LTCI: How can I protect my assets?

Monday, November 10th, 2008 by Charles Mayfield, CFP®


These rocky times in the market have certainly got plenty of us on edge about what our money is doing for us.  I felt like this was a great opportunity to use the current state of affairs to highlight another tool that helps protect our clients.  No…Long Term Care (LTC) Insurance will not keep your portfolio from declining in these volatile markets.  However, if your investments are down, it only further drives home the importance of making that money last in retirement.

retirees on beach

 In planning for retirement, there are many costs that consumers should always count on.  Housing costs, utilities, vacation, food and health care costs just to name a few.  What is often overlooked is the cost associated with a physical or mental impairment that limits our ability to perform the simplest of tasks without assistance.  These tasks, known the activities of daily living (ADL’s) are: feeding, bathing, clothing, transferring, going to the bathroom and continence.  Additionally, you could have a cognitive impairment such as a stroke.  It is very difficult to plan for such an illness or injury in much the same way you can’t really plan for a car accident.   LTC Insurance is designed to protect our savings and assets against the additional costs incurred by the needs associated with this care.  Most policies trigger when the insured cannot perform two of the ADL’s or has a cognitive impairment.

Not so long ago, you could see a few nursing homes scattered throughout local metropolitan areas.  Today, we see assisted living facilities, adult day care and the increasingly popular “in home care”.  The majority of policies sold today will cover treatment received in any or all of these settings.  The average cost of care in the US today is a little over $120 per day.  This can vary dramatically depending on where you live (rural/major city/state).  The purpose of this blog is to provide consumers with some real “take-away” information regarding relevant topics.  So, please allow me to give you some basic information to look for when it comes to making a decision regarding LTC and its place in your overall planning.

First, if you are over the age of 50, now is the time to begin exploring long term care insurance.  There is supportive date that suggests the odds of needing the coverage go up significantly past this age.  Second, you should rarely fully insure the risk.  In other words, if the cost of care is $120 per day…consider a policy that provides you with $80-$100 per day in benefit.  Obviously, the more coverage you buy the more expensive it gets.  It is imperative that the cost of LTC fit into your budget now and in the future.  Lastly, LTC is a very dynamic policy.  There are many different features and benefits that make up a policy.  I want to highlight the four main features and give my suggestions on how to shop for them:

- Daily Benefit: How much coverage (usually expressed either per day or per month)

  •  I have touched on this above. This is the ultimate cost driver when constructing a policy.
  •  I suggest insuring 70-80% of the costs associated with where you live…or plan to live in retirement

- Benefit Period: How long will my benefits be payable (2,3,4,5,10 years and lifetime)

  • This benefit is calculated using 365 days per year (a 2 year benefit would really give you 730 days of coverage)
  • Most policies only count days you need care as days against your benefit period
  • Not an area I like to skimp on. When I quote this for our clients, I typically start with lifetime and work our way back if the premium is out of budget.
  • The statistics say that the average need is a little more than 3.5 years. However these numbers don’t account for much of the unskilled care performed by family. Nor do they track what happens when someone leaves a facility.

- Inflation Protection: How much does my benefit grow each year (none, Simple, Compound are most common options)

  • If I purchase $100/day today, it needs to grow with the cost of care
  • There are several ‘hybrid’ inflation riders that allow for premium control
  • What option you select should depend slightly on how old you are when you purchase the coverage. The older you are, the more I would recommend the simple interest option.

- Benefits Payment Options: How the insurance company pays benefits to you (Cash, Monthly, Daily)

  • Daily reimburses you for costs incurred on a daily basis, up to your daily benefit.
  • If you exceed this figure on any given day, you will pay the balance
  • Monthly reimburses you for all daily costs tallied over the course of a month
  • This is the benefit level I typically recommend, at least initially
  • Cash, the most expensive of these options, pays you a check to spend as you see fit. There is no need to provide proof of expenses as there is with Daily/Monthly.

It goes without saying that you should always work with a trusted advisor when making a purchasing decision regarding LTCI.  Preferably, someone very familiar with these policies and how the benefits can be massaged to create a plan that falls within your budget.  Additionally, you should choose a very reputable insurance company with sound balance sheets and experience in underwriting Long Term Care.

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