Long Term Care Blog Series: Financing

April 15th 2016, by Garrison R. North

In the final installment of our long-term care blog series, we are discussing your options when it comes to paying for long-term care. According to JP Morgan’s Guide to Retirement, a woman age 65 has a 73% chance of needing some type of long-term care in her lifetime and a man age 65 has a 35% chance. The average age of a person making a new long-term care claim is 79. Several of the ways you can pay for long-term care are listed below.

Self–Funding:  You may not realize this, but if you have avoided making a decision about how you will pay for long-term care costs, you have decided to self-fund. Unfortunately, many do not realize they have defaulted to this decision until it is too late to make a different decision. For those who have significant assets, self-funding could actually be the best way to pay for long-term care. Receiving long-term care for the national average of 3 years will cost $150,000-$500,000 in today’s dollars depending on the level of care received. If you have all of your retirement and estate planning goals funded with assets, any remaining money can be earmarked for potential long-term care costs.

Insuring:  For many of us self-funding the cost of long-term care will not be a plausible option; we will need a long-term care insurance policy.  Even for those who have the resources to self-fund, a long-term care insurance policy could add a layer of emotional and financial security. There are two main types of long-term care insurance policies offered in the market today.

Traditional Policy:  With a traditional policy the client pays an annual premium for a policy that will pay a stated monthly benefit (e.g. $6,500/month) for a defined period of time (e.g. 4 years). Two attractive options available with traditional policies are an inflation increase benefit, that increases the monthly benefit by a specified percentage (e.g. 3%/year) and the shared care benefit, that allows a couple to “pool” their benefits together in case one spouse exhausts his or her individual benefit and still needs care. Many people have experienced premium increases with these traditional policies because of gross mispricing by many long-term care insurance providers on policies that were written in the late 1990’s and early 2,000’s. Although the possibility for increased premiums still exists, many newer policies have not experienced premium increases because many insurance companies have adjusted their rates using updated data on claims instead of the antiquated data used by some older policies.

Hybrid Policy:  A hybrid policy contains the same basic benefits as a traditional policy (monthly benefit, specified period of time, inflation protection) but pays a death benefit if the insured doesn’t use the long-term care benefits. These policies can be funded with a single premium or be paid over a period of time up to 10 years. This type of policy protects the client from the potential of increased premiums as well as the “use it or lose it” nature of a traditional policy.

As you have seen over our last few blogs, long-term care is not a singular decision or event; it is an ongoing conversation that involves many decisions. Despite what many in the insurance industry will tell you, paying for this risk, specifically through an insurance policy, is the last step in this process, not the first. We believe it takes a true financial planning process to decide which long-term care funding decision is best for each unique client situation. We look forward to walking with you through this process in the future.