The sticking point of long-term insurance is the idea of paying a lot of money for a policy that may never be used.
It’s not something most of us would like to think about, but the odds are strong you’ll need some help taking care of yourself late in life. The average 65-year-old today has a 70 percent chance of needing some kind of long-term care, according to the Urban Institute and the U.S. Department of Health and Human Services. Among those winding up needing it, they use it an average about two years.
So long-term care insurance makes sense.
Long-term care refers to a host of services not covered by regular health insurance, including assistance with daily activities, such as bathing or dressing. Medicare covers only short nursing home stays or limited amounts of home health care. To get long-term care insurance, you must buy it before you need it. Most buyers are in their mid-50s to mid-60s.
A 55-year-old single man can expect to pay a long-term care insurance premium of about $1,700 per year and a couple about $3,100, according to the American Association for Long-Term Care Insurance. (A 55-year-old single woman pays about nearly 60 more because she tends to live longer.) Prices have not risen much in recent years but many policies have trimmed coverage for only three years, down from five years in the past, and inflation adjustments have also been weakened. A 90-day waiting period is standard.
If you wind up needing long-term care but don’t have the insurance or some other means to at least help foot the bill, the upshot is almost unthinkable. According to insurance company Genworth’s 2020 Cost of Care Survey, the median cost of care in a semi-private nursing home room is $93,000 annually.
Nonetheless, most people won’t end up buying long-term care insurance, either because they don’t think they will need it or cannot afford it, or both. The primary sticking point is the idea of paying a lot of money for a policy that may never be used. This is true for all insurance, of course, but long-term insurance is particularly expensive, and most people buy it when they are facing retirement and often looking for ways to trim spending.
So this article will also outline alternatives and quasi-alternatives,
such as a qualifying health event “doubler” on some annuities and insurance products.
A possible, albeit limited, option is a Medicaid-compliant annuity, a restricted period-certain annuity that couples can use if one of them is headed into a nursing home covered by Medicaid. The income from the annuity is not counted as income under Medicaid guidelines. Medicaid annuities have drawbacks, however. They are irrevocable, non-assignable, have no cash value and can only be written for a limited period of time. In addition, participants cannot sidestep Medicaid asset restrictions by transferring assets to a child or other relative.
Here are five additional options or quasi-options:
Annuity with nursing home doubler. Some annuities offer to increase owner payouts from 150 percent to 300 percent if you experience a health event that requires a stay in a nursing home, or, in some cases, professional care. Coverage often lasts up to five years and is offered as an annuity benefit that the buyer can “opt in to” for free or as part of a rider package offered at a minimal cost. This isn’t a complete replacement for long-term care insurance because it won’t cover the whole tab, but it is nonetheless helpful. No medical exam is required for annuities.”
Asset liquidation. People who need long-term care and have no fallback at all may opt to liquidate or sell some of their assets to help pay the bills. The goal, if possible, should be to sell assets unlikely to appreciate quickly and to try to be strategic. If a spouse wants to sell the house to move into a smaller house, for example, he/she should determine whether their home’s value is closer to a peak or a trough. If real estate prices are near a trough, the sale of, say, stocks might make more sense. Regardless, the risk of selling any asset at the wrong time always exists. If you sell stocks that later rise, you have permanently decreased the value of your assets.
Annuity/long-term care combo product. As the name implies, these annuities – usually fixed annuities – offer a surrender-penalty-free, federal tax-free payout if you require long-term care. The payout is usually two to three times the face value of the policy and lasts up to six years. This feature is expensive, however – typically 1-2 percentage points annually for this coverage. So say, for example, that a $100,000 fixed annuity without long-term care insurance coverage pays the buyer 3 percent a year in interest. That is $3,000 a year. If the same policy also offers long-term care insurance, it might pay the policy holder the difference between 3 percentage points a year and 1 to 2 percentage points a year – or $2,000 at most or $1,000 at the least. So these annuity holders may have to be satisfied with a minimal annual return on their money. No medical exam is required.
Universal life insurance policies with a long-term care rider. These products offer a “live, quit or die” option. Unlike standard long-term care insurance, the policyholder or their heirs will receive something no matter what. Policyholders receive funds if they need long-term care. If they don’t, their heirs receive the policy’s death benefit. And if a policyholder decides to eventually drop the policy, he/she typically will get a refund of the premiums he/she paid. These policies are expensive. A medical exam is typically required.
A Qualified Longevity Annuity Contract (QLAC). A QLAC, a type of deferred income annuity, allows you to defer taxes on Required Minimum Distributions (RMDs) up to $125,000 in all your traditional IRA or 401(k) plans until age 85. Typically, traditional IRA and 401 (k) plan owners had to start taking distributions from these tax-deferred vehicles and pay income taxes on them by April 1 of the year following the year they turn 72. The QLAC tax law pushes that liability back, providing tax-free money to help purchase a long-term care insurance contract, among other things. This is similar to delaying Social Security benefits and the taxes you often have to pay on them, but you delay far longer with a QLAC. No medical exam is required.
What should you do, if anything at all? That is up to you, but you should be aware of long-term care insurance and its alternatives because aging and attendant health issues eventually catch up with most of us.
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