“Qualify” Yourself for Long Term Care Insurance

Purchasing or not purchasing Long Term Care Insurance is a personal choice. By reading this article, one is open to the concept of Long-Term Care Insurance for later years and protecting their assets in retirement using insurance. If one doesn’t believe in the idea or the decision has been made, you can save yourself the trouble of reading this article. If that’s not you, then likely prepare yourself for uncomfortable decision-making.

Insurance is weird

Making a confident decision of having (or not having) insurance is likely a well-rationalized, fact-based, methodically driven personal process.

What are the main types of Long Term Care Insurance policies?

Standalone policies. We refer to these policies as “use it or lose it.” Should custodial care needs arise, standalone LTC policies cover the care need with specified benefits. If a claim never arises, like most types of insurance, the insurance company keeps the premiums paid. Standalone long-term care policies are written individually or as “group policies” – like through one’s employer.

Asset-based. Using insurance to cover custodial care needs is increasingly becoming a part of life insurance. Asset-based policies have an equity component, usually include some guarantee, and are based upon a permanent life insurance framework. If a claim never occurs, the money paid into the policy and any interest is usually bequeathed to beneficiaries. Since these policies ensure no money is “lost,” should a claim never occur, the insurance company will, understandably, require noticeably higher premiums.

Am I a believer?

Below is our take on top criteria to consider when personally attempting to “pre-qualify” or “disqualify” oneself for insurance.

• Insurable. Is a good insurance company likely to qualify me to purchase coverage for a potential custodial care need?
• Philosophical. In my unique circumstance, is having a long-term care insurance policy a viable and sustainable solution for this potential need?
• Sustainable. Are the premiums for effective plan protection currently below and expected to remain below about 1% of total investable assets?

The 1% “Rule” for the sustainability of premiums

As a general rule, we do not recommend that someone consider a standalone long-term care policy if policy premiums are expected to exceed 1% of investable assets. This is because retirement assets already have a lot of work to do. There is inflation to consider and growth to account for. In addition, income will be needed to be generated from retirement accounts to cover essential and discretionary expenses. So adding another 1%+ in premiums on top can get unsustainable. However, I’m only suggesting isolating that specific cost variable in the overall mosaic of the financial plan design. The clarification on the sustainability of premiums might best revolve around analyzing premium payments over the long haul. In addition, there may be personal preferences toward insurance. Other variables of the case are also likely applicable.

If the coverage costs more than 1% percent, there are likely substantial sustainability concerns to consider in the long term. Many people want peace of mind but could face dropping a policy that is not sustainable and takes too much from retirement assets. As a side note, always seek professional advice before making substantial changes to ANY in-force long-term care policy.

Look for strength, not just price

With some rare exceptions, long-term care insurance companies cannot guarantee they will not raise your policy premium rates later. That’s because no one knows how the cost of care will change over time, and of course, nobody wants carriers going out of business and not fulfilling their policy obligations to seniors. The cost of care is likely to increase in the future, and it’s probably all but certain that ANY policy that is not “paid up” will go up in price, possibly multiple times. Of course, if you are self-insured, you’d be covering the same cost increases out of pocket, so it is a relative decision.

When a Long Term Care insurance company is not profitable and must raise rates, it’s done with an appeal to the state. The state then approves or doesn’t approve the rate increase. We’ve compiled a list of the state insurance websites where more information about the various insurance carrier rate increases histories may be available.

What else should I know?

If the appeal is approved, the company will send a letter announcing the rate increase for that particular block of policies. Carrier strength matters because when underwriting, better companies tend to be more selective with individuals they permit into their risk pool as well s having the stability associated with their strength. Competitively speaking, a weaker company may have a risk pool that ultimately results in higher claim rates. So the strength of the carrier (and the competitiveness of their underwriting guidelines) greatly determine the likelihood of a rate increase in the future. 

Individuals who qualify from a health standpoint should attempt to underwrite with a company that is as strong as possible and has as few rate increases as possible. If not eligible for one of the stronger companies, it’s much more subjective but not necessarily a dealbreaker to go with a weaker company. It might make the offer price more competitive, certainly more subjective, but not necessarily “bad.” Sorry, you’ll have to put your” thinking cap” on.

