Alternatives to Long-Term Care Insurance

Nov. 14, 2012 - PRLog -- It's common knowledge that American's are living longer and because of it the risk of age-related impairments increases.  We know the statistics.  We know everyone thinks it won't happen to them.  We've heard it all.

I recently read an excellent article entitled "Alternatives to Long-Term Care Insurance," published in the Journal of Financial Services Professionals.  The article was on point, and examined the traditional and nontraditional methods of planning for long-term care.  I found it so interesting I couldn't help but dedicate an entire blog post to it.

The article posed the question:

1) if only 40% of individuals age 65 and over will require custodial care, this means that the other 60% of seniors will never experience the need to expend funds in payment of such care and thus, if saving for the possibility, will incur an unnecessary expense; and 2) for those individuals in need of the care, and who do not save for it, what is the governmental "safety net" provision for such coverage?

First addressed were the three basic types of long-term care insurance policies available for purchase.  One version covers facilities only, another covers home care only, and the third version is more comprehensive and covers both types of care.  The most common policy being purchased includes comprehensive care.  This isn't surprising, in that most of us know a nursing home stay usually comes after some type of home care or assisted living facility stay.

Long-term care insurance would be the perfect solution, if everyone could obtain it, afford it, and ensure they were going to use it in the future.

So what else is there?
Hybrid Policies.
The insurance industry realized that the needs of consumers were not being met with traditional long-term care insurance policies.  In response to consumer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies.  These policies combine the benefits of an annuity or life insurance agreement with a traditional long-term care contract.  The consumer has the guarantee of long-term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

However, these policies can be tricky.  Not all annuity products will provide for assisted living facility expenses.  And the taxation of the long-term care insurance benefit provided by the life hybrid policies may vary, depending on the type of illness the applicant has.  An applicant interested in the product should always meet with a qualified financial advisor prior to purchasing a hybrid policy.

Reverse Mortgage.
The article mentions the controversial nature of reverse mortgages, primarily in light of the excessive cost to the client.  It is important to keep in mind that the primary intent in the development and design of reverse mortgages was to provide for retirement income, not to pay for long-term care expenses.  Yet, it is an option nonetheless.

Self-Insurance.
According to a study referenced in the article, only 1 in 20 consumers (5%) will incur more than $100,000 in long-term care expenses (in 2006).  Given those odds, self-insuring (e.g. setting aside the funds) seems to be a worthy alternative.  However, "self-insurance is really an option only for those consumers who are relatively young, self-disciplined, and have the compounding-of-earnings advantage of time on their side."  The article states that an annual return of 10% would be required for an individual to earn the cost to cover one year's worth of a future nursing home stay.

Medicaid Planning.
"The plan not to plan" as the article states.  The article goes on to discuss the eligibility tests, transfer rules, the use of trusts, the protection of the home from estate recovery, and the use of annuities in Medicaid planning.  In reading the section regarding annuities, it is clear that the author isn't well-versed in the planning options, but knew enough to stress the importance of distinguishing what type of annuity to use in planning.

The article was a very interesting examination of the rapidly growing, and severely neglected, need for long-term care planning.

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Keith R. Fevurly, MBA, JD, LLM, CFP. "Alternatives to Long-Term Care Insurance." Journal of Financial Services Professionals. October 2012: p61-68.