Considering or not considering Long Term Care Insurance is a personal choice. By reading this article, you are saying you are open to the concept of Long-Term Care Insurance for later years in retirement. If you don’t believe in the idea, or the decision has already been made, then you can probably save yourself the trouble. If that’s not you, then prepare yourself for some uncomfortable decision-making.
Insurance is weird, but the decision to have it (or not have it) will be a non-emotional and methodically driven personal decision.
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 starting to exceed 1% of investable assets. This is because your retirement assets already have a lot of heavy lifting to do. You have inflation to offset and growth to consider. This is all in addition to generating the income needed to cover essential and discretionary expenses. So adding another 1%+ in premiums on top starts to get expensive. However, I’m only suggesting isolating that specific cost variable in the overall mosaic of a final decision. The clarification I would offer a client would revolve around analyzing the sustainability of premium payments over the long haul.
Say you went to a hypothetical bank, and they happened to be having a “sale.” By having your money managed by the bank, they’ll cover your Long Term Care needs. And the cost for this service is a quarter of a percent a year on the money managed. That might not be a horrible deal. You got to use the money, probably got substantial capital appreciation, and if a Long Term Care need arose – you were covered. You don’t need to worry about keeping all that money earmarked for Long Term Care and sitting on the sidelines for your later years – and some feel more comfortable spending in the early retirement years.
If the cost of the coverage had cost more than 2 or 3 percent, there are likely substantial sustainability concerns. Many people want peace of mind but must face considering a policy that is not sustainable and takes too much from retirement assets. This situation has the potential to be a problem.
Seek professional advice before making consequential changes to any in-force long term care policy.
Look For Strength, Not Price
With some rare exceptions, Long Term Care insurance companies cannot guarantee they will not raise your policy premium rates at a later date. 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, not fulfilling their policy obligations to our seniors. The cost of care is likely to increase, and it’s probably all but certain that any policy will go up in price later on, maybe 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.
Recommendation: 7 Steps To ‘Personalize’ Your Risk Tolerance
[IMAGE] The makeup of a typical insurance company. When a Long Term Care insurance company is not profitable and is required to raise rates, it’s done by appealing to the state. The state then approves or doesn’t approve the rate increase. Information on California’s carrier rate increase histories can be found here.
If the appeal is approved, the company will send a letter announcing the rate increase for that particular business block. Carrier strength matters because when underwriting, the better companies can be more selective with individuals they permit into their risk pool. Competitively speaking, a weaker company may have a risk pool that ultimately results in higher claim rates. This, in turn, affects the stability of the insurance carrier. So the insurance company’s strength (and the competitiveness of underwriting guidelines) greatly determine the likelihood of rate increases. Ideally, individuals who qualify from a health standpoint make every attempt to underwrite with a company that is as strong as possible and has few rate increases as possible. If not, it’s more subjective but not a deal breaker. It might actually make the offer more competitive, probably more complex, but not necessarily bad. You’re going to have to put your” thinking cap” on.
It’s Not a Scam, But Not for Everyone
One of the key benefits of long-term care insurance is the peace of mind to spend your money freely in early retirement. It just so happens that there is a high likelihood of a long-term care event happening, so it costs more than other forms of insurance due to the risk being higher. In a way, insurance can offer permission to spend more money in those early retirement years. If the plan is simply 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. Of course, if the money will be there no matter what, that can certainly change the dynamic. I recommend that if you plan to pay for the care yourself, expect to be able to create a large portion of money for later years that is liquid and available if needed. This probably shouldn’t be money in, for example, rental property because the income or asset won’t be there for any survivors. Just be realistic about what will be needed and what extra money is available to pay for care.
The Hybrid Policy Design
I’m not referring to the Life Insurance Hybrid policies. You can ask my opinion, but those policies generally do not make sense for most people. It is a niche product, yet it is not sold as a niche product. That is the crux of the issue (in my personal experience) with ALL universal life and variable universal life products. I’m not saying they are bad for society; they are too often marketed to the wrong people.
When I refer to “hybrid” I’m referring to a Long Term Care standalone ‘use it or lose it’ plan design with specified benefits to ‘buy time’ should the need arise -not necessarily take the entire risk off the table. A hybrid between self-insuring and having some benefits. Some designs may only have insurance on one partner. This may be because clients may want to “play the odds,” knowing, at least based on today’s statistics, that women tend to live longer. Word is women use the policies more than men, but interestingly not by that much nowadays. In our traditional couple example, the policy may be a way to obtain benefits on what could be perceived as a higher risk while also reducing the premium overall by having one spouse possibly take care of the other. And then, the survivor has benefits as the partner is likely not around when the survivor needs care. It’s not an ‘all-inclusive’ solution, but in some cases, it fits just right given the circumstances. Finally, designs should always consider the unexpected outcomes of both the risks in a relationship.
Think of the benefits as a runway. Even if self-insuring 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 seems to be a valuable benefit. 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 expense.
Can’t We Invest the Money?
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 (say age 85) with a specific rate of return, you then need to back out the taxes and fees. Yes, you will owe tax on any gains.
Furthermore, possibly in the early years, you can attain a higher rate of return, but I’m not sure you should assume that same number in those later years. I often use a conservative flat 3 or 4% net pre-tax rate of return for this calculation. You will find that the investment will approximately buy one year for one person versus three or more years for two people. It’s insurance, so it will hypothetically either be the best investment you ever made – or the absolute worst. Standalone long-term care policies can be labeled appropriately as ‘use it, or lose it.’
Unfortunately, you will never be your own insurance company as hard as you try. Like it or not, Insurance companies get to enjoy the “law of large numbers.” They can offset their risks by making another bet on another person or offset risk with a different product offering. It is arguably one of the most stable business models that exist. Fact is, there is nothing wrong with well-intentioned insurance when appropriate.
The “Creative” Solution for Long Term Care
I’ve heard them all when it comes to the long-term care plan that is no-cost or low-cost. Some are reasonably practical and perfectly suit a client’s lifestyle. The point is, there MUST be a plan. If you have no plan, you are 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 just avoidance. Yet plenty of people have had retirement success and not had long-term care insurance. Whether you have money or not, the point is you will want a plan to which you are 100% committed. Many who arbitrarily opt-out and choose to self insure 100% and come up with something later often change their minds or will not follow through with the original plan. A “no-insurance” answer must be well thought through and realistic.
‘Pre-Qualification’ as a strategy
We find that our plans will 50% involve applying for insurance (in no way associated with our services) and 50% of the time completely ‘self-insure’ the need either by choice or necessity. As stated above, it is a personal choice, and every case is different- and not always is it simply a money decision.
We believe all plans should and are likely required to include some form of self-insuring. Taking the entire risk off the table is probably no longer an option and likely being financially burdensome.
Editor’s note: This blog offers informal investment and financial planning advice(Advice Only Financial Planners). 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.