• Number of LTC Policies Sold Each Year
• 64% of LTC Claims Paid Out to Women Each Year
• 2020 Milliman LTC Insurance Survey
• When to Buy LTC Insurance to Get the Best Value
• Hybrid Long Term Care vs Traditional
• LTC Insurance Cost:
  • Example: Low Advertised Cost of “Bare Bones” LTC Policy
  • Actual Cost of Robust LTC Insurance Policies
• LTC Advocates:
  • The Alliance of Professional Health Advocates
  • Patient Advocate Certification Board

Last week, we tackled one of retirement’s biggest questions.

Should you buy long-term care insurance or self-fund?

And for those who determine insurance makes sense, the follow-up advice from experts seems pretty straightforward. Buy a traditional policy in your mid-50s, pay premiums for a few decades, and you’ll be protected when you need it. Despite that conventional wisdom, traditional long-term care policies have essentially disappeared from the market.

In 2002, over 750,000 Americans bought traditional policies. Today, it’s around 60,000, a 92% collapse. Meanwhile, hybrid long-term care policies have exploded to over 500,000 sales per year.

So what’s going on here?

Are more people buying hybrid policies because they’re genuinely better, or is there something else at play? The truth is, the answer depends entirely on your situation, and unfortunately, many people are being sold policies that don’t actually fit their needs.

So in this episode, I’m breaking down everything you need to know before buying long-term care coverage.

When to buy, traditional vs. hybrid policies, the real cost vs. the advertised cost, and three critical implementation details that can make or break your coverage when you actually need it.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week, I tackle the most important financial topics to help you stay wealthy in retirement. And now, on to the episode.

The Truth About Long-Term Care Insurance (and When to Buy It)

As I mentioned last week, just because you determine that you can self-fund for long-term care, doesn’t automatically mean that you should skip buying insurance. And there are two primary reasons why.

1.) First, self-funding still carries real risk, and even the best retirement plan can be derailed by the unexpected.

For example, maybe the cost of care skyrockets beyond the assumptions used in your planning scenarios. Or perhaps the timing works against you, and your long-term care event coincides with a severe market downturn forcing you to sell investments at the worst possible moment. Or maybe life throws you another curveball entirely. Suddenly, you’re helping to support an adult child going through a divorce, or you’re helping to raise a grandchild, or you’re facing your own unexpected medical expenses on top of long-term care needs. The point is, self-funding assumes everything else in your plan goes according to plan. And as we all know, life rarely cooperates that neatly.

2.) The second reason is that peace of mind has real value.

I’ve had clients tell me, Taylor, I know the math says that my plan is healthy and can absorb a long-term care event, but I just don’t want that uncertainty hanging over my head. And you know what? It’s completely valid. If having an insurance policy allows you to sleep better at night, travel with less worry, and maybe spend on experiences without constantly second-guessing whether you’re preserving enough for a potential medical event, that psychological benefit is worth something. It may not show up in a spreadsheet, but it absolutely shows up in your quality of life.

Now, if your analysis reveals that your retirement plan simply cannot absorb an average long-term care event, if it reveals that the events you’ve modeled would jeopardize your financial security or even burden your family, then insurance isn’t just a nice-to-have, it’s a necessity, especially since the majority of people over age 65 will experience some form of a long-term care event in their lifetime.

This is where long-term care insurance can get a little tricky, because unlike other forms of insurance where you can estimate costs with reasonable accuracy, like replacing a car or rebuilding a home, predicting the cost of a future long-term care event is nearly impossible.

Will you need care for three months or three years?

Will you need basic assistance at home or intensive memory care in a facility?

Will cost be $5,000 a month or $15,000?

It’s this uncertainty that makes the decision so challenging. You might end up paying premiums for decades and never file a claim, but that’s true of most insurance. You’re not hoping to use it, you’re hoping to have it if you actually need it. The key is making an informed decision that aligns with your specific situation, your risk tolerance and of course your values.

So once you’ve worked through the decision of whether long-term care insurance makes sense for your situation, the next natural question before analyzing different options is, when should you actually buy it?

So unlike life insurance, where buying when you’re young almost always saves you money, long-term care insurance presents a more complex trade-off.

Buy it when you’re younger, say, in your 40s, and you’ll lock in lower premiums. But you’ll also be paying those premiums for potentially 30 or even 40 years before you ever need to file a claim.

