“If there’s a single unsolved problem in the retirement plans for many middle- and upper-middle-income adults, it’s what to do about long-term care costs later in life,” says Christine Benz of Morningstar. And she’s right.

According to the Genworth 2018 Cost of Care Survey, the national median annual cost for long term care ranges from $48,000 to $100,375 depending on the type of care required. Of course, home care is less expensive than care in a facility, and shared rooms are less expensive than private rooms.

The frightening bottom line: “Assuming the average stay in a nursing home is three years, costs can easily surpass $300,000 for the entire long term care event.” And that’s just an average stay. Expect to pay more in a large city. And according to The Wall Street Journal, 20 percent of Americans will require long-term care longer than five years.

The fact is, nothing is likely to drain your assets faster than long-term care. Memory care, if required, can be even more devastating to a family’s budget (or to a family’s time, as some loved ones will require 24/7 monitoring or care). If you and your spouse or partner both require care, costs could be well into 6 figures, if not more.

Do you really need long-term care protection?

So it all sounds rather scary, but what are your chances of actually needing long-term care assistance? In the 1960’s, airports used to sell flight insurance in vending machines to nervous flyers afraid they might not make it to their destination. Yet plane crashes were exceedingly rare.

Unfortunately, the chance you will require long-term care is another matter. The odds of needing long-term care are 70 percent. When considering a couple, the chance of one or both spouses requiring long-term care, either in a facility or through home care, are a whopping 91 percent.

Compared to other types of insurance, these are horrible odds. The chance of your house burning down or sustaining other damage is 1 in 1200, or less than 1/10th of one percent, according to AccuQuote. The odds you will use your auto insurance for a claim on your car is 18 percent. Yet we insure our homes and our cars—but many people do not insure against long-term care costs, in spite of much higher risk.

Of course, the BEST solution is staying healthy! Those who stay active and vital and continue to use their minds and bodies are less likely to have high long-term care costs. But what happens if—in spite of your best efforts—you’re one of the majority who will require long-term care?

The affluent have assets they can use to self-insure should they need long-term care. On the other end of spectrum, those with very few assets will become reliant on Medicaid, which limits their choices for quality care dramatically. Then there’s everyone in between. They have too many assets to qualify for Medicaid—and wouldn’t wish to end up in that situation anyway—but not enough assets to retire AND face a long-term care health challenge.

Some will qualify for Medicare, although it has substantial limitations. For those who qualify—Medicare recipients must enter a long-term care facility following a hospitalization that lasted at least three days. Then the benefits cover only up to 100 days of long-term care, with substantial co-pays after 20 days ($170.50 a day in 2019). Health insurance does not pay for long-term care needs.

There are other conditions for qualification as well. For instance, the need for long-term care is generally recognized when a person can no longer do 2 or more of the activities of daily living, such as:

  • Eating
  • Dressing
  • Toileting
  • Bathing
  • Grooming

A person also qualifies for LTC benefits in the case of cognitive impairment such as Alzheimer’s disease.

Out of necessity or by choice, sometimes after Medicare or other benefits are exhausted, many families decide to care for loved ones themselves. According to a government report on “The Economic Impact of Family Caregiving,” 36 percent of family caregivers suffer financial strain because of it. Many must take time off to travel or stay home with loved ones. Those who help family members with dementia are especially impacted, providing about 9 hours per day of caregiving help.

The failure of typical long-term care insurance

Most people think of stand-alone long-term care insurance as win-lose scenario at best—and they’re right. With typical long-term care insurance, you’re placing a bet that you might one day need nursing care. It’s an ugly bet to make, because “winning” means a long, expensive stay in a facility. (Not much of a win.) “Losing” the long-term care insurance bet means you remain relatively healthy—but you’ve wasted many thousands of dollars (and the opportunity cost those dollars represented).

Typical long-term care insurance hasn’t been much of a “win” for insurance companies, either. Claims have been more numerous and expensive than predicted, and most companies offering LTC insurance have gone out of business. Others have dramatically increased premiums, sometimes resulting in class action lawsuits. Typically premiums were not guaranteed, which is why we see headlines such as “Out of Control Premium Hikes for Long-Tern Care Insurance.” Policyholders have often not received the benefits they were expecting at the price they expected.

Additionally, typical LTC insurance doesn’t build cash value. You have to be quite healthy to qualify. And if you can no longer make payments (because the premiums rise or for any other situation), all the money paid into the policy has been wasted.

Hybrid policies: life insurance + long-term care

Fortunately, there are better options now than typical, standalone LTC insurance! Rather than having to pay for protection the insured may or may not use (while insurers scramble to meet the demands of unanticipated cost increases), these solutions are coming from the life insurance industry. Whole life insurance guarantees both growth of cash value and a permanent death benefit. And by creating “hybrid” products that also offer long-term care benefits, some newer types of policies offer the flexibility of accelerated living benefits that can be used for long-term care.

There are other significant benefits to this combination of life insurance and long-term care benefits. Of course, when we look at the odds of a certain insured event happening, the odds of a loved one eventually dying are 100 percent! When a family member dies uninsured, it can compound financial strain—especially if their assets have been depleted to pay for long-term care, and/or family members have provided care at the expense of their careers. Former family caregivers are now saddled with final expenses, and there is no easy way to reimburse family caregivers for missed work or lost opportunity cost.

