May 20, 2022
Back in the early 1990s, long-term care insurance was widely considered to be the darling of the insurance industry. Insurers promised their agents and brokers that virtually everyone needed one of these policies, and the benefits that they paid out would keep middle and lower-income policyholders from having to rely solely on Medicare or try to qualify for Medicaid.
The median cost for a year of long-term care insurance today generally runs anywhere from $70,000 to $110,000, depending upon your location and the level of care that is needed, according to a cost of care survey completed by Genworth. And the U.S. Department of Health and Human Services has stated that they don’t expect this trend to stop anytime soon. The incidence of cognitive impairment is rising, and insurance costs are rising with it.
Life insurance companies greatly underestimated the rate of at which healthcare costs would increase when underwriting long-term care policies, and many insurance companies, such as Genworth, are now scrambling to find ways to keep their traditional long-term care insurance policies in force. The average monthly cost of a private room in a nursing home facility is now about $7,700, and in heavily populated areas such as New York, the price can be much higher. Semi-private rooms are only slightly less expensive. The costs of long-term care are threatening many people’s retirement financial plan.
Needless to say, this has effectively forced many insurers to drastically raise their annual premiums. As a result, many policy owners have had no choice but to let their policies lapse because they can no longer afford them. This is a dangerous trend, as statistics compiled by the government indicate that the average 65-year-old in America has at least a 70% chance of needing some form of long-term care before he or she dies.
What is long-term care insurance?
LTC insurance is a type of insurance for health care coverage designed to pay for the cost of care from any form of long-term care services that are not covered by health insurance or Medicare. These policies are only designed to cover the cost of medical care that is not rendered in doctor’s offices and hospitals. It can be used to pay for caregivers who come to your home or provide care outside of your home elsewhere.
Long-term care includes home health care provided by home health aides, skilled nursing, custodial care, assisted living facilities, adult daycare, and nursing home care. These policies either have an absolute dollar limit (known as a lifetime benefit) or else a daily limit on long-term care costs covered. For example, a policy can pay for every dollar of long-term care expenses up to $250,000, or else set a daily benefit limit of $250 for services provided.
Some LTC insurance companies require the insured to pay for the cost of care upfront and then reimburse them, while others will pay the care provider directly for services rendered. Some LTC policies also come with inflation riders (which are always a good idea, since the rate of inflation in the long-term care industry has been at least twice the base rate of inflation in the U.S. over the past 20 years). These riders give the insured some inflation protection to cushion the rising costs of managed care.
All forms of long-term care coverage have an elimination period, which is a waiting period that must elapse before benefit payments can begin. This waiting period effectively functions as the deductible for the policy or a way to deter people for waiting until they immediately need care to purchase coverage.
For example, a policy may state that it will not start paying for benefit amounts until the insured has been medically certified to require them for at least 90 days before reimbursements or indemnity payments will commence. Most policies also state a limit on the amount of benefits that they will provide, such as for five years.
Set benefit periods
Policies that pay for services up to a specific dollar amount on a daily basis have a set benefit period. Once this period has elapsed, the insurer will no longer pay for long-term care services, and all future costs must be borne solely by the insured. So a policy with a daily benefit limit of $250 per day for 1,000 days will stop paying after that period of time is up. If the insured has long-term care needs that cost $300 per day to satisfy, then the insured must also pay for the $50 difference every day while the benefits are being paid.
The skyrocketing annual cost of long-term care insurance premiums has left many seniors wondering whether it might be cheaper to self-insure rather than pay for coverage. Most financial planners will tell those facing this choice that self-insuring or paying family members to provide care are better alternatives if the client can afford it.
How do I qualify for long-term care benefits?
Most long-term care policy benefits are paid when the insured becomes permanently unable to perform at least two out of the six basic activities of daily living (ADLs). These activities include:
- Transferring (as from a wheelchair to a bed)
In most cases, a doctor must provide written certification to this effect in order for the insurance company to accept the claim and approve a payout. Insureds who are physically capable of taking care of themselves but suffer from mental conditions such as Alzheimer’s or other forms of dementia can also qualify.
Is long-term care insurance worth it?
Twenty years ago, the answer to that question was fairly obvious. At that time, long-term care insurance premiums were much cheaper than they are now, and a large number of insurers offered these policies in many forms.
In recent years, though, many insurers have dropped out of the long-term care market, and those that remain have had to raise their premiums by as much as 100% in some cases. Worst of all, those who paid premiums into these policies for years and became unable to afford the higher premiums had no way to recoup the cost of the premiums that they faithfully paid for so long.
So the answer to whether long-term care insurance is worth it has become “no” for a growing number of Baby Boomers and senior citizens who are contemplating paying for nursing home stays or other forms of managed care. Those who can still afford the premiums are probably capable of self-insuring in many cases, and those who cannot may have better luck trying to qualify for Medicaid.
Fortunately, there is a ray of hope on the horizon for those who are contemplating what course they should take with their personal finances in the wake of the long-term care insurance rate increases.
The annuity solution
If you can’t qualify for any other type of long-term care coverage, consider buying an annuity that provides an increased payout for those who end up needing any form of managed care.
The life insurance policy solution
About 20 years ago, the life insurance industry began layering additional forms of protection onto whole life insurance policies in order to stay competitive and relevant for today’s consumers. These hybrid life insurance policies offered accelerated death benefit riders that paid out a portion of the policy’s death benefit if the insured became incapacitated or unable to perform at least two of the six activities of daily living .
