The subject of long term care can be a scary one. No one likes the thought of living in a facility, or of a loved one having to do so. Plus, when you consider the cost of receiving long term care, whether in a facility or at home, the concern grows downright uncomfortable. Everyone has heard of Long Term Care Insurance, but this tool is also a touchy subject, because many people have had difficult experiences with it. With that in mind, this article will review the pros and cons of one particular kind of Long Term Care Insurance – Asset Based Long Term Care Insurance. By the time you’re done reading you’ll have a good feel for what it is, and whether it’s a good fit for you.
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The Background Of Long Term Care Insurance
As American’s have begun living longer (a trend that really accelerated in the 1980s), they have very often had to deal with one or more debilitating illnesses and conditions. Many of these are chronic in nature. Over 50% of the American population has at least one chronic illness, and people over 65 years of age are far and away the mostly likely segment of the population to suffer from chronic disease. With the increase of both life expectancy and chronic illness has come a rise in the need for long term nursing care.
The problem is that this kind of care is extremely expensive; it is very “hands-on” and often requires room and board as well as close monitoring by nursing staff. In addition to this, long term care residents generally need physical help with activities of daily living. The average cost for in-home nursing care is just over $4,000 per month for full-time care. The average cost for long term care in a facility like a nursing home or assisted living facility is more than $7,500 per month for a semi-private room. The average length of need for LTC of any kind is between 4 and 5 years. This is the case because many people receive care in-home as long as possible before moving to a nursing home or assisted living facility.
The average length of stay in a long term care facility is a little over 2 years. If you stay 2 years and pay $7,500 per month, your total cost could be $180,000 ($7,500 average monthly cost times 24 months). Not everyone needs to stay in a facility, or needs full-time nursing care, though, so the average lifetime cost of long term care for those who end up needing it is $25,000. Almost 70% of people turning 65 today are projected to need some level of long term care. This means that you have a 69% chance of spending between $25,000 and $180,000 (or more) on long term care. It is the thought of paying these kinds of bills that keeps people up at night, and that’s where Long Term Care Insurance originated.
Ways To Pay For Long Term Care Without Long Term Care Insurance
There are two basic ways to pay for long term care without using a specialized insurance product:
- Pay with your existing investments, savings, and income, or
- Get coverage through Medicaid
You’ll note that Medicare isn’t listed as an option. This is because Medicare won’t cover you for any kind of custodial care (when you need help with activities of daily living). They only cover medically necessary services and procedures. This leaves your existing assets or Medicaid (a State-facilitated federal program) to help pay for your care. The problem here is that Medicaid is only for people with minimal assets and incomes – it is a welfare program. You typically can’t get Medicaid coverage for long term care without spending most of your income and assets. This is known as a “spend-down” arrangement, and it basically means that any assets you’ve accumulated will be depleted to pay for your long term care. This is a major bummer to say the least, and can leave your heirs with no inheritance. In the best case scenario, this is simply an inefficient use of the assets you’ve spent your entire life accumulating.
In the worst case, it’s a huge disappointment to your family, and it can potentially ruin an otherwise well-executed estate plan. Another potential negative of using Medicaid to pay for long term care is that not every long term care facility accepts Medicaid, meaning your choices may be limited when it comes time to move into a facility. Long Term Care Insurance helps to alleviate all of these difficulties.
Traditional Long Term Care Insurance
As more people started receiving long term care it became clear that this level of care was financially burdensome. In response to this, insurance companies created insurance products that helped pay for long term care. The early versions, usually known as Traditional Long Term Care Insurance, were based on indemnity models. These plans paid you a fixed amount per day or month when you had a covered claim (like receiving long term care, whether in a facility or at home). You pay for the care, and the insurance company reimburses you. The payments you receive may be less than, equal to, or even more than the amounts you actually pay for care.
Why Traditional Long Term Care Hasn’t Worked Well
If you investigate long term care insurance (especially online, or by asking people who purchased traditional coverage), you’ll find that many people are upset about it. They don’t feel it’s working the way they thought it would. Most of the frustration relates to the cost for coverage – the premiums paid. These premiums aren’t fixed; they adjust each year. Not only have they tended to go up, they’ve accelerated higher, especially in the last ten years. The reason for this is two-fold:
- Medical expenses are rising rapidly for things like nursing care, and
- More and more people are receiving long term care, so insurance companies are paying rising levels of claims
It’s fair to say that insurance companies under-estimated both the true likelihood of their policyholders requiring long term care, and how much it was going to cost. These rising costs have led to several bad outcomes, including:
- People lapsing or canceling their coverage because they could no longer afford the premiums
- People reducing the daily or monthly benefit amount to keep their premiums as low as possible
- People reducing the total duration of benefits (many plans only pay benefits for a fixed amount of time) to keep premiums more affordable
- People not purchasing Long Term Care Insurance at all because of the bad press. By default, they are assuming the potential costs for long term care.
These accelerations in the cost for long term care show no signs of abating. This has created a need for a different kind of Long Term Care Insurance.
What Is Asset Based Long Term Care Insurance?