Another benefit to combining LTC benefits with life insurance is the stability of life insurance. While many companies offering standalone LTC coverage have proven to be unsustainable, mutual life insurance companies have been managed for longevity for centuries. Since whole life insurance policies already pay permanent death benefits, it makes perfect sense to convert some or most of the death benefit to long-term care benefits when needed.

By combining LTC and life insurance benefits into a single policy, a family always benefits from the policy. If long-term care is not needed, the accumulated value of the policy (including its gains) goes to the insured’s beneficiaries upon death.

One such hybrid product is the whole life policy with a long-term care rider.

The LTC benefit rider has an overlap of benefits with a terminal and chronic illness rider, also known as an extended accelerated benefits rider. As you cannot have both riders on a policy, you’ll want to look at both options to decide which fits best. The long-term care rider allows you to accelerate a portion of the death benefit to meet long-term care expenses following a qualifying period. Often a qualifying period is 90 days, and the terms of the policy set both a maximum and monthly long-term care benefit. When LTC benefit expenses are paid, the death benefit and cash value are reduced accordingly.

The policy base premium and the LTC rider premium are suspended while LTC benefits are being paid. Depending on the policy, benefits may be reimbursement (based on actual payments) or indemnity (monthly cash benefit paid regardless of expenses).

For those who want a traditional whole life policy with some extra LTC expense protection, this can be a good choice.

Linked-benefit policies are a powerful hybrid product

A special type of whole life policy, a linked benefit or “asset care” policy (called such because it protects your other assets) offers more robust long-term care benefits than a traditional whole life policy with an LTC benefit rider.

Three features that are especially attractive with this type of policy include:

  • The ability for two individuals to benefit from one policy.
  • Even if the linked benefit is exhausted, some policies continue paying long-term care expenses for as long as necessary.
  • The premium is credited with a guaranteed interest rate, increasing the cash value each month.

See the chart below to understand some of the differences:

Whole life policies with LTC rider:

Offer a guaranteed death benefit which is reduced when LTC rider benefits are used.

Offer guaranteed cash value growth and may pay dividends (not guaranteed but historically reliable).

Pay monthly LTC benefits for a limited, predetermined period of time (such as 60 months).

LTC benefits are determined by the policy and are not inflation-adjusted.

Policies typically insure an individual.

Growth is tax-deferred, generally tax- free if policy remains in force. Benefits can be tax-free,* unless they exceed those that would qualify for favorable tax treatment.

Have great flexibility (especially if additional riders are selected.)

If LTC benefits are not used, there is a larger death benefit to beneficiaries.

Policies are typically paid over many years. (A single-premium option is available and is classified as a MEC.)

*Benefits may be taxable if the policy owner is not the insured or the insured’s spouse.

Linked-Benefit Policies:

Offer a guaranteed total benefit, all of which can be used for LTC care qualifying expenses.

Do not pay dividends.

Can pay long-term care benefits for an unlimited amount of time as long as insured requires care. (This is called the continuation of benefits or COB rider.)

Policies may offer inflation-adjusted LTC benefits.

Policies can be shared between spouses, domestic partners or engaged couples.

COB rider premiums can be tax-deductible, plus benefits are typically tax-free.*

Provides robust long-term care benefits and a death benefit.

If LTC benefits are not used, there is a larger death benefit to heirs.

Policies may be paid with a single premium or over multiple years, or we can reposition funds. I.e.- IRA, Nonqualified annuities, etc.

*Benefits may be taxable if the policy owner is not the insured or the insured’s spouse.

Immediate annuities

If someone cannot qualify for whole life insurance due to health or health history, there is one other life insurance product that can still prove helpful. A fixed immediate annuity can provide a guaranteed monthly income for life—with no qualifying medical exam.

Some annuities also offer a LTC benefit rider that increases this income when long-term care is required. These annuities are easier to qualify for than typical long-term care policies. Depending on the payment option chosen, beneficiaries may be eligible for annuity payments after the insured passes. Or the cash flow can be maximized if it is paid only for the annuity holder’s life.

A few things to know about life insurance and long-term care…

Life insurance with long-term care benefits can be helpful in paying for long-term benefits. And you must be aware of the benefit limitations of policies, such as qualifying periods and benefit limits. Having a long-term care rider or linked-benefit policy does not guarantee that most or all long-term care expenses will be covered.

With a combination product, the more long-term care benefits used, the less death benefit beneficiaries will have.

The insured must qualify for the policy and the LTC benefits rider separately. Illustrations are estimates only and are not a commitment for insurance or a guaranty of qualification.

Read the fine print, understand the advantages and disadvantages of a particular type of policy or product, and get your questions answered. Not all types of coverage may be available in all states.

We should all do our best to stay healthy well into our 90’s and beyond. And… it’s wise to be prepared to pay for care, if needed, and protect your wealth. We can provide you with a policy illustration that will show you the details and an estimate of how a policy with long-term care benefits will perform at the current dividend rate. (A whole life policy with the LTC benefit rider is a type of policy that can earn dividends. While not guaranteed, dividends have been historically and reliably paid for more than a century.)

Contact Partners for Prosperity for additional information and illustrations. We can help you compare options, get answers to your questions, and apply for a policy!

—Kim Butler and Kate Phillips