Money matters: Insuring for long-term care

It’s no secret that Americans are living longer these days. 

What may come as a surprise is that, according to the U.S. Department of Health and Human Services, 70% of adults who reach age 65 will need significant long-term services and supports (LTSS) as they grow older. Nearly half of those older adults will receive some paid care, but most paid care periods are relatively short, the DHHS report continues. Many older adults will rely on family or other unpaid caregivers for most of their LTSS.

That reality underscores the need to start early to prepare for the probable expenses of health and life care in later years, said Scott Winslow, managing partner at Wilmington-based Nabell Winslow Investments and Wealth Management. 

Winslow and his colleagues at Nabell Winslow specialize in retirement planning and counsel their clients on protecting their assets – and their comfort – for what they call the “no-go” stage of retirement. A primary means of ensuring comfort and asset protection in those years is through long-term health care insurance.

“This is about long-term planning, and it can require a lot of capital,” he said recently. “But the result is you have more time to spend with your family, versus worrying them or wearing them out. Most people wait too long to deal with these issues: The optimal time to purchase a long-term health care policy is in your late 40s to early 50s. Most claims are filed when people are between 85 and 89.”

Does that mean that people in their 60s should give up on the idea of purchasing a policy?

No, Winslow says, but it can be mathematically difficult from a health underwriting and cost analysis perspective to wait that long. He understands that middle-aged people’s budgets are often squeezed by the costs of raising and educating their children, but believes strongly that finding some room in that budget for policy premiums is essential.

He explains that there are two types of policies: asset-based and traditional. He and his associates help their clients choose policies or packages that fit their particular situations, assessing the value of a client’s assets and finding the most tax-efficient means of protecting them against potential future care costs.

An asset-based policy is a type of life insurance that is noncancelable. The carrier charges a set premium for a term of 10 or 20 years. At that point, the policy is paid up and the owner has created a set amount to draw upon, either as a death benefit if no long-term care is needed or sooner, when care needs arise. The expense of buying such a policy is completely predictable, as is the resulting fund.

“We’ve calculated that 70% of policyholders are likely to use that policy (for care),” Winslow said.

Similar to this is a life insurance policy with a long-term care rider.

With this option, the owner has, essentially, two policies in one, according to online personal finance advisory firm SmartAsset. One part pays out benefits for long-term care during your lifetime. The other pays out a death benefit. Asset-based long-term care insurance pays benefits for long-term care first and death benefits second.

Traditional long-term care insurance is pure insurance, Winslow continued. Once a person purchases such a policy, he or she must continue paying the premiums or the policy lapses and is worth nothing. Unlike with an asset-based policy, traditional policy premium costs are usually not guaranteed.

“They start really low, but when you get to your key stages when your faculties decline, that’s when they go up,” he said, emphasizing that someone who chooses a traditional policy should be clear about its benefits and potential costs. “Sometimes older people become frustrated at the rising costs and cancel their policy. Then they need it.” 

There are two types of traditional policies: reimbursement-based and indemnity-based. 

A reimbursement policy will pay invoices submitted by qualified care providers. Usually, the reimbursements don’t fully cover costs, but they can prevent major damage to the policyholder’s financial assets.

Indemnity policies require the policyholder to certify that he or she has at least two cognitive or physical impairments. Once underwriters have verified that, the policy starts making payments to the policyholder to help cover care expenses.

“It’s a predictable income stream when you need it,” Winslow said. “For example, it could pay for a family member to take a sabbatical from work to care for you.”

It’s not just individuals who should take a close look at long-term care insurance, according to Winslow.

“Business owners potentially can get a tax deduction on providing insurance for themselves or their employees,” he said. “If structured correctly, there are some tax planning opportunities.”