What’s New in Long-Term Care Insurance?

Long-term care is a topic that continues to resonate because it’s such a vital piece of planning for your future self. Despite its importance, it tends to be something many people put off or simply don’t know much about. There are also many misconceptions about long-term care insurance. Furthermore, medical advances and new technologies are constantly evolving to meet changing needs as people are living longer, families are taking on more caregiving responsibilities, and legislation creates new policy-funding opportunities.

We sat down with Suzanne Scheer, a financial advisor on our team who specializes in long-term care insurance, to get the facts and latest news.

Misconceptions About Long-Term Care Insurance

Q: What are the biggest misconceptions around Long-Term Care Insurance?

A: Most people assume that health insurance or Medicare will cover long-term care needs. In a recent survey, 58% of Americans polled incorrectly thought Medicare paid for long-term care. But Medicare only covers short-term stays if skilled care is needed after at least three days in the hospital. In a long-term care situation, the type of care needed is usually custodial care–help getting through the day safely, such as bathing, dressing, and transferring–and this is not medical in nature, so it isn’t covered by health insurance or Medicare.  

Also, people think that they will never need care, despite the fact that about 56% of people over the age of 65 will need some kind of care during their lifetime. Further, the term “long-term care insurance” evokes the image of a nursing home–yet most people who have this coverage are able to avoid nursing homes altogether and have a myriad of options for receiving care, often in their own home.

The New Face of Long-Term Care Insurance

Q: What changes have you observed in the long-term care landscape during the last decade?

A: The long-term care insurance landscape has changed substantially over the years. When long-term care insurance was first available in the 1970s, it only covered stays in a nursing home. But the policies evolved and became comprehensive, covering care at home, in assisted living, and at adult day care. For several decades, there was only one option–traditional long-term care insurance. It was a bill that you kept paying, year after year, and the payments would continue until you went on claim or passed away. If you needed care, you would have access to a bucket of dollars that would be many multiples of the amount you paid in. If you didn’t need care, you wouldn’t get anything back–similar to auto or homeowners insurance. One of the biggest objections was this concept of “use it or lose it”. Also, the premiums were not guaranteed level, and the early policies were priced way too low, so large premium increases for those policies have been the norm. 

As a result of those objections, a new product came about, which is referred to as asset-based long-term care insurance (some people call it hybrid, combination, or linked benefit). With traditional policies, there’s one bucket of money, and when getting coverage, you decide how much you want to be able to take out each month, and how long the dollars in your bucket will last. With the newer products, you have two buckets of money. Typically, the first bucket is a life insurance policy, and the second bucket is an extension of benefits. You deposit money with the insurance company, either all at once or over time. If you never need care, the funds in your life insurance bucket go to your beneficiaries tax-free when you pass away.

But if you do need care, you initially draw funds from the life insurance bucket. If the first bucket is depleted, you then draw from the second bucket, which doesn’t have a death benefit. With the asset-based plans, you’re repositioning an existing asset (cash, qualified funds, etc.) and adding leverage from day one. If the funds are used for long-term care, they come out tax-free. It’s like moving funds from one pocket to the other and adding features and benefits to maximize efficiency. The policy is still an asset, and it has cash value. If you don’t need care, there’s a death benefit for your beneficiaries. It’s a big shift in how people are looking at funding a possible extended care event. And these policies provide peace of mind because you know exactly how much you will be paying in premiums when you put your policy in force. It is also very comforting to know that if you don’t need any care, or if you only use a portion of that life insurance bucket, whatever’s left goes to your beneficiaries tax-free.

There are still many scenarios where a traditional long-term care policy is the best fit.  But it is nice to have so many options.

Q: The asset-based plans are opening the door to a lot more flexibility of use, and you don’t have to worry necessarily about, “Am I paying a bunch of money for a what-if that I might never use?”

A: Exactly. Another thing that’s new: most of the traditional long-term care policies require the use of licensed caregivers or home health-care agencies and provide reimbursement for care after receipts have been provided. Many of the asset-based policies, however, have something called indemnity, where once you trigger a claim, you receive your monthly benefit, and you can hire whoever you want, and they don’t have to be licensed or work for an agency. You don’t have to submit receipts to the insurance company. You still have to set up withholding as you would with any household employee, but you have more flexibility.

