Long-term care (LTC) insurance is an essential part of your financial plan at any age. In the past few years, new types of policies have created more realistically priced, guaranteed benefits to guard against impoverishment from the need for help doing basic activities of daily living.

Many LTC policy-owners who bought insurance years ago have found their premiums rising as insurers recalculated longevity. The good news now is that the industry has moved to a newer type of policy, which removes the threat of rising premiums and does guarantee coverage for care.

It’s called a “hybrid asset-based” or “combo” policy, in which you make a one-time deposit (or a series of premium payments) into a life insurance policy. That policy offers a long-term care insurance rider—which means you leverage your money to pay for long-term care—for one or two lives. And if the care isn’t needed, your beneficiaries get a death benefit, less any claims paid out.

Why You Should Consider Buying LTC Insurance

You don’t want to be a burden on your adult children—and you don’t want to be in a state-funded nursing home. We all hope to live to a healthy old age, and then die peacefully in our sleep. But the facts say that once over age 65, chances are greater that you’ll need some help doing basic activities of daily living (showering, toileting, transferring from bed to chair, feeding yourself) than the odds of your house burning down. Yet, you still pay for homeowner’s insurance.

You should worry about accessing care, whether you are alone or have adult children. The baby boomer generation is living longer, healthier lives. But sooner or later, time will catch up. It’s estimated that seven out of 10 people over age 65 today will need some long-term care, and one of five will need more than five years of care.

And if you’re thinking that Medicare will pay, think again. Medicare pays only for a limited number of days of skilled nursing, and only after a hospital stay. Your state-funded Medicaid program will provide care if you run out of money—but only in a facility that is likely not going to be your choice of care.

(And states are getting aggressive about finding assets that have been transferred to create impoverishment and eligibility for state-paid nursing home care.)

Here are the issues your adult children would face if you don’t have insurance to pay for care in your old age: Will you care for your parents—and your in-laws—in their old age? Will you invite them into your home, to use the bedroom your college kid just vacated, and will you provide them with help dressing and bathing?

Or let’s reverse the situation. Here’s what you might be thinking: Who will care for you in your old age? Will your children invite you to live with them and help you shower and take you to your doctors’ appointments?

The time to think about these issues is now—while you can solve for these potential problems by purchasing long-term care insurance.

The Cost of Care

Care is costly, whether given in the home, in assisted living or in a nursing home. Again, the cost of that care is not covered by Medicare (except for a limited number of days in a skilled nursing facility after a hospitalization), or by your Medicare supplement insurance. You, or your family, will have to spend a lot of money to provide that care, and those costs are rising faster than inflation.

For example, according to the latest annual cost of care survey by Genworth Financial, the average private room nursing home now costs $100,375 per year. And assisted-living facilities now cost nearly $48,000 a year, more if you have a cognitive problem.

But those numbers may not reflect the true cost of care. Many will need round-the-clock care, raising the amount spent. There’s also the forgone income lost by family members who provide unpaid care.

Think about how those costs would add up over several years of care. Today, there are 1.8 million Americans residing in skilled nursing facilities and 12% have been there for five years or more.

Having long-term care insurance does more than just pay for your care. It keeps you from spending all your savings, so your spouse or family does not become impoverished. And it gives you the choice of where you want to receive that assistance—at home, in an assisted-living facility or in a private nursing home.

Not everyone can afford to be fully insured for long-term care. But even a small amount of insurance will get you into a private facility, where you may be able to remain if you use up your insurance benefits and require state aid.

Understanding Long-Term Care Insurance

The time to purchase a policy is when you’re healthy and can qualify for the least expensive policy. Most LTC policies require a medical underwriting to determine that you are eligible and to set the price of your coverage.

Given the benefits provided by the newer “combo” life and long-term care policies, you might start considering LTC insurance at age 50 or earlier, when prices will be lower. And you’re not too old to buy a policy at age 70, if you’re still in good health and can afford the premiums. The amount of coverage you can get for your money will be more expensive as you grow older, so don’t procrastinate.

Long-term care insurance is especially important for women. It’s a fact: Women live longer than men. So, you’re likely to wind up on your own. If there was a man in your life at one point, he is likely to have used up the family’s financial resources, as well as your energy in providing care and assistance.

And if you are a woman who expects to be alone in her later years, there’s an added benefit that comes with an LTC insurance policy. Most policies provide a geriatric care manager who not only will help with the payout but will assist you in finding appropriate care providers or settings.

What Does a Long-Term Care Policy Cover?

Long-term care insurance policies typically cover nonskilled, skilled and custodial care as well as adult day care, either in your home, an assisted-living facility or a nursing home. All policies vary slightly in their coverage, so you will need an insurance agent who is familiar with these products to guide you through the purchase (see below). But here are the basics.

Elimination Period

Just as you have a deductible on your car insurance, there will also be a deductible—called a waiting or elimination period—before your LTC coverage kicks in. Typically, this is a 90- or 100-day period.

Daily or Monthly Benefit

You’ll want to have at least $6,000 a month in coverage. But if that makes the policy too expensive, it’s better to have a smaller amount of coverage to assist with the cost of care than none at all.

Length of Benefit

Your policy could offer benefits for a period from two years to as long as you need care—sometimes called lifetime benefits, which is especially expensive. These days the most popular benefit period is four to five years. The average stay in a nursing home is about three years—although Alzheimer’s and stroke victims could require assistance for a decade or more. So, compare the costs for a range of benefits and time periods.

Inflation Protection

The potential impact of inflation on care costs is a real concern when purchasing long-term care insurance. After all, you hope to use this coverage in the far-distant future, if at all. The best—and most expensive—policies will offer a 3% compound inflation protection.

