We all know there is potentially significant financial and emotional consequences of having to provide care for an elderly or incapacitated individual. How does one deal with this challenge?

The Solution

Why would someone spend money to cover the eventuality of needing long term care (LTC)?

The most powerful reasons I’ve encountered have been:

• The desire to protect children against the difficult task of caring for a parent, and the maintenance of a parent’s dignity by doing so.

• The aspiration of preserving assets for children.

• The wish to maintain freedom of choice of the type of care one will receive, and the setting in which it will be given.

Once the decision has been made to protect assets against the expense of long-term care, there are various things you can do. Initially, you might think the answer is to save a certain amount on a regular basis against this possibility. As we all know, however, saving a substantial amount is difficult, earnings in a conservative investment vehicle tend to be low, and one never knows how soon the event might occur. So, as with many issues of protecting against a possible loss, we turn to insurance products.

There are two classes of LTC products: (a) traditional LTC insurance; and (b) hybrid products.

Traditional LTC policies

LTC policies can be structured in many ways to suit an individual’s particular needs and ability to pay. The variables include:

• the amount of benefit per day or per month;

• the length of the benefit period (that creates the pot of money accessible for claims);

• the elimination period (the length of time before payments begin);

• whether inflation protection or other riders are included;

• whether a couple purchases the insurance together.

Also, a policy may be indemnity or reimbursement, that is, it pays a certain amount regardless of bills, or it reimburses you based on submitted bills and paperwork.

Choosing the right combination of elements is an involved process which requires thought and input by both the buyer and the insurance agent. It should be a collaborative effort, and the consulting agent should be very familiar with this particular product because of the many variables. For instance, because it is appealing to have a lower premium, it is enticing not to buy an inflation rider, or to choose a long elimination period. These savings are deceptive, however, and can come back to bite you at the time of a claim. With these choices you may not have the coverage you ultimately need, or you may have to lay out a considerable amount of money before the coverage kicks in.

Factors that should be considered in structuring the policy should include:

• the person’s age and, therefore, the horizon of time before this coverage might be needed;

• a person’s financial ability to pay the premium; it should be kept reasonable enough so that lifestyle is not negatively affected;

• other assets that may be available to co-insure a LTC expense—that is, to cover some of the costs—which may reduce the amount needed to be purchased;

• the planned geographic location for retirement—and costs in that area;

• longevity in the family, which can affect which inflation rider should be recommended.

Age is the single most determinative factor in the cost of the LTC premium. Second is health, and then, of course, what is selected. It is for these reasons that people should not to wait too long before buying this important protection, especially given the recent rate increases by the various LTC companies. Younger is always better—for cost, and regarding the applicant’s health. Although many controlled health situations are acceptable by the companies, certainly the better your health, the easier, and often cheaper, it is to get a policy. And, of course, there are illnesses or conditions that are simply uninsurable.

There is a little bit of government support for the purchase of these policies. A certain amount of the annual premium of a tax-qualified LTC policy (basically all LTC policies sold after 1997) can be included in your itemized medical expenses, and whatever exceeds 10 percent (7.5 percent for people 65 and over until 2017) of your adjusted gross income can be used as a deduction for your federal income tax. The includable amount increases with increasing age brackets. For NJ state taxes, you can include the premium within your itemized medical expenses and use as a deduction whatever exceeds 2 percent of your gross income. Deductibility differs for LTC offered by companies to their owners and/or employees, depending on the structure of the entity.

So, after paying premium for years, when do you actually get to collect benefits? As of 1997, the triggers of all LTC policies were standardized:  If a doctor certifies that you cannot do two out of six activities of daily living (eating, bathing, dressing, toileting, transferring, and continence) safely by yourself for a minimum of 90 days, you can submit a claim. The other trigger is cognitive impairment—such as having dementia—which, if documented, does not require the 90-day threshold.

Hybrid Products

If there is a need for life insurance protection as well, there are life insurance products available that have LTC riders. These are called “hybrid” or “linked benefit” products. If there is a LTC expense, then the insured can access most of the death benefit for care; if no care is needed, then the beneficiaries receive the death benefit. But, often, there are expenses added on to the policy which are not present in traditional LTC insurance policies, and, crucially, the riders can lack an inflation factor for the payout—which means that the value of the benefit amount the company will pay you will shrink over the years. If inflation protection is an option, it can add substantially to the premium. Also, the premium of many life hybrid products would not qualify for the Federal LTC tax deduction.

A second linked product is an annuity that requires the applicant to invest a lump sum of money which grows at a certain rate and can be accessed to pay for the first three years of care, after which an extending rider (which is purchased at the time of application) will continue to pay for a set number of years. For someone who would rather minimize ongoing premium payments, this is less expensive than a LTC policy because the applicant bears the initial and greatest risk of paying for three years of care with his/her own money. However, the amount that needs to be invested in the annuity has to be large enough so that payments, when needed, will cover the charges.

Although different avenues can be explored, most people, after comparing the varying costs and the mechanisms for claim payment, settle on the traditional LTC policy, which is supported by an annual premium.

A leading proponent of insurance, Ben Feldman, once said, “Doing something costs something. Doing nothing costs something. Sometimes, doing nothing costs more than doing something.”

This could not be more true than when dealing with the need to provide LTC protection for yourself and your family.

Ann Stern is an independent insurance agent specializing in crafting policies based on each individual’s needs. She can be reached at [email protected].

By Ann Stern, CLTC