The need is being filled by a strategy called Asset Based Long Term Care Insurance. This strategy utilizes an insurance asset, typically a permanent life insurance policy or an annuity, that offers help with long term care costs. This is the most fundamental difference between traditional and asset-based Long Term Care Insurance:
- Traditional long term care coverage isn’t really an asset, it’s a coverage – it only has value if you end up needing long term care
- Asset-based long term care coverage puts a financial asset at the center of your coverage – your life insurance policy or annuity has value whether you ever need long term care or not
This is very important, because Traditional Long Term Care Insurance is “use it or lose it” meaning that if you never need long term care, you don’t see any use from the premiums you paid for years, or even decades. There are some options for “return of premium,” but these make the cost of Traditional Long Term Care Insurance even more expensive.
With asset-based coverage, you always have a valuable financial asset that grows in value over time. This asset can be used in several helpful ways:
- It can be called upon to help pay for long term care
- It can be used for other expenses if you live to such an age where you feel that you won’t actually need long term care because you’ve been healthy
- It can be passed on to your heirs or beneficiaries when you pass away, in many cases even if you used some of the value to help pay for long term care
This last scenario, passing on money to your heirs, is what’s called a death benefit. You can use your life insurance policy or annuity to do double-duty: this asset will help pass on a healthy estate to your heirs when you die, but if you happen to need long term care before you die, the Long Term Care Insurance aspect of these assets will help pay for the cost, and keep as much of your estate intact as possible.
You can see how much better this scenario is if you have substantial assets that you’d like to preserve in the form of an inheritance for your children or grandchildren. Even if you don’t have kids or don’t want to spoil them, you might prefer to avoid “wasting” your assets on long term care; you can use Asset Based Long Term Care Insurance to pass on a gift to a favored church, charity, or other cause you support.
What Are The Cons Of Asset Based Long Term Care Insurance?
This strategy isn’t for everyone. There are some potential cons to using an insurance policy or annuity to help with long term care.
The first con is that this strategy can be expensive. Particularly if you use permanent life insurance, your initial premiums will certainly be higher than if you went with traditional coverage.
A second potential con is that the level of protection from an asset-based strategy is probably lower than if you went with a traditional policy. Not always substantially so, but it can be a factor.
The third potential con is that you may not have a true need for either another life insurance policy or an annuity. In other words, your financial plan could be complete and effective already; buying one of these assets just for the long term care coverage could be inefficient and potentially wasteful. On the other hand, if this situation describes you, you may not have a true need for long term care insurance in any case.
What Are The Pros Of Asset Based Long Term Care Insurance?
For each of the potential negatives there are positives, which basically highlights the central theme of Asset Based Long Term Care Insurance (which we’ll close this article with), which is that this strategy is excellent for some people, under some circumstances.
For starters, if you use an insurance policy as your asset, your premiums are guaranteed NOT to increase, ever. So while your initial premiums might be higher than with a traditional policy, by the time you’re in your 70s or 80s, your traditional LTC policy premium might be higher than your life insurance premiums. In fact, asset-based products are often funded with a single premium paid up-front. This gets all the payments out of the way, and allows your insurance policy or annuity to accumulate maximum cash value. In other words, you’re protected against the exact situation so many are facing right now: rapidly escalating premiums. Even if you use an annuity instead of life insurance, you’re costs won’t rise fast as with traditional coverage.
A second pro of the asset-based strategy is that you’re funding a financial asset. This asset will grow in value over time. The cash that is accumulated is potentially available to you through withdrawals or policy loans (which can come with tax benefits). In short, you’re not just paying for a coverage, you’re building wealth while also protecting against the possibility of having to pay for long term care.
The third benefit is the protection you can give to your estate. If you’ve accumulated significant assets that you want or need to pass on to your heirs, an asset-based strategy will do double-duty: provide coverage for the cost of long term care if you should ever need it, allowing you to keep all of your savings and investments. Plus, if you pass away without needing long term care, the life insurance death benefit or annuity value will be added to your estate, increasing the inheritance your heir or favored charities receive.
Who Is Asset Based Long Term Care Insurance A Good Fit For?
As has been stated throughout this article, Asset Based Long Term Care Insurance (actually long term care insurance of any kind) is not an appropriate strategy for most people. It’s easier to start off by saying who asset-based strategies are NOT appropriate for. This is not a good strategy for:
- People with relatively few assets (less than $100,000 in savings or investments), or
- Very wealthy people (assets over $10,000,000 with a sound estate plan)
On the other hand, Asset Based Long Term Care Insurance is a great fit for people who have significant assets, but are not extremely wealthy (and also those who are extremely wealthy, but lack a sound estate plan). You don’t like the idea of spending all of your hard earned assets on long term care, but you want to be able to receive five star care in your home, or in an exclusive facility if need be. In this case, you have the assets and cash flow to afford the premiums for an asset-based strategy, and you have an estate that will benefit from the kind of protection an insurance policy or annuity can provide. You can gain peace of mind on both fronts: your long term care is provided for, and your life savings will be used to bless your loved ones, rather than drained on your care.
As I’ve said throughout this article, long term care insurance isn’t for everybody. If you have questions about how it works or would like a free, no obligation consultation, contact me today. We will review the state of your needs, and I’ll give you an honest opinion as to whether Asset Based Long Term Care is something you should consider. This is a serious subject, and you can count on receiving an objective opinion, full disclosure of my potential compensation, and ZERO sales pressure. Click here to request your free consultation, or call me at 858-248-0337.
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