Is Long Term Care Insurance Worth it? The Truth

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How much cash is your policy worth?

Back in the early 1990s, long-term care insurance was widely considered to be the darling of the insurance industry. Insurers promised their agents and brokers that virtually everyone needed one of these policies, and the benefits that they paid out would keep middle and lower-income policyholders from having to rely solely on medicare or try to qualify for Medicaid.

The median cost for a year of long-term care insurance today generally runs anywhere from $70,000 to $110,000, depending upon your location and the level of care that is needed. And the U.S. Department of Health and Human Services has stated that they don’t expect this trend to stop anytime soon. The incidence of cognitive impairment is rising, and insurance costs are rising with it.  

But insurers badly underestimated the rate of inflation that would grip this sector of the economy, and many insurance companies such as Genworth are now scrambling to find ways to keep their traditional long-term care insurance policies in force. The average monthly cost of a private room in a nursing home facility is now about $7,700, and in heavily populated areas such as New York, the price can be much higher. Semi-private rooms are only slightly less expensive. The costs of long-term care are threatening in many ways to bankrupt the middle class in America. 

Needless to say, this has effectively forced many insurers to drastically raise their annual premiums. As a result, many policy owners have had no choice but to let their policies lapse because they can no longer afford them. This is a dangerous trend, as statistics compiled by the government indicate that the average 65-year-old in America has at least a 70% chance of needing some form of long-term care before he or she dies. 

What is long-term care insurance?

This form of health care coverage is designed to pay for the cost of care from any form of long-term care services that are not covered by health insurance or medicare. They are only designed to cover the cost of medical care that is not rendered in doctor’s offices and hospitals. It can be used to pay for caregivers who come to your home or give you care elsewhere. 

Long-term care includes home health care provided by home health aides, assisted living facilities, adult daycare, and nursing home care. These policies either have an absolute dollar limit or else a daily limit on the amount of long-term care costs that they will pay for. For example, a policy can pay for every dollar of long-term care expenses up to $250,000, or else set a daily benefit limit of $250 for services provided.  

Some LTC insurance companies require the insured to pay for the cost of care upfront and then reimburse them, while others will pay the care provider directly for services rendered. Some LTC policies also come with inflation riders (which are always a good idea, since the rate of inflation in the long-term care industry has been at least twice the base rate of inflation in the U.S. over the past 20 years). These riders give the insured some inflation protection to cushion the rising costs of managed care.

Elimination periods 

All forms of long-term care coverage have an elimination period, which is a waiting period that must elapse before benefit payments can begin. This waiting period effectively functions as the deductible for the policy.

For example, a policy may state that it will not start paying for benefits until the insured has been medically certified to require them for at least 90 days before reimbursements or indemnity payments will commence. Most policies also state a limit on the amount of benefits that they will provide, such as for five years. 

Set benefit periods

Policies that pay for services up to a specific dollar amount on a daily basis have a set benefit period. Once this period has elapsed, the insurer will no longer pay for long-term care services, and all future costs must be borne solely by the insured. So a policy with a daily benefit limit of $250 per day for 1000 days will stop paying after that period of time is up. If the insured has long-term care needs that cost $300 per day to satisfy, then the insured must also pay for the $50 difference every day while the benefits are being paid. 

The skyrocketing annual cost of long-term care insurance premiums has left many seniors wondering whether it might be cheaper to self-insure rather than pay for coverage. Most financial planners will tell those facing this choice that self-insuring or paying family members to provide care are better alternatives if the client can afford it. 

How do I qualify for long-term care benefits?

Most long-term care policy benefits are paid when the insured becomes permanently unable to perform at least two out of the six basic activities of daily living (ADLs). These activities include:

  1. Eating
  2. Bathing
  3. Grooming 
  4. Toileting
  5. Transferring (as from a wheelchair to a bed) 
  6. Continence 

In most cases, a doctor must provide written certification to this effect in order for the insurance company to accept the claim and approve a payout. Insureds who are physically capable of taking care of themselves but suffer from mental conditions such as Alzheimer’s or other forms of dementia can also qualify. 

Is long-term care insurance worth it?

Twenty years ago, the answer to that question was fairly obvious. At that time, long-term care insurance premiums were much cheaper than they are now, and a large number of insurers offered these policies in many forms. 

In recent years, though, many insurers have dropped out of the long-term care market, and those that remain have had to raise their premiums by as much as 100% in some cases. Worst of all, those who paid premiums into these policies for years and became unable to afford the higher premiums had no way to recoup the cost of the premiums that they faithfully paid for so long.  

Two senior couples who don't need long-term care insurance, stopping to take a selfie as they hike in the mountains together.

So the answer to whether long-term care insurance is worth it has become “no” for a growing number of Baby Boomers and senior citizens who are contemplating paying for nursing home stays or other forms of managed care. Those who can still afford the premiums are probably capable of self-insuring in many cases, and those who cannot may have better luck trying to qualify for Medicaid

Fortunately, there is a ray of hope on the horizon for those who are contemplating what course they should take with their personal finances in the wake of the long-term care insurance rate increases

The annuity solution 

If you can’t qualify for any other type of long-term care coverage, consider buying an annuity that provides an increased payout for those who end up needing any form of managed care. 

