Mary’s (name changed) mom has been at a long-term care facility for over five years.
When Mary came to me, she transferred her investment account with her husband and her mom’s account (she had power of attorney) to my firm Alliance Wealth Management.
We asked Mary what the goals were for her mom’s money, and she told us that her mom wished to leave the money to Mary and the grandchildren.
Unfortunately, because Mary’s mom had Alzheimer’s disease, that sizable account was used to fund the long-term care facility. And, sadly, the costs for the long-term care facility just went up and up.
And that once sizable account is now completely depleted. If there had been some kind of long-term care planning done, there would have still been a sizable account even after the care that Mary’s mom received at the facility.
Long-term care insurance has been important for a number of families. But sometimes, it’s best to consider the alternatives. In some cases, the alternatives might be better for families than actual long-term care insurance.
So, if you’re the kind of [awesome] person who wants to know all of your options so you can make an informed decision, you’ve come to the right place.
Sit back, relax, and let’s explore a few little-known alternatives to long-term care insurance.
But first, we’ll explain what long-term care is in the first place. We’ll also explore your odds of needing it, and much more!
There’s a lot to go over here, so grab a coffee and let’s dive in!
Just What Is Long-Term Care?
Long-term care is not equal to medical care.
Here are some things that long-term care involves:
- Transferring (to bed, chair, etc.)
- Managing money
- Shopping for groceries
- Communication with others
These are called “assisted daily living activities.” Notice: That’s not the same thing as medical care! Now, some hospitals and plans may provide this care, but if not, you’re going to need some extra coverage.
What Are the Odds You’ll Need Long-Term Care?
Well, 9 million Americans over the age of 65 needed assistance in 2012. That number is expected to grow to 12 million in 2020.
68% of adults turning age 65 are expected to need some form of long-term care! That means the chances are not on your side. You’re probably going to need long-term care coverage of some sort.
Who’s Responsible for Paying?
Medicare might pay up to 100 days as a maximum or couple that with skilled home health care.
Medicaid meets many long-term care needs if you meet income and eligibility requirements. What we’ve seen is that you have to be at about the poverty level or below to qualify.
Department of VA also has separate long-term care planning that they offer and you might be able to get some coverage there. But otherwise . . . .
You will have to pay if you can’t find coverage elsewhere!
How much will you have to pay? We’ve seen numbers as high as $136,437 per year. However, this does vary from state to state – but even the best case scenarios don’t look that great.
Long-Term Care Options (and a Case Study)
In order to explore your long-term care funding options, it would be helpful to look at them in the context of a case study.
Take “John and Sheila Jones” for instance. Both of them are age 55 and live in Georgia where the average cost of a nursing home is $64,000 annually. They have $1.5 million for retirement, are in generally good health, and are seeking $4,500 of monthly long-term care coverage just for John.
Here are their options:
Traditional Long-Term Care Insurance
Although this article will focus on long-term care insurance alternatives, it’s important to make sure that you have a good understanding of how traditional long-term care insurance works so you can get a good baseline for the alternatives.
When you call around asking how much long-term care costs, you’ll normally receive prices in the form of a daily cost. In this case, let’s say that the maximum daily benefit is $150.
It’s also important to know the maximum benefit pool: $219,000. The maximum period of coverage is four years.
Now here’s the thing –those last two figures have a substantial limitation in that if John needs to be covered for more than four years, he won’t be. Additionally, if he meets the maximum benefit pool figure, he won’t get any more coverage.
So, let’s say that he has care for four years but hasn’t met his maximum benefit pool amount. Unfortunately, he won’t get any more coverage. It’s one or the other.
Plus, there are no death benefits for this traditional long-term care insurance.
The premium for this coverage? $387.45 per month.
So, the benefit of this policy is that it covers or can supplement long-term care costs to protect assets. The downside is that they have to use it or they will lose it.** Additionally, their premium may increase (it happens, and sometimes substantially).
Wade Pfau, a Forbes contributor, described why it’s so important for people to shop around for different providers. Some providers will actually create inexpensive policies to lure customers into the plan, and then will increase premiums at a later time. Don’t fall for this trap.
**Please note that all long-term care policies are structured differently. Make sure you understand the total maximum coverage you’ll receive for the life of the contact.
1. The Legacy Optimizer Strategy
The Legacy Optimizer is simply life insurance with a long-term care rider.
You probably already know what life insurance is, but what’s a rider? A rider is an option that you can add on top of a policy. It’s like a feature (like GPS) you can add onto your car. Simple, right?
The thing about this option is that it actually has a death benefit (from the life insurance) which is $225,000. The maximum daily benefit is $150. And, the maximum benefit pool is $225,000.
The maximum period of coverage is 50 months which is pretty close to the four years in the traditional long-term care insurance example.
The premium for this policy is $3,926 annually (or about $327.17 per month – less than the traditional long-term care insurance.
Keep in mind that this is a universal whole life policy that allows acceleration of the death benefit to pay for long-term care. Also, remember that The Legacy Optimizer Strategy provides a death benefit whereas the traditional long-term care insurance does not.
Finally, this is structured in a monthly or annual premium version to stretch costs over time.
2. The Income Plan with Long-Term Care Bonus
Annuities are not evil. Well, not all of them.
Some advisors that sell annuities are, well, “evil.”
Again, there are situations where annuities make sense. There must be a detailed financial plan to make sure that an annuity makes sense.
