- Long-Term Care insurance (LTCi) planning can be a lot like buying a car; there are many factors to consider regarding price, value, and options.
- LTC coverage comes in many forms, from traditional LTC insurance policies to LTC riders on life insurance and linked benefit LTC policies, also known as “hybrid LTC insurance”.
- Looking into LTCi can be broken down into 3 main categories; comparing the price vs the value, options and features to consider, and how you’re going to pay for your policy.
It’s funny how moments in life can be tied to your work, and that’s exactly what happened to me recently.
My husband announced that he was ready to replace his car – and he wanted me to help him consider different car models, and the pros and cons of buying a used car vs. a new car. As he was running his thoughts past me, I sort of zoned out; and he was a bit annoyed because he thought I was not listening to him.
Then suddenly, I lit up and said, “Honey, you just made me realize that buying long-term care coverage is a lot like buying a car!” Now, most husbands would have looked at me as if I were crazy – but not my husband. He simply smiled and said, “Glad I could help!” We finished talking about his car, and then he listened to me as I explained the connection between buying a car and buying long-term care (LTC) coverage.
What we think about when buying a car
There are many factors you look at when buying a car that go beyond style, color and comfort. You are looking at price vs. value, mileage, extra options, holding value, and expected length of use. In addition, the purpose of the vehicle matters. Perhaps a reliable car is all you need, but if you need a workhorse of a vehicle, you might choose an SUV or truck.
And, how are you going to pay for the car? Do you have a trade-in? Will you pay for it up front, or finance the car over a period of time? These questions will vary based on your personal experience.
Factors in choosing the right LTC coverage
All of these same factors go into making a decision about which LTC policy may work best for you. We will look at some of these one at a time:
Price vs. Value
LTC coverage comes in many forms, from traditional LTC insurance policies to LTC riders on life insurance and linked benefit LTC policies, also known as “hybrid LTC insurance”. Each policy has its own advantages, and all of them have the potential to meet the needs of specific individuals or couples.
- Traditional LTC insurance (LTCi) policies are generally the least expensive solution and have riders for an additional charge that allow couples to share benefits. These policies also have inflation options, and choice of benefit and elimination periods. This coverage may offer the most in LTC benefits for the money, but the trade-off is that the premiums are not guaranteed; and if the policy is not used, premiums paid are lost. If value to the individual is nothing more than the lowest price, this might be a good choice.
- LTC Riders on life insurance generally have more limited options, however, certain policies can be had with guaranteed premiums and benefits. More importantly, if the policy is little or never used, any death benefit that is not accelerated to provide LTC benefits is paid tax free to a beneficiary. This policy has a meaningful death benefit, but generally the least in LTC benefits compared to other policy types. Either way, the payout will be the total of the issued policy amount between the LTC benefits received by the policy owner and any remaining tax-free death benefits paid to beneficiaries. This could be a good choice for someone who is more concerned about the value of the death benefit vs. the value of the LTC benefit.
- Linked Benefit (Hybrid) LTC policies are literally a hybrid between a LTC rider on life insurance and a traditional LTCi policy. This type of coverage has a choice of benefit periods and inflation, but also has guaranteed premiums and benefits. The LTC benefits are generally much more than life insurance with LTC rider – and with the inflation options, the benefits can be maximized further. Plus, in most cases the policy will pay beneficiaries at least the amount of premiums paid into the policy as a tax-free death benefit if the policy is not used. This policy may be of most value to someone willing to pay a little more to protect their premium while being able to maximize LTC coverage.
Options and features to consider
The individual will want to be sure they have options that will provide the most comfort, control and flexibility for their care needs. Which options they need will depend on factors such as age when purchasing, how long they think they will need benefits, how they want to receive their benefits and so forth.
- Benefit periods – Traditional LTCi policies and linked benefit policies provide choices of benefit periods that extend into many years. LTC riders on life insurance have limited or no choice, usually no more than 50 months.
- Inflation – For individuals buying at an age where there is concern that the policy will maintain its current buying power, inflation is a good option and comes in choices as low as 3% simple to 5% compound.
- Elimination periods – Choice of elimination periods are only available on traditional LTCi policies – and they span from 0 days to 360 days. The longer the elimination period is, the less expensive the policy is. However, while LTC riders and linked benefit policies don’t offer a choice, the elimination periods offered vary in some form from 0 to 100 days – never longer.
- Benefit Model – This is an important choice, and for some individuals, the most important choice. The benefit you choose will determine how much control and flexibility you have using benefits while on claim.
- Reimbursement plans – are policies that only reimburse your LTC expenses covered under the policy, up to the benefit amount purchased. Expenses not covered by the policy must be paid for out of pocket. Bills and receipts must be submitted each month to prove expenses. Some insurance companies will do direct billing with care providers willing to bill a 3rd However, this will not eliminate paying bills since uncovered expenses will still need to be paid for out of pocket to the care provider.
- Cash Indemnity Plans – are policies that pay the full maximum monthly available LTC benefit to the policy owner and provide the most flexibility of use. No bills or receipts need to be submitted. You can use your LTC benefits as you see fit, including paying unlicensed or family caregivers to provide care.
Paying for the policy
The type of policy you choose will determine the payment options you have. While most traditional LTCi policies only have lifetime premium options (with a few exceptions), LTC riders on life insurance and linked benefit policies offer a wide range of premium payment options – including paying monthly.
And remember earlier when I mentioned trading in your car? You can do that with certain financial products as well using a tax-free IRC Section 1035 exchange. There are some rules that must be followed, and you may have to add additional premium, but it is a great way for example, to take cash value from an old life insurance policy and 1035 exchange it into LTC coverage.
LTC benefits can help provide more care options for the insured, help protect the individual and their surviving spouse’s retirement income and life-style, and help keep legacy plans in place. In the end, LTC coverage is just another type of vehicle to help make your life easier.