As a person ages, insurance for long-term care will be a welcome lower cost solution as current costs for care in a nursing home is about $70,000 annually. Our elder population is growing as the Baby Boomers enter their retirement years; before long there will be a significant impact on end-of-life health issues, and mortality rates will increase as this generation becomes ill and dies.
Elderly people typically require assistance with daily activities such as eating, bathing, dressing, etc. This type of care is called long-term care, and may be administered by family members, or in a variety of assisted living facilities. Because the costs for long-term care can be exorbitant and can quickly deplete assets, and because standard health insurance policies exclude long-term care benefits, long-term care insurance can mitigate the effect of excessive expenses.
Long term care insurance is available to manage the risk of enormous expenses, typically in the later years of a person’s life when they are living on a fixed income. The risk is great, because most people will not be able to afford the exorbitant cost of the care they may need, and their entire estate can be consumed. Some careful thinking about and planning for this very likely situation is mandatory.
An analysis of the risks associated with long-term care reveals that the only choices available to an individual considering the financial impact of elderly needs are purchasing an insurance policy, or self-funding the costs. A third choice, dispersing your estate to rely on the resources and mercies of Medicaid, is an unappealing alternative.
There are three categories of people when considering the need for long term care. The first group is composed of the multimillionaires who will be capable of self-funding their elderly care needs, either through a personal staff or through an LTC policy. The third group is those individuals with less than $100,000 in resources who will be cared for through Medicaid. It’s the group in the middle that needs to use an insurance risk transfer technique to handle the impending risk.
For this middle group, the issue is focused on determining a reasonable way to finance the risk. People will either retain the risk and take the chance of paying the full cost of care out of their pockets, or they can choose to pay a premium to an insurance company and transfer the cost of covered charges to the insurance company. But there is another option, and that is to use a combination of retention and insurance. This option is usually chosen because people cannot pay or do not want to pay high insurance premiums. Remember, when evaluating LTC insurance, it does not have to be an all or nothing decision.
For some, a long-term care policy is an affordable and attractive form of insurance. For others, the cost is too great, or the benefits they can afford are insufficient. You should not buy a long-term care insurance policy if it will cause a financial hardship and make you forego other more pressing financial needs.
Factors to evaluate
After identifying the potential need for health care, the age, ability, financial situation and marital status of the individual must be considered.
Although policies are available from age 18 to 99, the average client is between 60 and 75. People under 40 are usually still more concerned with retirement and college planning while people over the age of 84 are not likely to qualify for coverage because of their health history.
Underwriting for long-term care insurance is different from that of life insurance since it is the applicant’s ability to function that is analyzed. The underwriting decisions are based more on morbidity (the chance of becoming disabled) than mortality (the chance of death). Underwriters look for diseases, injuries or illnesses that could lead to loss of function. In general, individuals with signs of a chronic condition that would likely lead to a loss of function will not qualify for coverage. Further, as individuals age, their likelihood of qualifying for LTC coverage decreases because chronic conditions begin to set in with age.
Financial Situation: When evaluating if one should purchase a long-term care insurance policy, the financial conditions of the situation need to be considered. Both assets and income must be analyzed to accurately measure the need for insurance.
Evaluating a long-term care insurance policy
The long-term care insurance market place has evolved greatly over the last several years, and there is no shortage of quality policies to choose from. There are several companies selling policies with multiple combinations of benefits and coverage.
In our next post, we’ll examine benefit flexibility and common long-term care insurance provisions. Until then, please let us know if you have any questions. Give us a call at 206-386-5455 or click here to email us, and we’ll be happy to address any questions or concerns.
To your wealth,
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance
Author of Exit Insight: Getting to “Sold!”