The life insurance policy solution 

About 20 years ago, the life insurance industry began layering additional forms of protection onto whole life insurance policies in order to stay competitive and relevant for today’s consumers. These hybrid life insurance policies offered accelerated death benefit riders that paid out a portion of the policy’s death benefit if the insured became incapacitated or unable to perform at least two of the six activities of daily living

One of these riders was designed to pay for long-term care expenses. Some insurers refer to it as a disability or chronic illness rider, but regardless of the name, it provides many of the same kinds of protection that standalone LTC policies do. 

Advantages of accelerated death benefit riders

This type of rider effectively resolves one of the biggest dilemmas that consumers have regarding LTC policies. If they are eventually forced to let their policies lapse, then they will essentially forfeit all of the money that they have already put into them. But the LTC rider solves that problem.

If a client ends up not needing long-term care before he or she dies, then he or she still has the cash value and the death benefit in the life insurance policy to fall back on. This means that there is no way that the consumer can “lose.” 

Single premium life insurance policies with long-term care riders also ensure that the cost of the long-term care benefits will never go up because they are entirely paid for at a set point in time. This is perhaps the most effective hedge against inflation that can be found in the life and long-term care insurance marketplace today. 

Economics of ADB riders

Life insurance policies with ADBs represent the future of the life insurance industry today. The cost of an LTC rider with a hybrid policy is often less than that of a standalone LTC policy, and in many cases, the level of benefits paid is comparable.

What's your life insurance policy worth?

Many long-term care riders will simply pay out the entire benefit in a lump sum upfront. Some LTC riders pay out a percentage of the life insurance policy’s death benefit while others can use the entire death benefit if necessary. 

For example, a policy with a face value of $300,000 might allow the insured to withdraw 70% of that amount to pay for long-term care expenses. That means that the insured can take $210,000 out of the policy’s death benefit and use it to pay for long-term care. The remaining $90,000 will be paid out upon the death of the insured. 

The life settlement solution

If an insured owns a life insurance policy that does not have accelerated death benefit riders, there is still a way that he or she may be able to cash in on their policy.

As long as the insured is at least 60 or 65 years old and has a cash value life insurance policy with a face amount of at least $100,000, then he or she can probably sell his or her policy to a life settlement company for a lump sum of cash upfront. The proceeds from this sale can be used to pay for long-term care expenses or for any other purpose that the insured desires. 

This method of cashing in a policy is known as a life settlement, and it will yield substantially more than any other form of cash withdrawal from a permanent life insurance policy. A straight cash withdrawal can only get the insured the cash value in the policy minus fees and expenses, which may be hefty in some situations. 

Surrendering the policy and taking the cash surrender value also limits the amount of withdrawal to the amount of cash value in the policy minus all surrender charges and other expenses. Borrowing from the life insurance policy is usually a better method of accessing the cash value, but interest is charged on the outstanding amount of the loan. And any unpaid loan balance will be deducted from the death benefit upon the death of the insured. 

Steps to selling a life insurance policy

Selling a policy to a life settlement company can easily yield the insured an amount of money that is equal to at least two to three times the amount of cash value in the policy with no surrender fees, administrative charges, or interest of any kind.

The life settlement process is fairly straightforward, at least from the insured’s point of view. The steps of a life settlement transaction are listed as follows:

  1. The insured lets the life settlement company know that he or she wants to sell their policy.
  2. The life settlement company will ask for a copy of the policy along with all of the insured’s medical records.
  3. The life settlement company will use this information along with the insured’s life expectancy to calculate a sale price.
  4. The life settlement company will make an offer to the insured to pay a certain dollar amount for the policy. The shorter the insured’s life expectancy, the greater the amount will be that is offered. And while the offer will be much more than the amount of cash value in the policy, it will still be less than the death benefit.
  5. If the insured agrees to the sale price, then the insured will sign over the ownership of the policy to the life settlement company.
  6. The life settlement company will name itself as the new primary beneficiary on the policy.
  7. The life settlement company will assume the responsibility of paying the annual policy premiums for the duration of the insured’s life.
  8. The life settlement company will collect the death benefit from the policy when the insured dies and thus recoup its premium and sale outlays and also make a profit.

Although a life settlement transaction will net the insured a large payday in the short term (most life settlements take anywhere from a few weeks to a few months to complete), the insured is also effectively disinheriting the original beneficiaries on the policy. Insureds should therefore be sure to thoroughly discuss the ramifications of doing this type of sale with their loved ones and the policy’s beneficiaries.

A life settlement can be a godsend for insureds who need to get their hands on a chunk of money fairly quickly, especially if they have health conditions that render them uninsurable at this point in their lives. This money could be used to cover the elimination period for a long-term care policy that he or she owns, and it could also be used to pay for any excess long-term care expenses that are not covered by the LTC policy.

Is long-term care insurance worth it?

The average cost of long-term care is likely to continue to rise at the rate it has for the last 20 years, and the cost of insurance coverage for this type of policy will undoubtedly continue to rise with it. Insureds who want to protect themselves from these costs should look at hybrid life policies or life settlements as possible solutions.

The AARP can also help you to find an insurer at a reasonable cost. Consult your financial advisor or life insurance agent or contact the American Association for Long-Term Care Insurance for more information on long-term care and what your options are for paying for it. Planning ahead can save you from having to make last-minute changes in your retirement planning and give you peace of mind.

Want to see how much you could sell your life insurance for? Try our instant life insurance calculator for free.

Author:
Chris Granwehr is the Founder of Dawn Life Settlements and a former senior manager with Mason Finance, an industry-leading life settlement provider in California. He's a member of the Life Insurance Settlement Association, and he has a passion for empowering customers financially through a faster, easier life settlement system.