Here are three questions to answer that can help you make this critical retirement planning decision.
Do not rush. But don't wait too long. This is the puzzle when you are considering long term care insurance. It is one of those things that most of us would prefer to refer to. After all, nobody likes to contemplate the negative side of aging. However, while determining if you need coverage and what kind of policy makes the most sense, it is not the decisions you want to rush, the sooner you make them, the better off you will be. SEE ALSO: What is your strategy for retirement homes?
The first step is to assess whether you need long-term care insurance based on your personal situation, the type of care you want and what you have saved for retirement. The first article in this series explored how to go beyond just crunching numbers while considering your options. It is a great decision that requires thoughtful discussions and the development of different scenarios, both financial and emotional. Once you are sure that long term care insurance makes sense to you, it's time to move on to step 2: figure out which type of policy best suits your needs.
Ready to take the next step? You are in the right place. Here are three key questions to consider.
1. What should I expect from long-term care insurance?
Taking the time to understand exactly what long-term care insurance is – and it isn't – is essential. In this way, you are able to better define the coverage you need and your expectations.
Long-term care policies are designed to provide assistance in the six key activities of daily life: dressing, bathing, bathing, moving, eating and continence. If you are unable to do at least two of the six without significant help, you will likely need long-term care. The necessary care can generally be provided at home or in a facility, such as assisted living, nursing home or hospital.
Long-term care insurance is an option to help you pay for the assistance you need. You pay a premium for coverage over time. So if you need long-term care, the policy will pay you or reimburse you for some or all of the costs of long-term care. Think of it as getting access to a personal bank account dedicated to paying for long-term care needs.
With different types of policies, coverage amounts and features available, it helps to make good sense of your financial situation and how long-term care insurance fits before you start shopping. And it's a significant financial commitment, so we recommend that you make sure that the coverage you choose gives you the protection you need at an affordable price. To help you evaluate the financial element of your decision and set your goals, take a moment to look back at the previous article in this series and explore the free long-term care insurance assessment tool on our website, which provides useful information on the costs of assistance in your area and the price of insurance.
As part of the decision making process, talk to your goals and financial situation with your family. It is essential to tell family members the type of assistance you would like to have and get their input on the best and most realistic ways to plan it. Not only will the conversation help you clarify your plans, but your family will also gain an understanding of your wishes and the type of coverage that is in place to help.
2. What kind of long-term care insurance makes sense to me?
With your goals set, it's time to buy coverage. There are two main types of policies on the market today: traditional and hybrid policies. Both provide similar long-term care benefits. To appreciate the differences, you will need to explore the other features offered by each product.
Traditional long-term insurance policies work in a very similar way to car or home owner insurance. You pay a premium for as long as you have coverage and reap the benefits if and when you need it. If you don't need the benefits, you don't get the rewards. While this may be acceptable for auto insurance, the higher price and extended payment period can make costs more difficult to reconcile if you don't end up needing long-term care. Furthermore, the rewards are not guaranteed and could increase along the way.
On the plus side, traditional policies usually have lower starting premiums than other options. They may also benefit from state partnership programs that allow you to protect a greater portion of your resources if you run out of long-term care insurance benefits and need to contact Medicaid.
A hybrid policy combines life insurance with long-term care insurance in order to address some of the risks that can arise from a traditional policy. With a hybrid policy, rewards are paid for a limited period of time, for example in advance or over 10 years, so you won't have to worry about having enough income to cover the rewards in 20 to 30 years. The premium is also guaranteed and cannot be increased. In addition, if you die without using long-term care benefits, beneficiaries receive premiums. For this reason, you are always guaranteed at least the recovery of premiums through long-term care, death benefits or a combination of both.
With these guarantees, the monthly premium amounts for hybrid policies are generally higher. However, when compared to the total amount of premiums paid for a traditional lifetime policy, the cost can be close to and sometimes lower for a hybrid policy.
