By Scott Olson
The long-term care insurance market has changed a lot over the past decade. There’s also more misinformation about long-term care policies than ever before. Here are five things you probably don’t know about long-term care insurance today.
#1 High-deductible long-term care insurance is here
The deductible on a long-term care insurance policy is called the “elimination period.” It’s the number of days you need to receive care before the policy will begin paying benefits for your care. Most long-term care insurance policies have a 90-day elimination period.
For years, high-net-worth consumers have been asking for long-term care insurance policies with high deductibles. Most high-net-worth consumers are comfortable covering the costs of a few years of care. They want long-term care policies that will have lower premiums and kick in after they’ve self-funded the first few years of care.
Forty-seven states have now approved long-term care insurance policies with an elimination period of 365 days or more. Forty-two states have approved policies with elimination periods ranging from 365 days to 1,460 days. Only three states (Connecticut, Florida and Vermont) have not approved policies with these higher deductibles.
#2 Beware: Some policies have premiums that go up EVERY year!
The single biggest concern consumers have with long-term care insurance is the threat of rate increases. Fortunately, 41 states have enacted the Rate Stability Regulation. Policies purchased before your state’s adoption of the Rate Stability Regulation are not protected by this regulation. Policies purchased after your state’s adoption of the regulation are protected.
Most states adopted this regulation over 10 years ago and it’s working very well. The Rate Stability Regulation uses the old-fashioned “stick and carrot” method to get the stubborn insurance companies to do what consumers (and regulators) have wanted all along: stable premiums.
The regulation penalizes the insurance company, by forcing it to lower its profits, if it requests a rate increase. That’s the stick. Conversely, the regulation rewards the insurance company, by allowing it to keep higher profits than it normally could, if it keeps premiums level. That’s the carrot.
Most long-term care insurance policies purchased today have inflation protection riders that grow the benefits every year. The growth in the benefits each year does NOT make the premium go up. However, you’ve got to be careful. There are some long-term care insurance policies that have premiums that go up every year. Each year when the benefits increase, the premium also increases.
When shopping for a policy, be sure to ask the agent, “Will my premium go up each year as the benefits go up each year?” If the answer is “yes” you should probably buy a different policy (and probably a different agent).
#3 Most hybrids come with a time bomb!
Hybrids are insurance policies that combine some type of life insurance with long-term care benefits. Hybrid sales have soared over the last few years as investment advisors and insurance agents have distanced themselves from traditional long-term care insurance.
However, you must be very careful when considering the purchase of a hybrid. Most hybrids are NOT guaranteed to remain in-force for as long as you live. Even if you pay your premiums on-time, every year, NEVER miss a payment, and never make a claim, the policy could lapse before you need to use it.
About 90% of the hybrids sold today are not guaranteed to remain in-force for as long as you live. If the policy lapses you will get NOTHING from the policy:
- No refund of premium
- No cash value
- No long-term care benefits
- No death benefit
Life insurance illustrations are very confusing. When considering the purchase of a hybrid, there’s only one page you need to see – the page that shows the guaranteed values through age 100. If the death benefit and long-term care benefits are not guaranteed through age 100 you should probably buy a different policy.
#4 Self-insuring: Two bad ways, one good!
Some people choose to “self-fund” their future long-term care expenses. Roth IRA’s and health savings accounts (HSAs) are extolled in personal finance columns as “ideal savings vehicles” for long-term care expenses because the withdrawals are tax-free. This is horrible advice.
If you want to self-fund your long-term care expenses, you’re better off withdrawing money from your 401(k) or traditional IRA because long-term care expenses are tax-deductible. Withdrawals from a 401(k) are taxable. You can avoid most of the tax on a withdrawal from your 401(k) when the withdrawal is used to pay for long-term care expenses.
If you’re going to designate an account to self-fund your long-term care expenses you should designate a pre-tax retirement account NOT an HSA or Roth IRA.
#5 Self-insuring: A better way!
Self-funding, however, comes with its own risks. Sure, you can earmark a few hundred thousand from a traditional IRA or 401(k) to cover the cost of an “average stay” in a nursing home. But those averages don’t include care at home. According to research conducted by the Congressional Budget Office, only 13% of the people who need long-term care are in nursing homes. Over 80% of people needing long-term care are at home. Plus, the incidence of Alzheimer’s and dementia is increasing at an alarming rate. What if you (or your spouse) burn through the account you designated for long-term care?
A better way to self-insure is to transfer some of your “long-term care fund” into an asset-based hybrid LTC policy. If you need long-term care, most of your deposit will be used to cover the first couple years of long-term care. After that an unlimited long-term care rider will kick in to help cover the cost of your care no matter how long you might need care. Because there’s no limit on the long-term care benefits, this helps protect you from the real risk: the long-tail risk. Of course, because this type of product is built on life insurance, if you pass away without needing care, most of your deposit will be paid income tax-free to the beneficiary you designate.
About the author: Scott Olson
Scott has helped thousands of consumers in all 50 states shop for long-term care insurance. He's co-founder of www.LTCShop.com and has been specializing in long-term care insurance since 1995. Scott's book "Simple LTC Solution: How to Protect Your Life’s Savings with a Long-Term Care Partnership Program" is available on Amazon. His next book "Making Long-Term Care Insurance Understandable and Affordable" will be published in Q1, 2022.