By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
Print This Post
During the holidays, many families will have someone close to them, possibly a parent, who needs assistance with activities of daily living for an extended period (long-term care). Despite this, most families do not address their own potential future need for long-term care (LTC). Let’s face it, the notion of needing care is often too depressing to think about. As a result, many people live in LTC denial, indicating that they will never need care, or that the problem will somehow just take care of itself.
The reality is that according to the U.S. Department of Health and Human Services, today’s average 65-year-old has a 70% chance of needing long-term care as they age, and the national average for 24-hour home care or for nursing home care is more than $125,000 annually[1].
Self-Insurance
Often individuals with LTC denial choose to “self-insure” and just use their personal funds to cover
potential long-term care costs. Some people like the idea of self-insuring the long-term care risk because
they want to maintain control over the assets, and they do not want restrictions on how they can use
them. Also, if long-term care is not needed prior to death, they can leave these assets to their beneficiaries. However, in the likely event that care is needed, even those with significant assets could erode their wealth very quickly due to the high cost of care. Moreover, self-insuring with tax-deferred retirement accounts could compound the problem even more. As care is needed, withdrawals may be required from these accounts to pay for care, which could mean an increase in income and potentially push individuals into a higher tax bracket.
Traditional LTC Insurance
Qualified traditional LTC insurance can provide income-tax-free benefits when a long-term care event does occur. The downside of this product type is that the policies are “use-it-or-lose-it” type contracts, meaning if long-term care is not needed prior to death, no death benefit is paid to the beneficiaries, and the premiums paid are lost. In addition, insurers have found it difficult to price these policies and have raised rates dramatically in recent years on both new issues and in-force contracts.
Hybrid Long-term Care Alternative
Many insurers have stopped offering traditional LTC; more have begun offering policies that combine life insurance death benefits with long-term care benefits. These policy types are used as an alternative to traditional LTC insurance or self-insurance. Hybrid LTC insurance enables individuals to maintain control of assets as they protect themselves and their savings from financial exposure to the long-term care expense risk. If care is needed prior to the death, the policies will provide an income-tax-free benefit to pay the expense. Should the insured die before care is needed, an income-tax-free death benefit would be paid to the beneficiary, avoiding the “use-it-or-lose-it” aspect of traditional LTC insurance.
Risk of Delaying the LTC Discussion
There are various factors and potential risks regarding delaying the LTC planning discussion.
- Health Risks: No one can predict when or if a serious illness or injury can strike. Should a serious change in health occur, insurance may no longer be an option due to an uninsurable status.
- Increased Costs: The longer an individual waits to purchase coverage, the higher the cost. Locking in meaningful insurance coverage now can protect against future uncertainties.
- Putting a Burden on Others: Without a LTC plan, financial, physical and emotional burdens can fall to loved ones.
November is LTC Awareness Month, which means it could be the perfect time to start having these discussions with family members you will spend time with during the holidays. Having an open and honest discussion about long-term care is the first step in developing a plan that works for you as well as your family and friends.
There are a variety of LTC planning issues and insurance options to consider. Contact your financial advisor to help with evaluating your situation and developing a plan based on your current assets, health situation, family dynamics and cost-of-care in your area.
________________________________
[1] “Cost of Care Survey 2024” Genworth.com
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.