What Should Traditional Long-Term Care Insurance Cost?

So-called traditional policies require an annual payment or a payment over a set period of years. Obviously, the annual premium on this type of policy will vary depending on the choices you make—working with your knowledgeable LTC specialist. Your age and health make a difference, as well as your state of residence (care costs are higher in some states).

That said, here’s an example of what a traditional (annual premiums) policy might cost at the time of this writing for a 60-year-old woman in good health, residing in Illinois. She decides to purchase a policy that offers five years of coverage, with a 90-day elimination period, at a current daily benefit of $210 per day ($6,300 per month).

The policy includes a 3% compound inflation protection that guarantees her a maximum benefit of $509/day at age 80. By the time she reaches age 80, she would have a total “pool of benefits” of $930,238 if she hasn’t used any benefits. If she starts needing care soon, there is a current guaranteed pool of benefits amounting to $383,250.

If she decides on an annual payment, the current cost will be $4,412 per year. If she decides on a 10-year payment schedule, the initial annual premium is $12,371. And that premium could actually rise during the next nine years of payments.

That is a whopping cost for most 60-year-old women to pay, on either schedule. There are some ways to mitigate those costs.

If she owns her own business, the premiums may be paid pretax, somewhat reducing the impact. Those who have health savings accounts (HSAs) at work can use those dollars toward LTC insurance premiums. Later on, if a person has significant unreimbursed medical expenses (exceeding 10% of adjusted gross income) the premiums for this insurance can be considered part of those potentially deductible costs.

But the costs for this insurance, at first look, are astounding. They are only dwarfed by the potential costs of the care itself.

Adjustments to coverage can reduce premiums. Perhaps the benefit period could be reduced, or other terms be adjusted—perhaps owning just enough benefits to cover entry into a nursing home, which eventually will allow you to remain when benefits run out and Medicaid may take over.

But before you think there is absolutely no way you can afford any long-term care insurance coverage, consider the hybrid or “combo” policies that are becoming far more attractive in the coverage and cost protection they offer.

Combo Life/Long-Term Care Policy Coverage

This is the way I suggest purchasing long-term care insurance today. Combo or hybrid policies remove uncertainties about rising premiums and give guarantees that if the money is not spent on care, your beneficiaries get a death benefit. You can even borrow some money out of your policy (reducing money available for care or the death benefit). It’s easy to understand, and easy to price. And remember, the price you’re paying is the price of peace of mind.

Here’s how these policies work: You deposit a lump sum of money into the policy. You can do that at all at once, or in a series of guaranteed payments lasting five, 10 or 20 years. Obviously, the longer you stretch out the payments, the more you ultimately pay.

You are purchasing a guaranteed whole life insurance policy with a long-term care rider. The entire death benefit can be accessed as monthly LTC insurance benefits. The policy accumulates a monthly benefit for long-term care. Any unused benefits pass to your policy beneficiaries in the form of a life insurance death benefit. If a person uses the entire death benefit for care, some carriers will still provide a residual death benefit.

Pricing a Combo Policy

A combo policy has a one-time “premium” (or it can be structured over as long as 10 to 20 years). So the up-front price has something of a sticker shock for many. Just remember that you are getting a guaranteed amount of long-term care coverage, and also a death benefit.

Here are pricing examples from Murray A. Gordon & Associates LTC (www.magaltc.com) for purchasing a hybrid/combo policy.

The first example is for a couple, both age 65, using the One America Asset Care product with a lump-sum single payment of $250,000.

They would get a long-term care benefit of $6,888 per month, per person, until they have exhausted the amount of the death benefit. At that point, they have a continuation of benefits rider, which extends their long-term care benefits at an even higher level of payout, reflecting the inflation protection. With this policy, there is a 30-day elimination period for home health care, and a 60-day elimination period for care in a facility. The care benefits include a 3% compound inflation adjustment.

There are no premium increases to worry about because they are covered by the single $250,000 deposit. But what if they never need care? In a traditional policy, all those premiums are down the drain if you die instantly of a heart attack or in a car crash. Combining it with life insurance, purchased with that same initial premium, is why I like combo LTC policies.

If one spouse dies, the survivor would not likely want to activate the death benefit, because now the survivor has an increased potential need to use the long-term care benefit. But assuming no care benefit was used—and no cash withdrawn—at the death of the second spouse, the beneficiaries would receive $229,628.

Now suppose the purchaser was a single buyer who never used the care portion of this policy. Then the death benefit would provide significant cash for the named beneficiary. Here’s the second example:

A man, age 50, deposits $100,000 into the Lincoln MoneyGuard II combo product. His initial LTC benefit is $6,296 per month, or a total of $488,662 per year in coverage for all types of long-term care costs (home, assisted living, adult day care, nursing home and hospice). The coverage will continue for a minimum of six years. And there is a 3% inflation increase in the benefits.

But if you don’t have that big of an up-front chunk of cash, consider paying a fixed and guaranteed premium for this same policy over 10 years. In that case, you would have to pay $12,819 a year—or $128,190 over 10 years—to get roughly the same benefits. That makes it more affordable from a cash flow point of view.

And if this single man dies two years after purchasing this policy, never using the long-term care coverage, his named beneficiary will receive a death benefit of $151,092.

Getting Started

If you truly want to avoid burdening your adult children with the cost and angst of your care, consider buying long-term care insurance. Even a little bit of insurance coverage could make a big difference for your entire family. You will need a specialist to advise you on this purchase.

Then, discuss your plans with your adult children, letting them know about your coverage. It will be a relief to them that you’ve lifted a multi-generational burden. That’s the Savage Truth. ?

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