The other thing with asset-based long-term care that is really interesting is that there are different ways of funding it.

How to Fund a Long-Term Care Policy

Q: What new opportunities are emerging for families who want to plan for care? 

A: There are many funding options for asset-based plans. Some companies offer coverage as early as age 30. You can put in a lump sum. You can pay over 5 years, 10 years, 20 years, or your lifetime. Your premiums are guaranteed not to increase, whether you pay all at once or over time. You also have a choice of what type of funds to use–cash, funds from an IRA, 401k, or Inherited IRA, cash value from a life insurance, or the exchange of an annuity. A parent can use cash or funds in their IRA to fund a plan for an adult child and their spouse.

The asset-based plans do require a large outlay, either all at once or over time. The funds deposited with the insurance company are not available for other purposes. These plans work very well with funds that you would have earmarked for care needs and kept in savings or other low-volatility vehicles, as opposed to funds that you would invest with an eye towards maximizing growth potential.

One thing that most people don’t know is that long-term care insurance is treated like health insurance under the tax code. If you have an HSA, you can pay a portion of your long-term care premiums from that account. Also, business owners may be able to deduct some long-term care insurance premiums for themselves and their spouses, and in a certain type of corporation, premiums for employees can be deductible.

Options for Customized Care

Q: There are a lot of assumptions people may make about long-term care insurance: I can’t afford it, I won’t need it, I won’t qualify, I’ll be locked into that policy, I won’t have any flexibility. It sounds like all of those questions are off the table now with newer products.

A: It’s all about designing a plan that’s right for you, and there are so many different variables that we can solve for–what benefit do you want to have per month, or how much do you want to pay in, or how much do you want to have at 83 (the average age of claim)? Is it important to you to have the ability to hire informal caregivers? Do you want a lifetime benefit? Do you want to have a joint policy with your spouse, or would you prefer an individual policy? We can design a plan to meet your needs.

What to Expect When Shopping for Long-Term Care Insurance

Q: How do you help people approach long-term care planning without feeling overwhelmed? It’s kind of an emotional topic that can be really scary.

A: Definitely. I try to lead with education and foster a dialogue. I do have to be a little bit nosy and ask personal questions about their medical history, because long-term care is medically underwritten. We try to do as much work as we can on the front end, because with long-term care insurance, if you have been declined, it can be difficult to obtain coverage. So, unless somebody tells me they don’t take any medications or they only take something very common, we’ll anonymously shop the companies on their behalf, providing their age and medical history. The companies provide a tentative assessment of whether or not they would consider offering coverage. It isn’t binding, but it helps us determine whether they are likely to qualify for a traditional and/or asset-based plan. We’ll then look at the person’s situation and figure out what would be best for them, in terms of how to fund a policy as well as the length of payments and the source of funds. I like to zero in on which features are most important and then fine-tune a plan. We usually add compound inflation protection, so the bucket (or buckets) of money available to you when you get your policy will grow over time. Once an application is submitted, each company has a different underwriting process. Some have a phone interview, some have an online “interview” where you enter your health information online. Some require a paramedical exam.

Finding the Right Guidance for LTC Needs

Q: What’s one piece of advice you would give someone who’s just starting to think about long-term care insurance?

A: Learn as much as you can about long-term care insurance and how it works, then give thought to what you would want if you were in a care situation and identify your priorities. There is a helpful resource that we send to everybody that we work with called the Shopper’s Guide to Long-Term Care Insurance. It’s put out by the National Association of Insurance Commissioners.

When you’re shopping for long-term care insurance, it’s really important to work with an experienced professional. There are so many different products and funding options, and the offerings and features change frequently. Make sure that whoever you are working with asks you about your health history. They should ask if you’re in physical therapy and whether you have any procedures or surgeries pending. Either of these things could jeopardize your ability to qualify for coverage. 

I’ll add that you should make sure that the person you’re working with is considering more than just one company and all of the available types of coverage; what’s right for you might not be right for me. Make sure to get a policy that’s customized to you and your specific situation.