It’s not for everyone

One of the key benefits of long-term care insurance is the peace of mind of spending your money freely in retirement. There is a high likelihood of a long-term care event, so it costs more than other forms of insurance due to the higher risk. In a way, the insurance can offer permission to spend more money in those early retirement years. 

On the other hand, if the plan is to “self-insure” with assets, it’s common to feel less comfortable with aggressive spending in early retirement years due to a concern for a long-term care need later on. We generally recommend that if one plans to pay for the care themself (or “self insure), expect to be in a position to be required to liquidate a large portion of retirement funds. This money should probably not be money, for example, investing in a real estate rental property, because the income or asset won’t be there for any survivors. Just be real about what will be needed and what extra money is available for care.

The “Hybrid” policy design

I’m referring to a policy design with specified benefits that is not 100% comprehensive of the total need but intended to ‘buy time’ should the need arise – and not necessarily take the entire risk off the table. For example, some plan designs may only have insurance on one partner. Maybe this is because clients may want to “play the odds,” knowing, at least based on today’s statistics, that women tend to live longer.

The policy may be a way to obtain benefits on what could be perceived as a higher risk while reducing the premiums overall. In some cases, one spouse commits to potentially caring for the other. Then later, after the spouse passes, the surviving partner has benefits to rely on should they later need care. It’s not an ‘all-inclusive’ solution, but in some cases, it fits just right given the circumstances and personal knowledge regarding health conditions. However, policy designs should consider the unexpected outcomes of BOTH risks in a relationship.

Buying time

Sometimes I’ll suggest thinking of the benefits as a “runway.” Even if planning to “self-insure” a substantial amount of the risk, sometimes it’s nice to have the time to figure out what the heck to do. The need often comes up suddenly in an individual’s 80s and 90s, typically when living on a fixed income. It’s essential to have the money available and not worry about selling properties or other assets and disrupting income for a potential survivor. 

Having 1 to 2 years of benefits is a viable consideration for some. Then once a plan of care can be better determined, I find that a “self insure” strategy, such as a reverse mortgage, can help round out the tail end of the potential need expense.

Can’t we invest the premiums?

Yes, you can. But be aware that you will need to be realistic in your calculations. If you assume a premium amount for a couple and compound that out over several years with a specific rate of return, you’ll need to back out the taxes and fees. While one can take tax deductions for health care costs, expect to owe tax on any gains. Furthermore, if hiring a caretaker as an employee, be aware of employer taxes.

Back to our example, in the early years, one can afford the risk associated with a higher expected rate of return, but less so in later years. I’ll often use a conservative 3% or 4% net pre-tax rate of return for this calculation. You will find that the investment will cost approximately one year for one person versus three or more years for two individuals. It’s insurance, so it will hypothetically either be the best investment one makes – or the worst. That’s why we label standalone policies as ‘use it or lose it.’

The individual can never be their own insurance company. Insurance companies get to utilize the “law of large numbers.” That means they’ll offset their risks by making another bet on another person or simply by offsetting risk with a different product offering. It is arguably one of the most stable business models that exist. Let’s be objective; there is nothing wrong with well-intentioned insurance when appropriate. After all, it’s why insurance exists.

The “Creative” Solution for Long-Term Care

We’ve heard all kinds of creative ideas. Many of them are reasonably viable when it comes to long-term care planning. Most involve a motivation to come up with a low-cost or no-cost solution. Some are reasonably practical and perfectly suit a client’s lifestyle or existing assets. We will be supportive as long as a solution is viable and a client commits to the follow-through.

The point is, there MUST be a plan. If you have no plan, one is effectively putting your head in the sand and ignoring the realities of this very highly likely to happen risk. Planning where several things can quickly and likely go haywire is not a plan – it’s avoidance. Yet plenty of people have had retirement success and still have not purchased long-term care insurance. 

Whether one has assets or not, the point is that an individual will want a plan to which they can 100% commit. Many who arbitrarily opt-out and choose to self-insure 100%. The fact is this may still result in second-guessing, damage control, or not following through with an original plan. A “no-insurance” answer must be rational and realistic.

Editor’s note: This blog offers informal investment and financial planning advice. We know nothing about your unique financial situation. The buying and selling of any financial product or security should only be considered in context. If appropriate, seek the counsel of experienced, ideally objective, financial, tax, or estate planning professionals. Past performance is not indicative of future performance.