One of these riders was designed to pay for long-term care expenses . Some insurers refer to it as a disability or chronic illness rider, but regardless of the name, it provides many of the same kinds of protection that standalone LTC policies do.
Advantages of accelerated death benefit riders
This type of rider effectively resolves one of the biggest dilemmas that consumers have regarding LTC policies. If they are eventually forced to let their policies lapse, then they will essentially forfeit all of the money that they have already put into them. But the LTC rider solves that problem.
If a client ends up not needing long-term care before he or she dies, then he or she still has the cash value and the death benefit in the life insurance policy to fall back on. This means that there is no way that the consumer can “lose.”
Single premium life insurance policies with long-term care riders also ensure that the cost of the long-term care benefits will never go up because they are entirely paid for at a set point in time. This is perhaps the most effective hedge against inflation that can be found in the life and long-term care insurance marketplace today.
Economics of ADB riders
Life insurance policies with ADBs represent the future of the life insurance industry today. The cost of an LTC rider with a hybrid policy is often less than that of a standalone LTC policy, and in many cases, the level of benefits paid is comparable.
Many long-term care riders will simply pay out the entire benefit in a lump sum upfront. Some LTC riders pay out a percentage of the life insurance policy’s death benefit while others can use the entire death benefit if necessary.
For example, a policy with a face value of $300,000 might allow the insured to withdraw 70% of that amount to pay for long-term care expenses. That means that the insured can take $210,000 out of the policy’s death benefit and use it to pay for long-term care. The remaining $90,000 will be paid out upon the death of the insured.
The life settlement solution
If an insured owns a life insurance policy that does not have accelerated death benefit riders, there is still a way that he or she may be able to cash in on their policy.
As long as the insured is at least 60 or 65 years old and has a cash value life insurance policy with a face amount of at least $50,000, then he or she can probably sell his or her policy to a life settlement company for a lump sum of cash upfront. The proceeds from this sale can be used to pay for long-term care expenses or for any other purpose that the insured desires. Any type of life insurance policy can qualify for a life settlement.
This method of cashing in a policy is known as a life settlement, and it will yield substantially more than any other form of cash withdrawal from a permanent life insurance policy. A straight cash withdrawal can only get the insured the cash value in the policy minus fees and expenses, which may be hefty in some situations.
Surrendering the policy and taking the cash surrender value also limits the amount of withdrawal to the amount of cash value in the policy minus all surrender charges and other expenses. Borrowing from the life insurance policy is usually a better method of accessing the cash value, but interest is charged on the outstanding amount of the loan. And any unpaid loan balance will be deducted from the death benefit upon the death of the insured.
Steps to selling a life insurance policy
Selling a policy to a life settlement company can easily yield the insured an amount of money that is equal to at least two to three times the amount of cash value in the policy with no surrender fees, administrative charges, or interest of any kind.
The life settlement process is fairly straightforward, at least from the insured’s point of view. The steps of a life settlement transaction are listed as follows:
- The insured lets the life settlement company know that he or she wants to sell their policy.
- The life settlement company will ask for a copy of the policy along with all of the insured’s medical records.
- The life settlement company will use this information along with the insured’s life expectancy to calculate a sale price.
- The life settlement company will make an offer to the insured to pay a certain dollar amount for the policy. The shorter the insured’s life expectancy, the greater the amount will be that is offered. And while the offer will be much more than the amount of cash value in the policy, it will still be less than the death benefit.
- If the insured agrees to the sale price, then the insured will sign closing documentation to transfer the ownership of the policy to the life settlement company. The life settlement company will fund an escrow account with the sale amount when all documentation is completed.
- The life settlement company will name itself as the new owner and primary beneficiary on the policy.
- The life settlement company will assume the responsibility of paying the annual policy premiums for the duration of the insured’s life.
- The life settlement company will collect the death benefit from the policy when the insured dies and thus recoup its premium and sale outlays and also make a profit.
The life settlement transaction will net the insured a large payday in the short term (most life settlements take anywhere from a few weeks to a few months to complete). A life settlement can be a godsend for insureds who need to get their hands on a chunk of money fairly quickly, especially if they have health conditions that render them uninsurable at this point in their lives. The life settlement sale proceeds could be used to cover the elimination period for a long-term care policy and could also be used to pay for any excess long-term care expenses that are not covered by the LTC policy.
Is long-term care insurance worth it?
The average cost of long-term care is likely to continue to rise at the rate it has for the last 20 years, and the cost of insurance coverage for this type of policy will undoubtedly continue to rise with it. Insureds who want to protect themselves from these costs should look at hybrid life policies or life settlements as possible solutions.
You should advise your clients with the information they need about long-term care and what their options are for paying for it. Planning ahead can save your clients from having to make last-minute changes in their retirement planning and give them peace of mind.
Let your clients know that they can use their life insurance policy to help them to pay off their debts. You can get an instant estimate of the value of your client’s life insurance policy by visiting the LCX Life calculator. You can also call LCX Life at 888-388-0988, contact us here, or email us firstname.lastname@example.org to discuss your client’s situation. Our team is available and ready to explain to you all that you would want to know about life settlements. Remember to visit our Life Settlement Genius portal for client materials and additional information.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!