See also: What to know before buying a long-term care cyclist
When you start looking for long-term care coverage, we recommend that you consider both traditional and hybrid policies. Since the relative costs and benefits of each policy differ according to age, gender and coverage amounts, being open to both will maximize your chances of finding the best solution for your situation.
Traditional vs. hybrid: a look at the choice of a woman. We recently helped a 45-year-old single woman explore her options for long-term care coverage. For a policy that offers up to $ 255,000 in total initial benefits and that includes a 3% inflation benefit, a traditional policy was $ 267 per month, with its payments continuing until the time it needed treatment. long term (and if she never needed treatment, her payments would continue for life). A hybrid policy cost $ 692 per month, with payments ending after 10 years or the moment it starts collecting benefits.
When we examined his situation, we used a spreadsheet to compare a number of scenarios, and here are the high-level conclusions:
If he needed a lot of treatment in the coming years, he would be better off with a traditional policy, because he would have paid only a few years of premiums before the premiums stopped. However, this is highly unlikely. The average person who needs treatment is around 80 years old.
Around 48% of retirees will not need long-term care or will need very little care, so they don't exceed the 90-day elimination period. In this case, if she has just passed away without needing care or using very little care, the hybrid is better because her family recovers her money a little more interest.
If he ends up in the other 52% who needs treatment, chances are he won't need treatment until he is 80. In this case, even the hybrid leaves it better, given all the premiums that would have been paid in traditional politics.
Based on the above analysis, it was clear that the hybrid was a better choice for this 45-year-old woman on the condition that she could afford the higher starting premiums. On the other hand, we looked at a similar package for a 71-year-old married man, and the opposite was true, so he followed a traditional policy.
When considering which type of long-term care insurance is right for you, make sure you work with someone who can help you consider costs and benefits in a wide range of scenarios so you can see the full picture.
3. When should I take the long-term care insurance decision seriously?
As with retired health, food and other expenses, long-term care costs are something you will need to be prepared for. Our advice would be to include long-term care considerations in general retirement planning.
Insurers offer coverage to people under the age of 30. However, most people in their thirties have other priorities and are starting to save up for retirement, so long-term care insurance may not be the most pressing issue. If you are able to purchase long-term care insurance in your 30 years, it's fantastic, but we find that buying coverage in your 40 or 50 years is the "weak point". The rewards are attractive and you are less likely to be turned down due to health problems. Also, since you are generally more financially established and have a clearer sense of your retirement goals, you are in a better position to take on the financial commitment of long-term care insurance.
Typically, you can get long-term care insurance for up to 79 years, so coverage is readily available. But keep in mind that prices can rise rapidly with each birthday and that the probability of being rejected for coverage also increases with age. According to a recent study by the American Association for Long-Term Care Insurance, only 16% of applicants aged 49 and under were declined for coverage. The percentage rose to 24% for candidates aged between 60 and 64 and went up to 44% more after 70.
If you decide to purchase long-term care insurance, we recommend that you work with an authorized agent to get quotes and request coverage. As with other insurances, work with someone who is independent so that you can review more options and buy at the best price. Make sure your agent helps you look beyond the "main title" when comparing policies by answering these questions:
What coverage amount best fits your goals and budget?
What are the nuances between the different policies you are considering?
How are your costs and benefits in different scenarios?
How financially strong are the companies behind the policies?
These are all important factors to consider when selecting a policy. If you only look at a monthly premium, you won't see the full picture and may not get the right coverage for your individual situation.
See also: Are you thinking of paying for long-term care from your IRA? Think again.
Dennis Ho is the co-founder and CEO of Saturday Insurance, an independent online insurance agency. With over 20 years of industry experience, Dennis has a passion for insurance and the role he can play in building financial security. Dennis is a member of the Society of Actuaries and a CFA card holder. Originally from Winnipeg, Canada, Dennis now resides in New Jersey with his wife and three young children.
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