By Thomas "Greg" Darden, CLTC | September 27, 2019

Traditional and Asset-Based LTC Insurance

Why are we talking about Traditional and Asset-Based Long-Term Care Insurance?  We would all like to think we’re going to take a nap one afternoon, far in the future, and not wake up. We won’t be sick, and we won’t need care. However, statistics tell us otherwise. The U.S. Department of Health and Human Services (HHS) tells us that 70% of Americans turning 65 now can expect to need and use long-term care (LTC).

While the average duration of care is three years, the degree of need is highly unpredictable – paid care could be required for many years and cost hundreds of thousands of dollars.

For a better idea of LTC costs, Genworth’s 2018 Cost of Care Survey (https://www.genworth.com/aging-and-you/finances/cost-of-care.html)  provides national, state and regional costs for long-term care, which can vary dramatically from state to state. The 2019 national median costs are listed below:

• Semi-private room in a nursing home: $252 per day or $7,664 per month
• Private room in a nursing home: $283 per day or $8,616 per month
• One-bedroom unit in an assisted living facility: $136 per day or $4,120 per month
• Home Health Aide services: $142 per day
• Homemaker (licensed companion) services: $136 per day
• Adult day health care services: $74 per day

Who Needs Long-Term Care Insurance?

High net worth individuals can generally afford to cover their long-term care needs out of pocket, though they may choose to insure part of the risk. Modest-income individuals may assume such care is unaffordable, so financial preparation does not enter their mind. Their default plan will be to rely on Medicaid.

The most vulnerable economic segment is everyone in between.

As part of our retirement planning approach, we encourage our clients to think about the costs of aging and how they want to plan for a possible need for LTC. A funding approach to LTC will often include some form of insurance. So, let’s take a closer look at the two most common types of LTC Insurance: Traditional and Asset-Based.

Traditional Long-Term Care Policies

Traditional long-term care insurance is pay-as-you-go, much like a homeowner or auto policy. You pay a premium (typically ongoing) and receive a monthly benefit for a specified or unlimited period.

The advantages of traditional policies include:

• Lowest out-of-pocket cost;
• Most benefit for your dollar;
• Premium is deductible as a medical expense up to IRS limits for individuals who itemize;
• Additional tax deduction advantages are available to business owners;
• A portion of the premium can be paid from a Health Savings Account (HSA);
• Benefits received are tax-free;
• Some policies offer a shared-care feature that typically allows one spouse who exhausts their benefit to use some of the other spouse’s; and
• Some policies offer a ‘joint waiver of premium’ feature suspends premium payments for both spouses when one goes on claim.
• Depending on the state in which you reside, a traditional policy might qualify for the federal-state partnership program. Under this program, you can exclude from Medicaid “asset spend-down” the amount of your assets equal to the total amount of long-term care benefits paid to you.

Disadvantages include:

• Harder to qualify for, due to strict underwriting requirements;
• Premiums are not guaranteed and could increase;
• Use it or lose it – no death benefit or refund of premium if the policy is canceled; and
• No cash value.

Asset-Based Long-Term Care Policies

Asset-based policies are also referred to as ‘hybrid’ or ‘linked-benefit’ policies. These policies are a combination of life insurance and long-term care benefit.

First, the life insurance benefit (or cash value) is accelerated to cover LTC. Once exhausted, LTC benefits continue through a continuation of benefits rider in the contract. Funding can come from repositioning existing available assets (for example, cash from CDs, savings, or brokerage accounts).

The advantages of asset-based policies include:

• Flexible payment options (single, multiple and limited payments);
• A portion of the premium can be paid from a Health Savings Account (HSA);
• Flexible funding options, including using existing cash values in life insurance or annuities through a ‘1035’ exchange, as well as the option to roll over a lump sum from a retirement account to pay premiums over time, thereby minimizing the tax impact;
• The premium is guaranteed never to increase;
• If the policy is canceled without having used LTC benefits, there is a refund of premium, typically subject to a vesting schedule;
• Guaranteed death benefit: if benefits are never used, your heirs will receive a tax-free death benefit equal to at least the amount of money you paid into the policy, less any withdrawals for LTC, and if benefits are exhausted, a minimal residual death benefit is typically paid;
• As with a traditional policy, the benefits are tax-free; and
• Underwriting generally is less restrictive than for a traditional policy.

Disadvantages include:

• More money paid into the policy initially and in the early years;
• Premiums are generally not tax-deductible; and
• Relatively less benefit for your dollar.

When considering whether LTC insurance should be a part of your plan, it’s also important not to underestimate the value of a carrier’s ability to offer care coordination and case management. Having these services available if and when you need to file for LTC benefits will greatly relieve stress on your family.

Lastly, when considering Traditional and Asset-Based policies, key features can be tuned to arrive at the best fit for your needs and budget. These include the amount of monthly benefit, how that benefit will be paid (reimbursement or cash indemnity), the benefit period, the elimination period (the initial period during which you have to cover the costs – essentially a deductible) and benefit inflation. Let us help you put together LTC protection that considers you, your loved ones and your heirs.