purchasing LTC insurance at age 60+, you should consider not using automatic inflation, but rather have a policy that gives you the opportunity to purchase more coverage on regular intervals (i.e. every 3 years) without any medical underwriting.  These are called Future Purchase Offers.  Going this route will save you about 40-50% in premiums, when compared to 3% compound inflation.

If you feel you have significant financial assets and are considering self-insuring the risk entirely, instead consider going with the Future Purchase Offers approach.  This enables you to address this risk with the leverage of insurance, and also not spend too much in premiums.


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