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Navigating the Waters of Long-term Care Insurance

Jessica Lanning

I’m almost afraid to take on this one, but here goes. I’m in the process of deciding on long-term care for my own family and those of a few clients of mine.  That has me mired in the long-term care debate, debacle, and decision.

The decisions are emotional and financial…and not easy

The purpose of long-term care insurance (LTCI) is to provide insurance to pay for your care when you are unable to take care of your basic needs – like eating, toileting, transferring from a bed to chair, etc. – which generally accompanies a debilitating illness that is not life-threatening or at least takes a long time to kill you.  With your basic LTC policy, you pay premiums for life or for 10 years and then receive payments for claims you make to the policy when you need it. If you die without using it, you lose all your premiums. In this way, LTCI is more like your homeowner’s or auto policy.

The first conundrum is that you don’t know whether you’ll ever make a claim on the policy, and these things are getting expensive.  First of all, most people want to believe they’ll be healthy until one night they die in their sleep. No one wants to use the policy benefits.  Once they concede that they might need care, some people believe that this is what their spouse or children are for – to take care of them in old age. Others don’t want to be a burden to their kids, so they want a policy to cover these expenses, which are predicted to be astronomical in the coming decades.  Others want to self-insure, but their kids are worried about losing the family vacation home and want Mom and Dad to have the coverage to the point that the kids will pay for it.  Once you’ve gotten past this decision – to get it or not – now you have to decide what and how much.

The number of insurers remaining in the LTC market continues to decline, so your options are limited. LTCI came on the market and was heralded as this terrific, must-have product, but it has had little history.  There are not many insureds and they’re only starting now to make claims, so there’s little claims history.  What that means is that there is not a lot of statistical data available to create and price the product accurately so that there is enough money available to pay claims. Life insurance is over 200 years old and auto insurance and disability insurance are over 100 years old. Companies selling those products have lots of history and statistics upon which to create and price products. LTCI is about 35 years old at the most – not a lot of history.  As a result, big-name players are getting out (MetLife, John Hancock, Berkshire, etc.).  The questions become: Which company do I use and will it be around?  And if so, is it going to hike the premium on my policy such that I can’t afford it or have to cut back on coverage in the years to come?  As a consumer, it’s hard to tell if what you’re paying for you’re actually going to get. That’s a hard sell.

Then, to make it even more complicated, there are “hybrid” products that are actually life insurance products that provide a LTC benefit rider. If you need to access the death benefit to provide long-term care, you can.  If you don’t use that rider and die, the death benefit pays out to your beneficiary.  This all sounds great until you look at the premiums. Because the over premiums you’ll pay will be bigger, ideally you want the premiums and corresponding death benefit to serve multiple purposes if you can (like estate tax planning or funding a trust). That has its own complications because if you do use the LTC rider and leave little death benefit, that secondary purpose may be thwarted.

The good news, I guess, if there is any is that business owners can get LTCI and get the premiums as a deductible expense. Be sure to ask your accountant about this. It’ll be the easiest question of the bunch.