Is LTC Insurance Still Relevant?
Posted on October 29, 2018
According to the U.S. Department of Health and Human Services, a 65-year-old now has a 70% chance of needing some form of long-term care in his or her lifetime, most likely due to chronic illness, cognitive impairment, or mobility issues. On average, a 65-year-old couple will spend more than $100,000 on long-term care during their lifetimes – in addition to the $225,000 they will spend on medical expenses in retirement.
Since the 1980s and 1990s, several million people have purchased long-term care insurance to help them offset the costs for in-home care, assisted living, independent living, or memory care. Many of those policies were purchased while the insureds were still in their 40’s and 50’s. To trigger eligibility for benefits you generally must be unable to complete at least two activities of daily living without substantial assistance from another person for at least 90 days, or be diagnosed as cognitively impaired.
One challenge for those who purchased coverage years ago is that when the insurance companies first offered the coverage they lacked a history of claims experience, miscalculated that people would live longer, failed to anticipate the rapid increase in health care costs, and were unable to achieve adequate investment returns due to the low interest rate environment. As a result, insurers incurred huge losses on the policies. Since those policies were subject to annual rate increases, policyholders saw double- and triple-digit increases in premiums or, conversely, large reductions in the benefits paid.
Today, few insurance companies continue to write traditional long-term care policies and have instead developed hybrid solutions, or bifurcated policies, that incorporate life insurance or annuities with long-term care protection. This was done to respond to the financial challenges of aging by creating more flexible and affordable products that met the needs of consumers and attempted to overcome the pricing problems of the past.
Now the question is whether long-term care insurance should be purchased – and if so, at what age? Coverage can be expensive, but the generally accepted principle is that wealthy people probably do not need to buy long-term care insurance. The trick is determining at what level of wealth is it safe to self-insure. A combination of some self-insurance and some limited coverage can be a way to reduce premiums and provide protection to preserve assets.
Gauging when to purchase coverage is also difficult. More than 50% of claims typically are paid after the insured reaches the age of 80, while only 10% of claims tend to be paid to someone not yet 70. That would lead you to think that it’s best to wait to purchase a policy to reduce the number of years you pay premiums. But also bear in mind that rejections rise with age, too. Nearly one-third of applicants between 60 and 70 are turned down for health reasons, while only one-tenth of applicants are denied coverage when applying while in their 50s.
As we live longer and health-care costs continue to rise, it is best to speak proactively with your financial advisor about whether to include long-term care insurance as part of your retirement plan. Your advisor can help you find insurance agents or brokers who specialize in that area, who have experience helping clients file claims, and who work with multiple carriers to provide a variety of choices.
Michael R. Dreyer, CPA
President, The Tampa Bay Trust Company
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