Long Term Care Insurance: The Ultimate Checklist

Introduction

When it comes to planning for long-term care, there are a lot of things to consider:

• Do you want to self-insure by spending your own assets to cover the need?
• Do you want to push the cost onto an insurance company? A combination of both?
• Will the state step in and pay for your needs?

Long term care (LTC) insurance is designed to help pay for expenses associated with long-term care services, such as nursing home care, in-home support, assisted living, or adult daycare.

The first step is figuring out the cost and how much your income sources will cover. Then you’ll have to decide if you want to pay for it or push the risk onto an insurance company or the state. After reading this article hopefully, you’ll have an idea of which path to go down.

Do You Even Need Long Term Care Insurance?

If you are very wealthy and have a high income, you might consider using your own money to pay for long-term care expenses that can range from 3500 to 10,000 a month depending on your needs. If you have little wealth and income, you probably cannot afford insurance. You will need to spend down what little assets you have and then you can qualify for Medicaid to cover your long-term care needs. Most people are somewhere in the middle, you may need some insurance to bridge the gap and protect what assets you have for your surviving spouse (more on this below).

The Long Term Care Insurance (LTC) Checklist

If you decide to use insurance, here are a few issues to think about when purchasing long term care insurance:

• How much coverage do you need?
• Do I need a short-fat policy or a long-thin policy?
• What is the maximum benefit amount?
• What is the waiting period before benefits kick in?
• How much will premiums cost each month/year?
• Can you afford to pay premiums for the rest of your life?
• What is the opportunity cost?
• If I’m paying for long-term care, should I do Roth Conversions?

These are just some of the questions you'll need to ask yourself when deciding whether or not to purchase long-term care insurance. At White Cloud Wealth Management, we don’t sell insurance to our clients, but we help them in the decision-making process. Hopefully, this article can be a starting point to help you assess your needs.

How much LTC coverage do you need?

The amount of insurance needed will depend on a variety of factors, including the type and extent of care desired and the current financial situation (more on this below). Additionally, consider any existing sources of deductible income that would reduce costs if required. It's important to choose coverage that provides adequate funds to cover both short-term and long-term expenses - and estate planning is essential as well. Once you've settled on the appropriate level of coverage, you'll be better prepared to face potential future challenges with confidence.

Do I need a short-fat LTC policy or a long-thin LTC policy?

When it comes to long-term care policies, individuals must consider the choice between short-fat and long-thin policies. Short-fat policies provide a large amount of coverage, but only for a shorter period of time. Long-thin policies offer less coverage than their short-fat counterparts but provide a longer period of security, usually 6 years.

The choice really depends on the individual's current and estimated future needs. For those who anticipate having fewer medical issues in older age, perhaps opting for a short-fat policy is the way to go; conversely, someone expecting more frequent and extensive care would likely benefit from the long-term support of a long-thin policy. Whatever option is chosen, having at least some form of long-term care insurance provides invaluable peace of mind for both individuals and their families.

I’ve continued to advocate the short-fat policy in most situations. One reason is if a client only uses half of the daily or monthly benefit amount the benefit pool will still be there after the 2 or 3-year benefit period ends. Benefits will continue until the benefit pool is exhausted. Hence a short-fat policy can continue to provide coverage beyond the benefit period. In addition, the average need for care is only about 2 to 3 years, so a short-fat policy will cover you for the needed period.

Furthermore, the short-fat policy allows more of your assets to keep working during your benefit period to leave more for you or your spouse down the road. In my opinion, the short-fat policy allows you to reap the most benefit in a shorter amount of time and shift more of the risk to an insurance company. It will give the insured the most flexibility in the type of care they receive.

Having trouble deciding whether or not you need a fat or thin long term care policy? Contact us here

What is the LTC maximum benefit amount?

When it comes to long-term care planning, the maximum benefit amount is an important factor. This is the sum of money that will be paid out if a policyholder needs long-term care assistance. The maximum benefit amount fluctuates, depending on the policy’s features and characteristics. Generally, it's possible to get a long-term care insurance plan with a benefit limit of up to $1 million or higher. It's important to remember that the amount of decisions you make about your long-term care plan could be irreversible in some states, so it's wise to work with an insurance specialist when selecting coverage amounts and eligibility criteria for long-term care plans.

Since it’s hard to predict your future long-term care needs, taking out a long-term care policy can be a risky decision. If you have a plan that pays 200,000 in your benefit pool, there is no knowing that you will need more or less than that until after the need has come and gone. If you are married it is smart to look into a shared benefit pool. This can double the benefit/payout you might need in long term care. In addition, it can help protect your spouse and assets if it is a partnership plan as well.

What is a partnership LTC plan and how does it protect my spouse?

If you use a long-term care policy, make sure you investigate a partnership plan. A long-term care partnership plan is a type of insurance policy designed to protect consumers against large financial losses due to the costs associated with extended medical and custodial care. The long-term care partnership program is a joint federal-state policy to shift the burden of long-term care from states to private insurance companies. Essentially, the policies increase the level where Medicaid will step in to pay your long-term care expenses.

For example, if you spent your shared benefit pool of 400,000 between you and your spouse and it was a partnership plan, the state will step in once your assets are down to 400,000. Let’s say you had 600,000 in assets and one of you had a long-term care need of 600,000 over a 5-year period. That’s 10,000 a month, ouch.

The insurance company will pay 400,000 for that need. You will pay 200,000. But then the situation gets worse when the other spouse now needs long-term care costs. Because you’ve already spent 200,000 of your assets, Medicaid will now step in and pay for your long-term care needs.

