Money matters: Long-term care insurance provides for comfort in final chapters of life

A handful of options exist for long-term care insurance, called the “last brick” in financial planning by one local retirement planning counselor. (iStock.com/ supersizer)

Money Matters is a monthly column exploring pertinent financial issues for older adults in or near retirement. In this installment, columnist Jenny Callison shares tips on navigating the landscape of long-term care insurance.  

Ask Ashley Hopkins what topic is top-of-mind among many of her clients, and her response: long-term health care insurance.

Hopkins, a retirement planning counselor and founder of Sound Retirement Solutions in Wilmington, has more than professional knowledge to offer her clients; she also helped her grandmothers with the issue, purchasing each of them a policy some years ago. 

“Long-term care is called the ‘last brick’ in any financial plan, and for a reason,” she said. “Both my grandmothers had dementia, and both died last February. One used her policy for five years and the other for six years. I am so passionate about people protecting their assets. There is no need to do income planning if you don’t protect your assets and make sure they are there for yourself and your spouse.”

The options available in long-term care insurance have changed over the last few decades, she added, with traditional plans and what she calls a hybrid: adding a long-term care rider to an IRA or life insurance policy.

In terms of a traditional policy, Hopkins said, “You are able now to design a plan for yourself with the daily amount of coverage you wish to have and the number of days you want covered. Multiply that and that’s the total maximum coverage amount.”

On average, the daily cost of care in a skilled nursing facility currently runs $220 to $250, she said. So, for example, a three-year policy (1,095 days) could yield maximum coverage of up to $273,750 ($250 x 1,095). 

People take the hybrid route when they don’t want to purchase a traditional plan whose premium could increase, Hopkins explained, adding that a long-term care rider should be fixed onto a permanent policy or IRA you plan to maintain. There is no risk of premium increase with these riders.

If the rider is added to a person’s IRA, it costs about 1% of the IRA’s interest yield, she said. If it is added to an existing life insurance policy, the overall premium increases but remains the same after that. The maximum coverage of a long-term care policy joined to a life insurance policy is usually 2.5 times the benefit amount: for example, a $100,000 life insurance policy would allow a maximum of $250,000 of long-term care coverage.

“We run the numbers to see what is going to be most economical in the long term,” Hopkins said.

Robert Loweth, a Certified Financial Planner in Wilmington, points out that – at some point – most people are going to be too infirm to live independently. He advises his clients to compare policy benefits and costs. 

“A life insurance policy with a long-term care rider tends not to have as large a benefit as a stand-alone policy and tends to be more expensive,” he said. “And policies can have different cost of living adjustments: most are 3%.”

Before deciding on a policy, Hopkins said, individuals should consider the following points:

• The policy does not start paying out until after the elimination period is over. It’s like a deductible, according to Hopkins, who said most people choose 30 or 90 days unless there is a zero-day option. If you choose the 90-day elimination period in the belief that Medicare pays for 100 days of skilled nursing care, be aware that after the first 20 days Medicare charges a copay.

• Medicare will not pay for skilled nursing care if there is no hospitalization involved. Conditions, such as Alzheimer’s, do not necessarily require hospitalization unless there has been a fall or some physical impairment that lands the policyholder in the hospital for at least one day. 

• Most policies today do cover home health care, although the coverage level may mean that care is delivered by a CNA rather than a nurse. Sometimes a flat rate, rather than an hourly rate, is a better option if the patient needs 24-hour care.

Loweth cautions people to make sure home health care is included in any policy they consider.

Whether the policyholder is temporarily incapacitated or in declining health, being cared for at home is often the best solution. 

“It’s statistically proven that people recover more quickly and live longer if they are cared for in their own home, where they have a sense of freedom and independence even if they are still incapacitated,” Hopkins said. “But individuals who don’t have families sometimes need the socialization of an institution. When we advise people, we ask if they have family [who can help out] and we talk about the benefits of socialization; it can be very lonely when you are aging. Depression is very real in the older population.”

One strategy some individuals consider is depleting their estate to qualify for long-term coverage through Medicaid, Loweth said. 

“I’m not a big fan of giving everything away so you can become a ward of the state,” he said. “Medicaid has gotten very good at clawing back dollars, and the number of beds available to Medicaid patients [in skilled nursing care facilities] is slim.”

And by all means, if you have an existing long-term care policy, even if the premiums are increasing, stick with it, Loweth continued. 

“You can’t replace it for what you are paying now,” he said. “Long-term care policies have gotten really expensive.”

And there’s the matter of qualifying: a person’s health status may have changed since the purchase of that original policy. Loweth said he’s had more clients denied long-term care insurance than life insurance.