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4 Ways to Afford Long-Term Care Insurance

How can the average American afford Long-Term Care insurance (LTCi)? Before we answer that question, let’s refresh our memory on the strategic use of LTCi. In our previous blog, we identified the following strategies to manage long-term care costs:

  • Self-insure
    • If you can comfortably afford catastrophic (e.g., dementia) long-term care costs of as much as $500,000 or more, this is an option.
    • Self-insurance may be attractive to the top 1% wealthiest families in the U.S.A., but even wealthy families frequently buy LTCi.
  • Rely on Medicaid
    • Individuals with near poverty level income and no more than $2,0001 in liquid assets may qualify for Medicaid long-term care coverage.
    • About 9% of Americans fall into this demographic.
  • Buy long-term care insurance
    • If an individual is neither wealthy nor impoverished, he or she is among the 90% of Americans that should consider LTCi.

Once you acknowledge the need for long-term care insurance (LTCi), the next question is frequently, “How do I afford the premiums?” Here are four potential techniques to minimize premium  costs:

  1. Determine the length and amount of coverage needed
  2. Take the free discounts and tax incentives
  3. Take the money for premiums from other sources
  4. Buy the coverage at the right time

 

  1. Determine the length and amount of coverage needed

    Few variables will impact premium cost as much as the coverage period and the coverage amount.

    Coverage Period

    We might want a policy that covers us for the rest of our life, but the average need is three years or less. Yet that word “average” can lull us into a false sense of security. By definition, about 50% of the time the need will be less than 3 years and the other 50% of time the need will be longer than 3 years.

    • You might need longer coverage but most of us will not need much more.For example, generally less than 1 in every 10 patients will need coverage for more than 5 years.
    • What about dementia? According to WebMD,2 the average life expectancy of a dementia patient diagnosed before age 70 is about 10 years and about 4½ years if diagnosed after age 70.

    What conclusions should you draw from these statistics?

    • 3-year coverage is the bare minimum coverage period and even that runs the risk of a need that lasts more than 3 years.
    • A more appropriate coverage period may be 5 years. There will be a modest increase in premiums vs. 3-year coverage but generally 90% of long-term care needs last 5 years or less.
    • If dementia coverage or similar long-lasting illness is a troubling concern, consider 10 years of coverage. Be prepared for a significant jump in premiums.

    Coverage Amounts

    You’ll need to select the daily benefit amount as part of the policy purchase. Consider the following national averages:

    • Home health care cost for 40 hours of care per week averages about $200 per day.
    • Average daily cost for an assisted living facility is about $160.
    • Care in a nursing home costs an average of about $175 per day.

    If these costs are a bit alarming, remember they are just averages. You may be surprised at how much long-term care costs differ among the states.

    For example, the daily cost of a semi-private room in an assisted living facility can range from:

    • $100 or less in a low cost of living state to
    • Well over $200 in a high cost of living state.

    If you’re already considering a move to another state, evaluate these costs as part of your decision-making process.

  2. Take the free discounts and tax incentives
    • Good Health
      • Save up to 15% with good health discounts. Interestingly, over 50% of applicants aged 50-59 qualify for this discount.
    • Pick a number of years, not lifetime, as the coverage period.
      • Choose a specific benefit period instead of lifetime coverage. Premium cost savings can range from 15% to 40%.
    • Extended elimination period
      • An elimination period (waiting period) is the time you must wait to receive benefits after you’ve been diagnosed with a long-term care need.
      • Elimination periods range from 30 to over 100 days.
      • The longer the elimination period, the lower the premium cost - but be sure you have the savings to pay the bills during the wait.
    • Joint coverage
      • If both spouses buy individual policies, the premium on each policy may be discounted by as much as 30%. This approach requires the purchase of two separate policies.3
    • Let the IRS pay some of the cost
      • What could be sweeter than having the government pay part of your premium costs?
      • You may be able to deduct the premiums on your tax return, especially if you own your own business. If you’re in a combined federal/state tax bracket of 40% and can deduct the premiums, every dollar in premiums you deduct really costs only sixty cents after taxes.
      • Restrictions apply. Contact your tax advisor.
  3. Take money to pay premiums from other sources

    You may not have to pay your LTCi premiums from your checking or savings account, alternatives include:

