Do you have or would you buy long-term care (LTC) health insurance?
It actually might make sense for many people. It typically covers most, if not all, of the tab for a nursing home stint or professional at-home care, and we know that at least some of us will eventually require long-term care.
But, my observation is this: You probably don’t have LTC insurance and will probably not buy it. With this in mind, this article will outline alternatives and quasi-alternatives to LTC insurance, some of which come with insurance products at no cost or cost very little, such as a qualifying health event “doubler” on some annuities and insurance products.
First, though, consider why people don’t buy LTC insurance – it may be instructional. For some, it is too expensive. According to the American Association for Long-Term Care Insurance (AALTCI), the average price for a comprehensive LTC policy for a single 55-year-old ranges from $1,325 to $2,550 annually. For a couple aged 55, it ranges from $1,985 to $3970 annually.1 A 90-day elimination period is standard.
Prices have not risen much in recent years but many policies offer coverage for only three years, down from five years in the past, and no longer include an inflation adjustment.
“The sticking point,” says Scott Sadar, an executive vice president at Somerset Wealth Strategies, “is the idea of paying a lot of money for a policy that may never be used. This is true for all insurance, of course, but LTC insurance is particularly expensive, and most people buy it when they are facing retirement and looking for ways to trim spending.”
Sadar tells clients that the money they have saved for their children can vanish quickly if they wind up in a nursing home without insurance, but it seldom phases them. “People tell me, ’I don’t want to pay these premiums,’” Sadar says. “’What if I pay all this money and don’t wind up needing the care?’”
A secondary reason for declining LTC insurance, Sadar adds, is the incorrect assumption that Medicare would pick up a nursing home bill. In fact, Medicare will pay for only 100 days of care following at least a three-day hospital stay.§
A possible, albeit limited, option is a Medicaid-compliant annuity, a restricted period-certain annuity that couples can use if one of them is headed into a nursing home covered by Medicaid. The income from the annuity is not counted as income under Medicaid guidelines. Medicaid annuities have drawbacks, however. They are irrevocable, non-assignable, have no cash value and can only be written for a limited period of time. In addition, participants cannot sidestep Medicaid asset restrictions by transferring assets to a child or other relative.
What are the other options or quasi-options? There are five:
- An annuity with a nursing home “doubler” feature for qualifying health events.
- Asset liquidation.
- Annuity/LTC combo product.
- Universal life insurance with a LTC insurance rider.
- A deferred income annuity known as a Qualified Longevity Annuity Contract.
Annuity with nursing home doubler. Some annuities offer to increase payments to owners from 150 percent to 300 percent if experience a health event that requires a stay in a nursing home, or, in some cases, cover that or the cost of professional at-home care. Coverage often lasts up to five years and is offered as an annuity benefit that the buyer can “opt in to” for free or as part of a rider package offered at a minimal cost. People don’t buy an annuity just for this benefit, but it makes sense, Sadar says, “if they are shopping for an annuity and find competitive annuities with doublers. This isn’t a replacement for LTC insurance because it won’t cover the whole tab, but it is nonetheless helpful. No medical exam is required for annuities.”
Asset liquidation. People who need long-term care and have no insurance at all, may decide to liquidate or sell some of their assets to help pay the bills. A strategic approach is helpful; the goal, if possible, should be to sell assets unlikely to appreciate quickly. If a spouse wants to sell the house to move into a smaller house, for example, he/she should determine whether their home’s value is closer to a peak or a trough. If real estate prices are near a trough, the sale of, say, stocks might make more sense. Regardless, the risk of selling any asset at the wrong time always exists. If you sell stocks that later rise, you have permanently decreased the value of your assets.
Annuity/LTC combo product. As the name implies, these annuities – usually fixed annuities – offer a surrender-penalty-free, federal tax-free payout if you require long-term care. The payout is usually two to three times the face value of the policy and lasts up to six years. This feature is expensive, however – typically 1-2 percentage points annually for the LTC insurance coverage. So say, for example, that a $100,000 fixed annuity without LTC insurance coverage pays the buyer 3 percent a year in interest. That is $3,000 a year. If the same policy also offers LTC insurance, it might pay the policy holder the difference between 3 percentage points a year and 1 to 2 percentage points a year – or $2,000 at most or $1,000 at the least. The difference between these figures and the $3,000 is the annual cost of the LTC insurance. So these annuity holders may have to be satisfied with a minimal annual return of their money. No medical exam is required.
Universal life insurance policies with a long-term care rider. Insurance professionals say these products offer a “live, quit or die” option. Unlike standard LTC insurance, the policyholder or their heirs will receive something no matter what. Policyholders receive funds if they need long-term care, if they do not, their heirs receive the policy’s death benefit. And if a policyholder decides to eventually drop the policy, he/she typically will get a refund of the premiums he/she paid. The drawback is that these polices are relatively expensive; they could easily cost $10,000 a year for 10 years, professionals say. A medical exam is typically required.
A Qualified Longevity Annuity Contract (QLAC). A QLAC, a type of deferred income annuity, allows you to defer taxes on Required Minimum Distributions (RMDs) up to $125,000 in all your traditional IRA or 401(k) plans until age 85. In the past, traditional IRA and 401 (k) plan owners had to start taking distributions from these tax-deferred vehicles and pay income taxes on them by April 1 of the year following the year they turned 70 ½. The QLAC tax law pushes that liability back, providing tax-free money to buy an LTC insurance contract, among other things. This is similar to delaying Social Security benefits and the taxes you often have to pay on them, but you delay far longer with a QLAC. No medical exam is required.
What should you do, if anything at all? That is up to you, of course, but now you know some of the consequences of no LTC insurance and some possible alternatives. Choose wisely.
§ Not affiliated with nor endorsed by any government agency, including the Centers for Medicare and Medicaid.
1 “For Consumers landing page.” American Association for Long Term Care Insurance, Accessed 8/14/2015. http://www.aaltci.org/long-term-care-insurance-rates/
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