Up until the COVID Crisis of 2020, the world had seen a relatively calm and peaceful existence for the better part of a decade. The last period of uncertainty was the Global Financial Crisis of 2007-2009 when the entire banking system nearly collapsed. The ensuing fixes ushered in an unprecedented level of government support that created a nearly straight up line for stocks, low volatility, and a general calm that we all came to love. However, today is afar different story.
Much of that shangri-la we experienced is now turning back the other way; high-volatility, military conflict, and hangover from the COVID shutdowns dominate the headlines today. As a result, we are fielding a regular stream of inquires about Long-Term Care (LTC) insurance. Let’s bottom-line this for you: our baseline view on LTC is that most of our clients would not benefit from owning it, although in some cases LTC still makes sense. The only way to truly know if adding a long-term care policy to your insurance line-up is by completing a comprehensive financial plan.
So let’s dig into the details and help you understand this tool for protecting your lifestyle should you or a loved one need outside assistance in the Golden Years.
An Overview of the Origin and History of Long-Term Care Insurance
Long-term Care Insurance (LTC) is a type of insurance that helps pay for costs associated with assisted living and long-term care across the UK, USA, and Canada. It typically covers services not typically covered by health insurance, Medicare, or Medicaid, including routine daily activities such as help getting in and out of bed, showering, dressing, etc.
Long-term care insurance was introduced to help people meet their personal daily needs as they aged or became disabled. It was like a plan to help them provide for themselves in the future.
Here’s a quick background: nursing homes first appeared in the 1960s to provide long-term care outside of the family. However, not everyone could afford it, and some people were forced to sell their homes or use their savings to pay for the care. Others avoided long-term care entirely.
This brought about the need for insurance plans that specifically addressed long-term care needs. By the late 1970s, this type of insurance was available, but it only became popular in the 1980s. Companies were eager to market it, and consumers recognized its need, particularly given that people were living longer than ever before.
This type of insurance became widely available for seniors by the early 1990s. They frequently paid monthly premiums on their policies for years, hoping they would never need them.
By the 2000s, it was clear that insurance companies had underestimated the number of people who would keep their policies and eventually claim long-term care benefits. As more policyholders requested benefits to pay for long-term care, some insurance companies couldn’t payout.
What Is Long-Term Insurance Used For?
Long-term care (LTC) insurance covers aspects such as home health care and nursing-home care for adults over 65 years that require constant supervision either due to old age or chronic or disabling conditions.
It takes care of out-of-pocket expenses for the elderly, primarily because they can’t fully rely on family members or their children for assistance. The costs would otherwise quickly deplete their personal and family’s savings.
How Does Long-Term Care Insurance Work?
Long-term care insurance assists in paying for the costs of essential daily activities ADL (bathing, dressing, going to the bathroom) that are not covered by regular health insurance.
You should note that age is not a major determining factor in whether you require long-term care.
How Do I Apply for Long-Term Care Insurance?
Typically, you are eligible for LTC benefits if you cannot perform several activities of daily living (ADL).
The good news is that regardless of your age or health condition, LTC insurance is assured as long as you pay the premiums. First, you’ll fill out an application and then answer some medical questions.
LTC policies have a maximum amount paid out per day and a total amount paid over your lifetime, so you need to decide how much coverage you’ll need before applying.
When you are approved for coverage, the insurer will issue you a policy, and you will begin paying premiums. The total amount paid out over your lifetime and given per day is usually capped by policies.
Benefits from long-term care insurance policies are paid in one of two ways:
Policies that reimburse policyholders for long-term care expenses up to the maximum benefit amount are known as expense-incurred policies. The person getting care should submit claims based on the information provided.
Indemnity policies pay a fixed dollar amount regardless of the service cost. After the waiting period, you will begin receiving insurance payments for long-term care.
How Much Does Long-Term Care Insurance Cost?
There are several factors that determine the rates you pay:
Insurer: Insurance companies charge a wide range of prices for the same level of coverage. So you’d better go shopping!