Thus, these policies are coordinated with state Medicaid plans in order to supplement care and provide a layer of protection from significant out-of-pocket expenses.

The policy offers protection for eligible individuals who may require long-term nursing or personal care services, such as a nursing home, in-home caregivers, or assisted living facility. An individual's participation in the program typically gives them access to expanded levels of Medicaid benefits without needing to spend all their resources. Furthermore, any amounts covered by the partnership plan are not counted as an asset for purposes of Medicaid eligibility. In sum, these policies provide an important safety net for those requiring long term care but wishing to retain control over their assets and finances.

What is the waiting period before my LTC policy kicks in?

It is important to understand the full implications of any policy before making a purchase. One element that seniors should consider is the waiting period on their long-term care plan. The waiting period is defined as the amount of time between when coverage starts and when benefits become available. Most plans come with a 30-90 day waiting period, with some policies requiring up to 180 days before benefits kick in.

It is essential that seniors choose a plan that fits their budget and timeline requirements and recognizes the reality that they may need financial support soon after losing their ability to perform certain activities of daily living or develop a qualifying diagnosis. By considering the waiting period ahead of time, seniors can make sure they are choosing the plan that best meets their needs and lifestyle.

How much will LTC premiums cost each year?

When it comes to long term care insurance, premiums typically depend on the policyholder’s age when they enroll in the coverage and the amount of coverage needed. Generally speaking, younger individuals generally pay less and receive more benefits because they are not considered high-risk yet and can spread out their payments over a longer period of time. That being said, premiums tend to increase as individuals enter their 50s and 60s, but this is due to a number of factors such as the risk of needing longterm care services, health status changes over time, etc.

As far as pricing goes, premium costs for a 55-year-old couple average around 3000 per year depending on your individual circumstances. Additionally, some policies may have a built-in additional benefit that raises premiums slightly but provides additional protection against inflation or catastrophic costs. At the end of the day, everyone should do their research when it comes to determining how much their long term care premium will cost; only then can you find the plan that fits your needs best. There are several free resources out there that can help you compare different plans efficiently so you can make an informed decision about your long-term care coverage needs.

Can you afford LTC premiums for the rest of your life?

As life expectancy increases, more people are considering the financial implications of long-term care premiums over their lifetime. After all, it's likely that you'll need some type of care for yourself or your loved ones during your lifetime. The costs of this care can be staggering if you're not prepared. That's why it's important to ask yourself 'Can I afford the long-term care premiums for the rest of my life?' when planning for your future.

As a first step, use a trusted calculator to determine how much money you'll need to cover healthcare-related expenses and make sure that you have enough income or savings to fund them. Be sure to also factor in inflation and other changing economic conditions that may affect your ability to make payments.

In short, understanding how you plan on financing long-term care premiums is an essential part of managing one's overall financial health and can help ensure that both today and tomorrow's health-related needs are taken into account properly throughout one’s life course. Thus, individuals should always consider whether they can afford such premiums before making any decisions about long-term coverage plans or other related matters.

What is the opportunity cost of buying a long-term care policy?

An opportunity cost is the loss of potential gain by choosing one option over another. The opportunity cost of long-term care insurance is based on the choices one will make between spending money in order to receive coverage, versus investing that money and taking the risk associated with not having a policy.

An individual must determine if they are willing to risk potential major medical costs – and associated financial consequences – if they unexpectedly require long-term care. Because it can reach hundreds of thousands of dollars, it's easy to see how protecting oneself with an insurance policy could be beneficial. That said, it’s important to consider that the money spent on the premium could have been invested elsewhere; however, there may still be certain tax advantages in choosing a long-term care policy as you can write off the insurance premium on your taxes.

By investing the dollars and gaining compound interest one could argue that foregoing the insurance is a better option. 3000 per year invested at 8% over a thirty-year period would grow to roughly 340,000 dollars. When thinking of the cost of insurance this way it’s hard to stomach. In the end, no one knows the future and it’s best to make the decision with your assets, family history, your health history, and significant others in mind. Ultimately, this is a decision that should be made while considering both short-term and long-term objectives.

If I'm paying for long-term care, should I do Roth Conversions?

Because you’ve worked hard and made it through this article, I will reward you with a golden nugget. When faced with long-term care for an elderly loved one, considering a Roth conversion as part of their financial plan is an option many families overlook. This is the perfect opportunity to use the cost of care to itemize deductions and make all or part of your Roth Conversion tax-free. Because the cost of care, lodging, and meals are deductible when you are living in a facility, it makes for the perfect time to do ROTH Conversion.

Let’s say your cost of the LTC facility is 7000 a month for a total of 84000 a year. That’s a big chunk of change to be able to write off on your taxes. Let’s say your other income is 40,000 a year. That leaves around 44000 or so that you could move from your taxable IRA to your tax-free ROTH IRA. Then that money is inherited tax-free, and you didn’t pay any taxes. It’s magical.

Ultimately, there are many variables to consider when making the decision whether or not to purchase long term care insurance. It’s important to weigh all your options. Answering the questions in the checklist will ensure you make a more informed decision. Putting one’s personal finances first is therefore an essential piece in ensuring worry-free security throughout life’s latter stages! If you need help with planning for these kinds of financial concepts, feel free to reach out to our office.

Sean West, Wealth Management Advisor/ CFP®

Disclosure

This blog reflects the personal opinions, viewpoints and analyses of the White Cloud Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by White Cloud Wealth Management. The views reflected in the blog are subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.