Decisions. Hamlet grappled with the decision to avenge his father’s death; he spent his time weighing his options, calculating and contemplating whether it was right or wrong or even worth it, and this paralyzed him. Unfortunately, deciding whether to purchase a long-term care (LTC) policy for yourself or your spouse or to keep an existing policy can create the same kind of indecision. Let’s face it, unless you have a crystal ball you don’t know what the future holds. We all know it didn’t end well for Hamlet, so how do you make this decision with the least amount of doubt and second-guessing?
First, and this is VERY important, know who you are talking to. The last person you want to ask for advice when considering if a long-term care product is right for you is a commissioned agent and/or advisor. They accept fees or commissions based on the sale of products, so their loyalty may be compromised. My advice is to speak with a fee-only fiduciary, someone who is sitting on the same side of the table with you, helping you decide what is best for you. A fee-only advisor is someone who is legally obligated to put their clients’ interests first. This “fee for service” model was designed to reduce inherent conflicts of interest in selling products for commission. Knowing that the advice you receive is based on your need is crucial, especially when making the decision to purchase or not to purchase long-term care insurance.
What are your options?
Self-Insure. There is always the option not to purchase LTC insurance, and in many cases, this is the best option. The basic premise behind any type of insurance is transfer of risk. The insurer assumes the risk, and the risk here is the possibility of needing long-term care. If you are comfortable with that risk and are in a position to take it on, this may be a great option for you.
So, what is the risk? Let’s look at the numbers. According to statistics, women will need an average of 2.5 years of long-term care in their lifetime and men will need an average of 1.5 years of long-term care in their lifetime.1 As of 2017, the average median annual cost for an assisted living facility was $45,000.2 If you do the math, that’s just over $100,000 for women and approximately $67,500 for men. Compare these numbers to the amount of premium you will need to pay for a LTC policy, and you may find the risk is definitely worth taking.
Purchase a traditional, stand-alone policy. A traditional LTC plan is unlike other types of insurance such as life insurance where there is a specific set premium and a specific set benefit. You might as well be signing a blank check for some unknown future benefit with an unknown future cost. But it is like other insurance in that you pay the premium and hope to never have to use it. There’s the gamble, or as Hamlet would put it, the rub. You pay a premium (which may have surprise future rate increases) for something that if all works out the way most of us hope things will work out, will never be needed; a large amount of money may be spent for what might feel like nothing.
In recent years these types of policies have suffered under the weight of higher costs for the insurers leading to premium rate increases for the insureds. Because of high costs, less and less insurance companies are even offering these policies. An evolution of new policies has entered the scene: asset-based hybrid policies, or combination LTC with life insurance and LTC with annuity policies. These policies may eliminate some of the “rub” I just mentioned; they have value beyond the insurance portion. But even here there are disadvantages that need to be considered.
Asset-based policies such as the LTC/Life Insurance and LTC/Annuities are insurance products with LTC benefits. They often require a large lump-sum premium or smaller, fixed premium payments for a given amount of time. With both of these types of policies, should you need long-term care, benefits will be paid at an amount exceeding the death benefit, annuity payment, or premium paid. This amount is determined and agreed to when the contract is purchased. Beneficiaries will receive the death benefit at your death either in full or reduced depending on LTC benefits used, and the annuity will pay out according to the contract, adjusting for any LTC benefits used.
These policies might seem like a welcome alternative to the traditional, stand-alone policies, but there are important factors that need to be taken into consideration before you sign on the dotted line.
- Some of the hybrids require a large upfront investment.
- Opportunity risk. Will your money serve you better somewhere else?
- Do you need life insurance?
- Does an annuity make sense in your retirement income plan?
- What are the tax implications?
- What is the surrender period?
Where do you fit in? If you are in a position to absorb the cost of LTC, self-insure. If you have no means to take on costs like this, you probably are not in a position to afford the high cost (premiums) of LTC insurance either. For those of you in this situation, there are government programs (Medicaid) that may assist with LTC costs.
A demographic that may be at risk are upper middle-class couples with a significant age difference. If the older spouse needs resources for care and drains the retirement portfolio, this may leave the younger spouse with less than adequate assets should they require long-term care. When assessing risk here, you also have to consider the possibility for loss of income when the elder spouse passes as well as the need to provide for a lengthier retirement in general for this household. This may be a situation where some type of LTC insurance may work in a plan.
To thine own self be true. It is my intention to provide you with information. One of the best ways to make any decision is to know your options and weigh them given your own personal circumstances. You may have guessed, I am not a fan of LTC insurance. Your premiums are added to a pool of money that is used for those policy holders needing LTC benefits. As we have seen with traditional policies, when those benefits exceed the projections of the insurance companies, premiums increase leaving many people with the difficult decision to pay the increased premium or let the policy lapse. And the risk, or the cost of LTC, may not be enough to warrant the high cost of the insurance. For many, your money may serve you better elsewhere.
There is no right answer for everyone. As with any big decision, knowing your options is the first step. Whatever decision you make, to purchase or not to purchase LTC insurance and the type of policy that may be best for you, needs to be made taking into consideration your own unique circumstances. At NRG Wealth Management, we take the time to understand the intricacies of each situation and help our clients through the decision process. We are a fee-only registered investment advisory firm held to those very high fiduciary standards through every line of advice.
Things to consider when looking at any LTC policy
- Elimination Periods
- Daily/monthly limits
- Benefit multiplier (years benefit will be paid)
- How the policy pays out (reimbursement vs. cash indemnity)
- Inflation protection rate
- Shared care
- Insurance company rating
- What your Medicare Advantage plan may cover
- Your age
- Your ability to self-insure
- 1035 Exchange eligibility
1 Nguyen, Vivian MPA, AARP Public Policy Institute. Fact Sheet: Long-Term Support and Services, March, 2017. https://www.aarp.org/content/dam/aarp/ppi/2017-01/Fact%20Sheet%20Long-Term%20Support%20and%20Services.pdf.
2 Genworth Financial, Inc., Cost of Care Survey, 2017. Summary of 2017 Survey Findings. https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/cost-of-care/131168_081417.pdf
Navigation Retirement Group is a registered investment advisor. Navigation Retirement Group and its representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
Jack Davis is the founder and CEO of Navigation Retirement Group, an independent wealth management firm serving high achieving retirees and pre-retirees with investable assets between one and ten million dollars. For nearly three decades, he has been using his asset management and financial planning skills to develop and implement planning strategies that help pursue his clients’ unique goals. Passionate about education, he holds a Masters in Personal Finance and the CERTIFIED FINANCIAL PLANNER™ credential. He is also the author of Cash Out! Retire on Your Terms, Live Well and Die Happy, a book that gives pre-retirees and retirees planning tools and insights that can help them flourish throughout retirement. Based in Oro Valley, he and his team serve clients throughout the greater Tucson area and around the country. Learn more by connecting with Jack on LinkedIn or visiting www.navigationretirement.com.