    • Veteran Benefits
      • The Veteran Affairs Aid and Attendance program provides long-term care benefits to certain combat veterans and their spouses. Significant eligibility requirements apply.
    • Heath Savings Account
      • Withdrawals to pay LTCi premiums are income tax-free.
    • Annuity
      • Exchange your annuity for an LTCi policy but be sure you will not need the annuity income in the future.
      • You could also exchange your annuity for another annuity with long-term care benefits. Your monthly annuity payment will drop but not disappear altogether.
      • The exchange is generally income tax-free.
    • Life Insurance Policy with a Cash Value
      • Alternative I: Consider taking periodic withdrawals from the existing policy’s cash value. Unless you withdraw more than you’ve paid in, the withdrawals are generally non-taxable.
      • Alternative II: Consider exchanging the existing life insurance policy for an LTCi policy if you no longer need the death benefit coverage (and you’re completely sure about that). The exchange is generally tax-free.
      • Alternative III: Exchange your existing life insurance policy for a new life insurance policy with a long-term care benefit. This will generally result in a reduced death benefit or increased life insurance premiums. The exchange is generally tax-free.
      • Alternative IV: Add a long-term care rider to your existing life insurance policy. Additional premiums on the life insurance policy may result.
      • Consult with your tax and life insurance professional before making any changes or taking withdrawals from an existing life insurance policy.
    • Employee Fringe Benefits
      • Pay LTCi premiums from an employer-sponsored cafeteria plan or participate in any group LTCi coverage offered by your employer.
  4. Buy coverage at the right time

    Buy too early and you risk paying premiums too long. Buy too late and, even if your health qualifies, the premium may be much higher. It’s a dilemma for which there is no “one-age-fits-all” solution. But consider the following information from a nationally respected consumer financial advocate:4

    • The average annual LTCi premium jumps by about 25% from an applicant’s age 50 to his or her age 60.
    • Despite the increase in premium, waiting until age 60 will generally cost less in premiums in the long run.
    • You should generally consider buying LTCi at age 60 to minimize long-term care premium costs. But if you’re worried sick over the risk, can’t sleep, and can afford the premiums, buy the policy at age 50!

    Still other commentators suggest that age 60 is too late. They argue that it’s time to buy LTCi no later than one’s age 55. The premise is that there is a greater likelihood of qualifying for coverage and receiving good health discounts in one’s mid-50’s.

    These and other opinions are remarkably consistent within a +/- 5-year window. While every person is different, consensus suggests buying LTCi from age 55 to age 60 for the average American.

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There is no crystal ball to tell us exactly what coverage we should buy, when we should buy it, and how long the coverage period should be.

The biggest risk is doing nothing. To paraphrase iconic World War II General George S. Patton,5 “ a good decision made and implemented now is better that a perfect decision made after the war is lost.”

Implementation Now

Especially if you are in your 50’s or older, consult with your financial advisors now and develop a plan to manage long-term care costs.

Stay tuned! In our next blog, we’ll illustrate how to have your cake and eat it too. You’ll learn how to coordinate your LTCi coverage period with Medicaid “spend down” strategies to create a stronger long-term care safety net.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice.

Each individual will have their own specific needs and circumstances. The number of variations, alternatives, and exceptions to the material in this blog is legion.

Consult an experienced long-term care professional, life insurance professional, annuity professional and/or tax professional before making any decisions regarding your long-term care planning.

 

1The liquid asset limit varies by state. Many states have adopted the $2,000 limit while some states permit as much as $16,000.

2 Boyles, S. (2008, January 10). “Average Dementia Survival: 4.5 Years.” Retrieved from https://www.webmd.com/alzheimers/news/20080110/average-dementia-survival#1

3 A variation on this theme is the Shared Policy. In a Shared Policy, if each spouse has a 3-year coverage period, they actually have six years of coverage to split between them. This benefit is purchased as a rider and generally adds significant premium cost over the cost of two individual policies.

4 ”Who Needs Long-Term Care Insurance?” Retrieved from https://www.daveramsey.com/blog/who-needs-long-term-care-insurance

5 General Patton’s bold and decisive “get it done now” leadership during the Battle of the Bulge is credited with shortening the war in Europe and saving tens of thousands of lives.