Memo – Long Term Care (LTC) Insurance Update

Long Term Care (LTC) is a hot topic for our aging nation. The average healthy 65 year old couple has a 75% chance of one of them needing long term care.

I have experts in my professional circles that I work with on a daily basis that can help you examine if the strategies below are a good fit.

If you have any LTC insurance questions, call me so I can refer you to one of them. 732-673-0510.

I urge everyone reading / listening to investigate LTC insurance options. The market and products have been much improved over the limited products offered years ago.

With inflation raging and nearly 10,000 Baby boomers retiring daily, the price of care is constantly being driven up. For example, in NJ full time long term care can cost upwards of $12k a month and that will only continue to rise.

One option is to defer some or all of that cost on to an insurance company in order to protect other assets from being depleted. LTC insurance can build a completely separate tax free pool of money earmarked for care so typical sources of income like IRAs and brokerage accounts do not need to be depleted at an additional $12k per month.

LTC insurance has been maligned in the past and has a bad reputation in some circles. The main reason for this has come from the unexpected increases to one’s premiums over the years of ownership.

For example, in the past, a LTC insurance company could not raise your rates on an individual basis but could blanket increase rates for customers on the whole. This allowed the insurance company to reassess what premiums were needed to support the future benefits a policyholder may receive. We can all see how this turned many people against LTC insurance.

Insurance companies are quite accurate with mortality since they have years of data on when people pass away but no detailed data for how long before death individuals will need care. This makes them typically more accurate in setting life insurance premiums compared to needing to regularly raise rates on the LTC policies.

The other historical negative factor is if one never needed the long term care, then the premiums were lost to the insurance company.

Now, it is not really a loss because no one ever wants to have to use the benefits, but at the end there is nothing to show for it.

So new LTC policy types and features have been added over the years that fix these issues.

The two new types of LTC are built on life insurance platforms. This allows for a death benefit to be a component to the plan. So, in case the client did not use all or any of the benefits, their heirs will receive a tax free death benefit. This eliminates the use-it-or-lose-it aspect of traditional LTC insurance and helps put clients’ minds at ease that someone will benefit in some way from them spending on the premiums.

First, now, there are the more care-centric policies. Meaning, these emphasize the care benefits more than the death benefits. These
policies are often paid for by a single premium or a 10 year level pay scenario.

They are excellent for those who have cash on hand or will in the near future from selling a home or business, or through inheritance.

These types of policies often fit well if the goal is to protect your other assets from the burden of a care need.

In my examples I have used $50k of premium, but more can be invested depending on projected monthly financial needs. My advisors tell me that $100k is the sweet spot.

For a rough example: a 60 year old paying a single $50k premium can expect 4x their money on day one. So they would have a pool of tax free cash to draw on for their care of $200k immediately. That $200k can then either grow guaranteed with an inflation rider or be invested in the market to hopefully outperform the 3% inflation rider. There are many more nuances and customizable options to these policies but a quick look is best for a first pass.

These policies cannot assess any premium increases and would provide a death benefit of about $100k. That death benefit is of course half a return of premium with a bit of a kicker for having kept the policy in force until death. The real benefit comes when that policyholder is 85 and the accessible pool of cash they have for LTC needs is over $400k after just a $50k original investment.

To further explain, a couple who each purchase $50k policies would have created an $800k pool of accessible tax free cash on top of any other assets they own by age 85.

So, if a couple has $100k in cash, and has no intention to use it, then this is a great way to get it working to protect what they have worked so hard to save.

Second, the life-centric policies are a bit simpler but also typically more expensive. These policies are permanent life insurance products
with LTC riders. Meaning they are built on a permanent life insurance platform of your choice Variable Universal Life (VUL), Guaranteed Universal Life (GUL) etc. and an additional rider that allows you to access your death benefit while you are living to pay for care needs.

An insurance company knows that with a permanent policy someone is going to be paid, whether that is the beneficiaries when the insured passes or the insured themselves taking it out for care costs, the insurance company is on the hook for the face value of the policy.

Let’s use an example to simplify it. A 60 year old may buy a $1M death benefit with a LTC rider. This might cost about $15k
premium annually until death (all depending on the insured health and underwriting but just an example). The insurance company is paying $1M tax free to someone, either beneficiaries or the insured can start spending the policy down during life for care.

Typically LTC insurance access runs between 2-4% of the death benefit per month for care. At 2% a client could get $20k each month from this policy tax free while living and pay their care providers. Each $20k removed does decrease the death benefit dollar for dollar. So if a client took $240k out (20k per month for a year) and then passed away, $760k would pass tax free to beneficiaries as the remaining amount. There is more complexity with IRS limits and rules but this is a highly simplified example for educational purposes.

To summarize, both policies discussed above have death benefits and care benefits at a level premium price. They each answer the two most
typical pain points of traditional LTC insurance: use-it-or-lose-it and ever increasing premiums. LTC insurance is not for everyone, but today it is a great investment for more of us than ever.

Sometimes self-insuring is all that is needed or perhaps health keeps one from being insurable. Either with or without insurance, there
needs to be a plan in place for exactly how to spend down from a specified source of assets if a care need arises. Without that, you
are simply hoping to be in the 25% of those who will not need care which of course is not much of a plan at all.