In other words, you’re spending decades writing smaller checks for coverage that you’re not using. Now, if you buy it when you’re older, say in your late 60s or early 70s, your annual premiums will be significantly higher, but you’ll likely be paying for a shorter period of time before potentially needing care.

So, which approach comes out ahead?  Well, it depends on how long you live, when you need care, and how long you’ll need it for. All variables that are, of course, impossible to predict.

But according to a comprehensive Genworth study, the sweet spot is typically around age 55 for married couples and ages 60 to 65 for single individuals. The study found that these ages offer the best balance of affordable premiums and adequate coverage, and this sweet spot actually happens to reflect the purchasing behavior of people fairly accurately.

According to the 2020 Milliman Long Term Care Insurance Survey, the average age long term care insurance policies are purchased is 58 years old, so right in the middle of those recommended ranges shared by Genworth. But age is not the only factor to consider. There are three additional considerations that often get overlooked.

1.) First, health matters more than age.

Long-term care insurance requires medical underwriting. If you’re 53 and healthy, you’ll get better rates than someone who’s 53 with, let’s say, diabetes. Once certain conditions develop, you may be denied coverage entirely or face significantly higher premiums.

2.) Second, it’s important to consider family health history.

If high blood pressure, heart disease, dementia, or other conditions requiring long term care run in your family, buying earlier locks in coverage before symptoms potentially develop.

3.) And then lastly, third, you’ll want to evaluate financial flexibility.

Because if buying a policy today means sacrificing retirement contributions or emergency savings accounts, it might be worth waiting until your financial picture improves.

To summarize, if you’re approaching or in your mid to late 50s, you’re healthy and you can comfortably afford the premiums, that’s likely your optimal window to start shopping. But remember, there’s no universal perfect age. Your ideal timing depends on your unique health situation, financial picture and family circumstances.

Okay, so far we’ve covered how to determine whether long-term care insurance makes sense for your situation and when to start shopping around if you’ve determined that you need or want insurance. So let’s now break down what you’ll actually be shopping for, i.e. what sort of options are available to you in the long-term care insurance marketplace and the pros and cons of each.

In short, there are two main types of long-term care insurance, traditional aka standalone policies and hybrid policies.

Let’s start with the first one, a traditional long-term care policy.

Think of this policy type like your auto insurance. You pay a monthly or annual premium for a specific amount of coverage and if you need care, the policy pays out up to your coverage limit. And just like auto insurance, there are two characteristics that can make some people uncomfortable.

1.) First, premiums can increase over time.

While rate increases by the insurance company do require state approval, they do happen and sometimes by a significant amount.

2.) The second reason people hesitate is that it’s use it or lose it coverage.

In other words, if you never need long-term care, you’ve paid premiums for years or even decades with nothing to show for it. But that’s the nature of insurance and it can certainly be a tough pill to swallow when premiums often run into the thousands of dollars per year. Speaking of costs, here’s something critical that often gets missed in these discussions. The numbers and quotes that you’ll find online are usually misleading. For example, you’ll see articles from reputable sources claiming that the average 55-year-old pays around $1,000 to $2,000 per year for a traditional policy with about $165,000 in total benefits.

And technically, that’s true. Those policies do exist. However, those figures are based on bare-bones policies that most financial planners would not recommend. And that’s because these online estimates typically don’t include the following.

First, inflation protection, which is arguably the most important feature since care costs will almost certainly be higher when you need them in 20 or 30 years. They also typically lack an appropriate elimination period. This is the period of time that you have to wait before your insurance benefits kick in.

And then lastly, they often lack optimal benefit periods and daily benefit amounts. In other words, these bare bones policies don’t typically provide sufficient coverage that actually matches the potential cost of care. When you build a properly structured standalone policy with these essential features, particularly inflation protection, a healthy 55-year-old should expect to pay closer to $3,000 to $6,000 per year for that same $165,000 in coverage, and a healthy 65-year-old might expect to pay somewhere between $4,000 and $8,000 per year.

In addition to your gender, age at purchase, and what’s actually included in the policy, your health and specific situation will of course also affect the actual cost of insurance. Nonetheless, the actual cost of a robust policy that’s more suitable for someone who truly needs proper coverage can be more than double what online advertisements and articles often suggest, which is why it’s so important to retrieve actual quotes based on a policy designed for your unique situation.

Now, before we move on to hybrid policies, let’s break down the advantages and trade-offs of traditional or standalone coverage so you can evaluate whether it fits your situation.

Specifically, there are three main advantages to consider.

1.) First, lower upfront costs.

