Long-Term Care Insurance
While the cost of traditional long-term care insurance has risen dramatically since it was first introduced, it still makes sense for certain clients to purchase some coverage to hedge the risk of needing long-term care services. The longer we live, the greater the probability we will need long-term care services at some point in life, and contrary to popular belief, Medicare does not pay for long-term care services. Medicare is intended to help pay for the cost of acute healthcare, not long-term care, which is different. Medicaid, however, will pay for long-term care services, but only after one has become impoverished enough to qualify.
Outside of Medicaid, which is not a desirable option for any of the clients with whom we work, there are essentially three options for securing or paying for long-term care services—1) paying them from personal resources (current income or by turning assets into income), 2) paying them from an insurance policy, or 3) relying on family and friends. Since most clients do not want to have to rely on family and friends for care, paying for these services from personal resources or from insurance become the most common alternatives.
Because the cost of long-term care services can be very expensive, some clients use long-term care insurance to minimize their risk. Skilled care in a long-term care facility, for example, can cost well over $10,000 a month. And even families with the income and assets to pay for care sometimes choose to insure the risk to avoid having to divert significant financial resources away from other priorities.
When working with clients on long-term care risk management, we never recommend that anyone insure 100% of their likely long-term care risk, if we recommend that they purchase long-term care insurance at all. Generally speaking, we do not recommend that anyone offload 100% of any particular risk onto an insurance company. The purpose of insurance is to pay for the risks we cannot afford to take.
Our first goal in discussing long-term care risk with anyone is to help them understand their risk and the options available to pay for long-term care services should they need them. If a client decides to purchase some amount of long-term care insurance, we generally recommend traditional, stand-alone long-term care insurance. This coverage is similar to term life insurance in that it is pure insurance designed solely to pay for long-term care services.
Hybrid or combination products are growing in popularity for managing long-term care risk; however, we do not believe that these products typically offer the best option for clients because they generally require tying up large amounts of money in a low-yielding insurance product. Furthermore, we have found that by purchasing stand-alone long-term care insurance and investing the difference, so to speak, clients often end up with more cash at the end of their life than the death benefit in their hybrid product, and they enjoy superior long-term care coverage during their lifetime as well. In sum, just as we are proponents of term life insurance in virtually all situations where life insurance is needed, we generally always recommend traditional, stand-alone long-term care insurance when insurance is needed or desired.