Level of coverage: The cost of your insurance will be determined by the level of coverage you choose. Higher daily and lifetime benefit limits are more costly. Policies that have shorter termination periods and fewer restrictions, on the other hand, will raise your expenditures.
Age and health: Typically, when you are young and healthy, you will pay lower premiums.
Marital status: Generally, married people pay lower premiums than single people.
What is Covered By Long-Term Care Insurance?
Long-term care insurance pays for the costs of an assisted living facility, a nursing home, or a home health aide if you are unable to care for yourself. It also covers the costs of the necessary care facilities.
Features of Long-Term Care Insurance
The coverage provided by long-term care insurance policies varies in coverage from one company to the next, so it is critical to compare several carriers. This section should serve as a general guide for the features of Long Term Care Insurance.
Money Pool or Maximum Policy Value
Your policy will provide a maximum policy value benefit. This benefit is like a checking account for Long Term Care Insurance, but the funds can only be used to pay for covered Services.
A Long-Term Care Insurance policy includes a money pool that allows you to extend the benefits years if you do not use the maximum daily or monthly amount. For example, a $200/day policy with a 2-year term has a maximum value or pool of money of $146,000.
You could exhaust the policy if you regularly took out $200 per day. However, if you took out less, say $100 per day, your policy could last up to 4 years because you were only taking out half of the daily amount.
The Long-Term Care Insurance company will send you a check for the total daily or monthly benefit under the Indemnity Long-Term Care Insurance Payment option, regardless of whether or not the actual expenses were minor. If there is money left over, you can spend it however you see fit.
Couples’ Shared Benefit Coverage
Couples can share each other’s benefits with this optional rider. If one spouse requires Long Term Care and runs out of money in their policy, they can use their benefits from their spouse’s policy.
When the time comes for you to require Long-Term Care, the last thing you want to think about is paying your policy’s premium. Most of the top companies’ plans will waive your premium when you start receiving benefits.
Premium Benefit Refund
Premium Benefit Refund is a rider that some companies provide that returns all or a portion of the Long-Term Care Insurance premiums paid to your beneficiary upon your death (minus claims). There are various options available with this rider, depending on the company, so ask questions and look at several companies.
Benefits for Survivors
This Long Term Care Insurance rider is designed for married couples. Depending on the option, if no claims have been paid after 7 or 10 years when one spouse dies, the other spouse receives full benefits and never has to pay premiums again.
Changes In The Industry That Have Happened Over The Last 10-20 Years
Since its inception, Long-term Care Insurance has undergone critical changes in recent years, according to trends analyzed by FinancialPlanning.com.
For instance, over the last decade, the LTC insurance market has struggled as premiums on existing, new policies have risen, and companies have become increasingly firm in their underwriting process. However, the pace of change has accelerated over the last ten years, with major players such as Prudential and MetLife discontinuing long-term care insurance entirely.
With the low-interest-rate environment persisting, changes are underway, with industry leader Genworth eliminating “limited pay” options and no longer offering lifetime benefits on policies. While Genworth is not the first company to make these changes, the largest carrier feels the need to reduce its exposure to LTC insurance policies.
It’s unlikely that this is the end of long-term care insurance, but it’s unclear whether or not future clients will be able to obtain policies as “generous” as those given in the past.
Since traditional long-term care policies are not profitable, most insurance providers have discontinued them. Instead, the industry has shifted to hybrid products like life insurance with a long-term care rider benefit.
Many large insurance companies are exiting the LTC insurance business, leaving fewer players in the market that once had more than 100. This has resulted in significant increases in LTC insurance premiums.
The Department of Health and Human Services claimed that in-home care cost $21 per hour in 2010, while a semi-private room in a nursing home costs over $6,000 per month. The costs for both have increased over the last ten years.
There’s no doubt that a long-term care insurance policy can be an effective tool for helping to cover future lifestyle needs. Here at Infinium, we highly suggest first starting with a comprehensive financial analysis – with conservative assumptions – in order to make an informed decision on the purchase of a LTC policy.