Remember: Annuities must have a purpose. If your advisor tries to sell you an annuity without explaining why it makes sense, run the other way.
The kind of annuity we’re talking about for our example here is a fixed-indexed annuity with a single premium.
John and Sheila Jones, should they take this alternative, would be putting in a lump sum of money at age 55 and then would receive a monthly income benefit in 10 years at age 65 of $2,300 per month.
Now, if they were to go into long-term care, there is a long-term care doubler benefit which would pay them $4,600 per month while they are in long-term care. Bonus!
The maximum period of coverage is 60 months for this alternative. That’s more coverage than the other ones thus far.
The premium? $350,000 single premium (that’s the lump sum we talked about).
Here are some of the key points you should know about this alternative:
- It’s only available for one payee regardless of the timeframe used – This means, for example, that if John goes into long-term care for two years, comes out of long-term care, and then goes in again – the doubler benefit would no longer be available. Additionally, this can only be used for one person.
- There’s a two-year waiting period after the income has started to use the doubler – For John and Sheila, this means that the doubler can’t be used until age 67.
3. The Hybrid Strategy
This is also called an asset-based policy.
Wade Pfau (a contributor for Forbes mentioned earlier) explained that hybrid long-term care insurance policies are the result of attempts to combat concerns related to traditional long-term care insurance. So, if you’re weary of traditional long-term care insurance, and are looking for an alternative, this one might be something to consider in particular.
This one has a death benefit of $150,000, a maximum daily benefit of $150, and a maximum benefit pool of $150,000.
The maximum period of coverage is 33 months – lower than some of our other options.
The Hybrid Strategy has a one-time premium of $72,330.
Remember that this option has a death benefit and they can also accelerate that death benefit.
Some policies have a return of premium option so that John and Sheila can pull out of the option and get their premium back (costing them their interest if they do so).
This policy also allows John and Sheila greater options than traditional long-term care policies through a death benefit.
Finally, this is a single premium policy which allows them to the use money they have set aside that they are not expecting to use for retirement to insure against long-term care costs.
Here are some of the features we look for on these hybrid policies:
- Return of Premium Option – We like not getting locked into an investment!
- Spousal Benefit – Shelia in our example would also have coverage.
- Lifetime Rider Option – An additional cost that gives the ability to receive money for long-term care for life (it would never run out).
Let’s Review the Alternatives!
The Legacy Optimizer (insurance with long-term care rider) can be very expensive and payments must continue.
The Income Plan with Long-Term Care Bonus (fixed-indexed annuity with long-term care benefit) must have an income need established and there’s going to be contract periods and surrender charges.
The Hybrid Strategy (asset-based long-term care) has a single premium and the remaining benefit goes to the heirs.
Personally, I prefer the asset-based long-term care plan. With the spousal feature that can cover both the husband and the wife, the 100% return of premium feature, and the lifetime rider option (although at an extra cost), this “hybrid” approach can be very attractive.
Which Option Should You Choose?
Let’s forget John and Sheila for a moment. Which option should you choose?
The worst option is to do nothing or to cancel a policy when you don’t have a backup plan.
Here’s a story about a close call.
One of my clients told me about his father, a widower, who had purchased a modest long-term care insurance package with two years of benefits at $75 per day. At that time, the dad was in perfect health. He wasn’t a smoker, wasn’t obese, and was physically active. Medical history? Great!
I have to say, this is amazing that the father purchased this policy. Many don’t.
However, at the age of 81, the father wanted to cancel the policy because he thought the premiums were too high. Thankfully, his children pointed out that their family members live a long time and that even though he was in good health, he might not always be and would need the benefits.
The father, thankfully, agreed to hang onto the policy. Three years later, dementia required the father to enter an assisted living program for six months followed by a nursing facility.
Again, thankfully, the policy covered most but not all of his care. The children said their only regret was not encouraging their father to get a policy that would last longer than two years and have a larger per diem benefit.
So you see the value in having some kind of plan. Which option should you choose? Well, that depends on your particular situation.
My recommendation is to sit down with a financial planner that can look at your situation in a comprehensive manner. Remember: One part of your financial life is not isolated from another part of your financial life. Your financial life is a whole unit. Change one thing, and you might change to another.
Many times, which long-term care puzzle piece you choose to fit into your financial picture depends on your existing situation. But it doesn’t stop there. What you plan on doing in the future matters a whole lot, too.
I remember clients who didn’t tell me about this or that they were going to buy in retirement, and it changed their financial life forever. Had I known, I would have recommended a different option. That’s why it’s so important to anticipate future expenses and ensure your financial professional knows your intentions.
Finally, make sure you understand the ins and outs of your long-term care strategy before you purchase a policy. There are financial “advisors” out there who will take advantage of you if you let them. The easiest way to avoid this pitfall is to simply ask them to explain exactly why they are recommending a particular policy for you. Then, run the advice by another financial professional. Get several opinions. See what makes the most sense. Think through it!
If your financial advisor won’t take the time to explain the policy they are recommending in detail and to show you the alternatives, you might be sitting in front of a salesperson – not a financial planner.
While there are a few alternatives to traditional long-term care insurance, there are many policies available for each alternative. There’s a lot of ground to cover. You’re going to need a patient financial planner who will show you your options.
Take your time, think it over, and make a decision. It’s an important one.