Broker Check

Double Duty Dollars For Nursing Home Care

October 23, 2018
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I hate losing money.  I don’t like to spend money for things I may not use.  But, I DO buy fire, auto, and health insurance, etc.  The truth is I couldn’t sleep without these protections. 

In a prior article [Winning the Retirement Income Sweepstakes] I reported that current retirees grossly misjudged their out-of-pocket medical expenses and rue the fact that they ignored Nursing Home coverage. 

So… What about Nursing Home coverage, officially called Long Term Care insurance? Or Chronic Illness coverage?  Should I take a chance?  Or will I lie awake with worry about these horrific exposures?

25 years ago, Long Term Care insurance[LTC] was widely sold at a fixed, guaranteed cost.  Then, suddenly, companies ended up in receivership because they couldn’t pay claims; they had miscalculated and charged too little.  Bankrupt, the companies were ‘rescued’ by the insurance industry with court permission to raise premiums and rewrite the contracts.  Premiums were raised in stages to three times their original cost.  Insurance companies learned their lesson.  No guaranteed premiums are offered today.  They may increase LTC premiums as needed.  The number of stand-alone LTC policies sold in 2014 was a third of those sold in 1990.  Average premiums doubled from 2000 to 2015 despite more and younger buyers.  

My dilemma:  Should I buy a good, expensive policy, knowing the cost will rise, knowing I may die without using it, or should I risk going without it? 

Consider the odds:  Industry surveys say 52% of those now turning 65 will need some Long Term Care, especially widows.  That number is rising.  Christine Benz of Morningstar suggests it is closer to 70%.  

The monthly cost of a semi-private room now ranges from $3,600 to $12,000 (excluding New York City & San Francisco at $14,000) not including ancillary services.  Location makes a great difference.  Middle class families now in their 50s may be looking at $300,000 in elder care, not including the cost of health insurance.  The average stay in a Nursing Home, now 25 months, is down from prior years, as alternatives that delay LTC, such as Adult Day Care and Assisted Living facilities are becoming popular.  We are living longer.  The need for 24-hour support of the elderly is growing.  The reported number of available beds today is believed to be about 80% of near-term need.  That means family and/or less comprehensive care may have to make due. 

Another problem:  Inflation is pushing up wages and costs while most LTC insurance benefits are not adjusted for inflation.  Those that are are very costly.

I hate losing money– especially when there is an alternative The insurance industry has quietly crafted reasonably-priced riders to permanent life insurance policies, mostly Universal Life[UL], the death benefits of which more than offset their cost.  LTC payouts are a percentage of the death benefit payable as a lump sum or monthly until a stated maximum is used.  Payments reduce the death benefit.  Further, policy cash values are available to the contract owner, with few restrictions, on demand.  Thus, there is liquidity to meet possible emergencies or even needed income.  If LTC payments are not needed, beneficiaries will receive a larger death benefit reflecting that savings.  Most policies also include a Chronic Illness Benefit as well as the right to access most of the death benefit if the insured is Terminally Ill.  These are usually offered at nominal or no cost. 

Of course, not all policies are alike.  The terms of each company’s obligations are clearly (sometimes not so clearly) stated in the contract.  As a contract, there can be no request for more money to shore up LTC benefits.  UL contract cash values earn a minimum guaranteed rate of return but may earn, over time, considerably more.  In selecting a contract, also consider Indexed UL which may have a higher return.  As annual earnings vary, we recommend calculating the desired benefits based on a modest rate of return.  If done prudently, any later surprises will only be positive.   

Policy riders differ in their definitions of LTC (usually ‘unable to perform 2 of 6 functions of daily living or cognitively impaired’), of Chronic Illness or of Terminal Illness; whether benefits are payable as Indemnity or Reimbursement; rider Fees, if any; whether including Home Health Care; the Amount/Percent payable; etc. 

Of course, each applicant must qualify medically, by age, and by lifestyle or occupation.  As you would expect, underwriting is more difficult the older the applicant.  Most contracts can be started through age 60; a few, up to age 80. 

Like creating a shade tree, Life and LTC coverage is best begun early, qualifying medically for lower premiums and locking in what are sure to be ‘bargain rates’ in the future, not to mention the time at compound interest.  Funding early, you can build sufficient value that future premiums at a certain age or after a number of years are no longer needed. 

Using a UL/IUL Policy assures you will have interim access to your money and will not “lose” unused LTC premiums.  Here, at least, we can use one flexible vehicle tailored to create both a living estate and a dying estate:  Double Duty Dollars, indeed.