Do not rush. But don’t wait too long. That’s the conundrum when considering long term care insurance. It’s one of those things that most of us would rather put off thinking about. After all, no one likes to contemplate the downsides of getting old. However, while you don’t want to rush to figure out if you need the cover and what type of policy makes the most sense, the sooner you pick them up, the better off you’ll be.
The first step is to assess whether you need long term care insurance based on your personal situation, the type of care you want and what you have saved for retirement. The first article in this series explored how to go beyond just analyzing the numbers when considering your options. It’s a big decision that requires thoughtful discussions and developing different scenarios, both financial and emotional. Once you’re convinced that long-term care insurance is right for you, it’s time to move on to step 2: determining the type of policy that best suits your needs.
Ready for the next step? You have come to the right place. Here are three key questions to consider.
1. What should I expect from long-term care insurance?
Taking the time to understand exactly what long-term care insurance is — and isn’t — is essential. This will allow you to better define the coverage you need and your expectations.
Long-term care policies are designed to provide assistance with the six key activities of daily living: dressing, bathing, toileting, getting around, eating, and continence. If you are unable to do two or more of the six without significant assistance, you will likely need long-term care. The necessary care can usually be provided either at your home or in an establishment, such as an assisted living facility, a retirement home or a hospice.
Long-term care insurance is an option that helps you pay for the care you need. You pay a premium for coverage over time. Then, if you need long-term care, the policy will pay or reimburse you for some or all of your long-term care costs. Think of it as access to a personal bank account dedicated to paying for long-term care needs.
With several policy types, coverage amounts, and features available, it helps to have a good idea of your financial situation and how long-term care insurance fits into it before you start shopping. And because it’s a big financial commitment, you need to make sure the coverage you choose gives you the protection you need at an affordable price. To help you assess the financial element of your decision and set your goals, take a moment to look back at the previous article in this series and explore the long term care insurance assessment tool on our website, which provides useful information on the costs of care in your area and the price of insurance.
As part of your decision-making process, discuss your goals and financial situation with your family. It is essential to tell family members the type of care you would like to receive and to get their input on the best and most realistic ways to plan it. Not only will the conversation help clarify your plans, but your family will also understand your wishes and the type of coverage in place to help you.
2. Which type of long-term care insurance suits me best?
Once your goals are set, it’s time to shop for coverage. There are two main types of fonts on the market today: traditional and hybrid Strategies. Both offer similar long-term care benefits. To appreciate the differences, you’ll have to dig into the other features offered by each product.
Traditional long-term care insurance policies work much like your car or home insurance. You pay a premium for as long as you have coverage and collect benefits if and when you need them. If you don’t need the benefits, you don’t get your premiums back. While this may be acceptable for auto insurance, the higher price and extended payment period may make the costs harder to reconcile if you don’t need long-term care. In addition, premiums are not guaranteed and may increase thereafter.
On the positive side, traditional policies generally have lower initial premiums than other options. They may also benefit from state partnership programs that allow you to protect more of your assets if you exhaust your long-term care insurance benefits and need to turn to Medicaid.
A hybrid policy combines life insurance with long term care insurance to address some of the risks that may be associated with a traditional policy. With a hybrid policy, premiums are paid for a limited time, such as all up front or over 10 years, so you won’t have to worry about having enough income to cover premiums in 20 or 30 years. . The premium is also guaranteed and cannot be increased. Plus, if you die without using long-term care benefits, your beneficiaries get your premiums back. For this reason, you are always guaranteed to recover at least your premiums through long-term care, death benefits or a combination of both.
With these guarantees, the monthly premium amounts for hybrid policies are generally higher. However, when compared to the total amount of premiums paid for a traditional policy over a lifetime, the cost can be close and sometimes lower for a hybrid policy.
When you begin your search for long term care coverage, we recommend that you consider both traditional and hybrid policies. Since the relative costs and benefits of each policy differ depending on your age, gender, and coverage amounts, being open to both will maximize your chances of finding the best fit for your situation.
Traditional versus hybrid: A look at choosing a woman. We recently helped a 45-year-old single woman explore her options for long-term care coverage. For a policy offering up to $255,000 in initial total benefits and including a 3% inflation benefit, a traditional policy was $267 per month, with her payments continuing until she needed health care. long-term (and if she had never needed care, her payments would continue for life). A hybrid policy cost $692 a month, with her payments ending after 10 years or when she starts collecting benefits.
When we looked at his situation, we used a spreadsheet to compare a multitude of scenarios, and here are the high-level findings:
- If she ends up needing a lot of care over the next few years, she would be better off with a traditional policy, as she would only have paid a few years of premiums before the premiums stopped. However, this is very unlikely. The average person in need of care is in their eighties.
- About 48% of retirees will not need long-term care or will need very little care, so they don’t make it past the 90-day waiting period. In this case, if she just passed away without needing care or using very little care, the hybrid is better off because her family gets her money back plus some interest.
- If she ends up in the remaining 52% who need care, chances are she won’t need care until she’s 80. In this case, the hybrid also leaves her better off, considering all the premiums that would have been paid into the traditional policy.
Based on the analysis above, it was clear that the hybrid was a better choice for this 45-year-old woman as long as she could afford the higher initial premiums. On the other hand, we looked at a similar package for a 71 year old married man, and the opposite was true, so he opted for a traditional policy.
When considering which type of long term care insurance is right for you, be sure to work with someone who can help you assess the costs and benefits under a range of scenarios so you can have a view of whole.
3. When should I take my long term care insurance decision seriously?
As with health care, food and other expenses in retirement, you’ll need to prepare for the costs of long-term care. Our advice would be to incorporate long-term care considerations into your overall retirement planning.
Insurers offer coverage to people as young as 30 years old. However, most people in their 30s have other priorities and are just starting to save for retirement, so long-term care insurance may not be the most pressing issue. If you’re able to buy long-term care insurance in your 30s, that’s great, but we think buying coverage in your 40s or 50s is the ‘sweet spot’. The bonuses are attractive and you are less likely to be turned down due to health issues. Plus, because your financial situation is generally stronger and you have a clearer picture of your retirement goals, you’re in a better position to make the financial commitment required by long-term care insurance.
Generally, long-term care insurance can be obtained up to age 79, so coverage is readily available. But keep in mind that prices can rise rapidly with each birthday, and the likelihood of being denied coverage also increases with age. According to a recent study by the American Association for Long-Term Care Insurance, only 16% of applicants age 49 and younger were denied. The percentage rose to 24% for applicants aged 60 to 64 and jumped to 44% and more after age 70.
If you decide to purchase long term care insurance, you’ll want to work with a licensed agent to get quotes and apply for coverage. As with other insurance, work with an independent person so you can review several options and shop around for the best price. Make sure your agent helps you look beyond “overall premium” when comparing policies, by answering these questions:
- What amount of coverage best suits your goals and budget?
- What are the nuances between the different policies you are considering?
- What do your costs and benefits look like under different scenarios?
- What is the financial strength of the companies behind the policies?
These are all important factors to consider when selecting a policy. If you only look at a monthly premium, you won’t get the full picture and you may not be getting the right coverage for your personal situation.
Co-Founder and CEO, Saturday Insurance
Dennis Ho is co-founder and CEO of Saturday Insurance, an independent online insurance agency. With over 20 years of industry experience, Dennis has a passion for insurance and the role it can play in building financial security. Dennis is a Fellow of the Society of Actuaries and a CFA Charterholder. Originally from Winnipeg, Canada, Dennis now resides in New Jersey with his wife and three young children.