Understanding Long-Term Care Insurance

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While many individuals have heard of Long-Term Care insurance, few understand how these policies function, what they cover, and how much coverage is needed.

How are Long-Term Care insurance policies structured?

The two most common types of Long-Term Care insurance policies available today are Traditional and Hybrid.

Traditional Long-Term Care Policies

Traditional policies are purchased for a certain benefit amount, and premiums are paid for the remainder of the applicant’s lifetime. This is equivalent to home or auto insurance, but insures against the need for Long-Term Care. These are “use it or lose it” policies, meaning that if Long-Term Care is not needed, there is no return of premium or death benefit. Individuals who pay into a policy over many decades may never receive anything back if they do not need Long-Term Care.

While individual policies cannot be singled out for rate increases, carriers are permitted to increase premium rates across an entire class of similar policies, making it likely that premiums will be increased at some point during the course of the insured’s lifetime. In fact, the majority of the carriers in the market today have increased the premiums on its existing policy holders, in some cases by more than double the initial premium rate.

Hybrid Long-Term Care Policies

Hybrid policies are a combination of life insurance and Long-Term Care insurance. With these policies, applicants generally have the ability to choose the premium payment term, giving the option to pay a one-time lump sum, or spread the payments out over a specified period, such as 5, 10 or 20 years. While Hybrid policies have higher initial premium payments than Traditional policies, the benefit is that the cost of insurance and the benefits paid cannot be changed, and most contracts have an option to cancel the coverage and receive all or a large portion of your paid premiums back. 

Another benefit to Hybrid policies is the death benefit. The full death benefit is available in the event the Long-Term Care benefit is not used, and the amount of the death benefit is generally similar to the total premiums paid into the policy. These policies typically also include a small minimum death benefit, which is paid even if the full Long-Term Care benefit is used.

Important Terms & Definitions

  • Maximum Monthly Benefit: The maximum amount payable in monthly benefits for Long-Term Care needs.
  • Total Long-Term Care Benefit: The total maximum benefit amount available.
  • Elimination Period: The amount of time between being certified as having a need for Long-Term Care and beginning to receive benefits. This is essentially a waiting period, and typically is 90 days, but may be less or more depending on the policy.
  • Specified Benefit Period: The amount of time during which benefits will be paid under the policy, assuming the maximum monthly benefit amount is taken continuously.
  • Cash Indemnity Policies: These policies will pay cash once the insured has been certified as  needing Long-Term Care. In general, the policyholder can choose to receive an amount up to the maximum monthly benefit, even if actual expenses are less, and excess can be used as the insured sees fit. Conversely, if the policyholder chooses to receive less than the maximum, those funds will generally remain in the policy, and will extend the benefit period. These policies typically allow for more flexibility with home health care providers than reimbursement policies.
  • Reimbursement Policies: These policies reimburse actual expenses incurred. Reimbursable expenses are limited to those specified by the policy, and the choice of providers may be limited by the carrier.
  • Inflation Rider:  Policies may offer inflation riders. These are typically either 3% or 5%, and can be either simple or compound. Due to the rate at which Long-Term Care costs are rising, we believe this feature is imperative. A compound inflation option will provide the best inflation protection.
  • Non-forfeiture Benefit Rider:  This rider provides protection of benefits if the insured stops paying premiums for any reason. There are two types of riders. The first is a return of premium option, which guarantees a return of premiums paid in the event of your death or non-payment of premiums. The second is a shortened benefit period option, which guarantees a reduced benefit amount based on what has already been paid into the policy at the time premium payments stop.
  • Spousal Benefit Rider:  Sometimes called “Shared Care,” this rider allows each spouse to tap into the other’s pool of benefits, if needed.

Do I need Long-Term Care Insurance?

Long-Term Care costs can be a significant expense. When determining whether or not to purchase Long-Term Care insurance, there are several factors to take into account, including the projected cost of care in your area, the cost of premiums, age, health status, and ability to self-insure.

As investment professionals, we are in a unique position to look at insurance needs as part of reviewing your full financial profile. Your Freestone Client Advisor can work with you to generate a financial planning analysis to assist you in determining whether coverage is needed and if so, how much, based on your own unique situation.

Important Disclosures: This article contains general information, opinions and market commentary and is only a summary of certain issues and events that we believe might be of interest generally. Nothing in this article is intended to provide, and you should not rely on it for, accounting, legal, tax, insurance or investment advice or recommendations. We are not making any specific recommendations regarding any security or investment or wealth management strategy, including regarding Long-Term Care insurance, and you should not make any decisions based on the information in this article. While we believe the information in this article is reliable, we do not make any representation or warranty concerning the accuracy of any data in this article and we disclaim any liability arising out of your use of, or reliance on, such information. The information and opinions in this article are subject to change without notice, and we do not undertake any responsibility to update any information herein or advise you of any change in such information in the future. This article speaks only as of the date indicated. Past performance of any investment or wealth management strategy or program is not a reliable indicator of future results. Portions of this article constitute “forward thinking statements” and are subject to a number of significant to a number of significant risks and uncertainties. Any such forward-looking statements should not be relied upon as predictions of future events or results. 

Posted By: Stephanie d'Ippolito, CFP®

Stephanie d’Ippolito, CFP®, is our Managing Director of Financial Planning. She is passionate about helping people and believes that financial planning can be a valuable tool for clients to understand and solve their unique financial problems. She lives in Seattle with her husband and two dogs, Toby and Thurman.