Traditional policies require ongoing premium payments rather than a large lump sum. So, if you need long-term care coverage, but you don’t have $50,000, $100,000 or more to earmark for a potential future event, a traditional policy with annual premiums of, let’s say, $3,000 to $8,000 per year may be more accessible.

2.) The second advantage is maximum customization.

As I alluded to a few minutes ago, you have complete control over your coverage design with traditional policies. Want a higher daily benefit or a lower elimination period or a specific inflation adjustment? A traditional policy allows you to tailor the policy to match your exact needs and budget, which means you’re not forced into a one-size-fits-all solution.

3.) Lastly, you typically get more coverage for the premiums you pay when compared to hybrid policies.

You might think of traditional policies like term life insurance, fewer bells and whistles than more exotic insurance products, but you maximize your protection dollars spent. For people focused purely on long-term care coverage, this efficiency is an important consideration.

So to recap the advantages of traditional long-term care insurance policies, lower upfront costs, maximum customization, and better coverage per dollar spent.

Now let’s review the three drawbacks.

1.) Number one, premium increases in many states are not capped.

As an extreme example, in 2019, Blue Cross Blue Shield of Florida notified policyholders of premium increases averaging 94%. These dramatic increases traced back to the late 1990s and early 2000s when insurers drastically underpriced their policies. They didn’t anticipate how many people would file claims, how long they’d need care, or how expensive that care would become. And as a result, the market imploded. In 2002, over 750,000 people bought traditional long-term care policies. By 2019, just 57,000, which remains the approximate average number of policies purchased each year today. Perhaps insurers have figured out that pricing now, but there’s no guarantee that your premiums won’t increase substantially over time.

2.) The second drawback is one that we briefly discussed already, which is you might pay for a policy that you never use.

At $5,000 per year for, let’s say, 25 years, that’s $125,000 in premiums with potentially nothing to show for it. If instead you took that $5,000 per year and invested it over 25 years and earned just a 5% rate of return, your ending balance would be around $250,000. At a 7% rate of return, it would have been closer to $330,000. This highlights the fundamental insurance trade-off and it’s especially painful with long-term care given the high costs and uncertainty about whether you’ll ever need it.

3.) The last drawback is one that is not talked about enough, and that is reimbursement hassles and caregiver restrictions.

For context, traditional standalone policies operate on a reimbursement model. You pay out-of-pocket, submit your receipts and then you wait to be reimbursed. During an already challenging time, this administrative burden can easily feel overwhelming, especially for an aging adult experiencing medical challenges. Even more limiting is that most policies require care from licensed medical professionals. For example, if your spouse, adult child or close friend wants to help with what’s referred to as the seven activities of daily living, you typically cannot use your insurance benefits to compensate them. This restriction not only increases your costs since professional caregivers charge more, but also reduces your flexibility during a vulnerable time.

So to recap the drawbacks of traditional policies, premium increases are not capped in many states, you might pay for something you never use, and you may experience reimbursement hassles and caregiver restrictions.

Now, despite these drawbacks, traditional policies still make sense for many people, particularly those who want maximum coverage efficiency and can handle the premium payment structure.

But as mentioned earlier, they’re not the only option. Hybrid policies take a completely different approach, and while there are important trade-offs to consider, for some people, they are the more appropriate option.

So what exactly is a hybrid policy? A hybrid policy combines long-term care benefits with life insurance, typically by pairing an indexed universal life insurance policy with a long-term care rider attached. And unlike traditional policies with ongoing annual premiums, with a hybrid policy, you fund it with a single lump sum payment.

Here’s how it works. Let’s use John, a healthy 55-year-old male, as an example. John pays $100,000 for a hybrid policy and in turn receives $500,000 in long-term care benefits plus a $150,000 life insurance death benefit. So if he buys the policy today and dies tomorrow without ever needing care, his named beneficiaries receive the $150,000 death benefit.

In other words, his $100,000 premium wasn’t wasted. However, if he does end up using the policy for long-term care expenses, that death benefit gets reduced and in some cases can be reduced down to zero.

It just depends on the policy. Some policies guarantee a minimum death benefit regardless of care expenses, while others don’t. So it’s something to evaluate and take into consideration. But the essence of this is that your long-term care benefits are funded in part by the life insurance death benefit.

Said another way, the insurance company has done the math across hundreds of thousands, maybe millions of policyholders, and they know that most people will not have catastrophic six-figure care events. So over the long term, the insurance company knows that they’ll come out ahead.

Now, before we break down the pros and cons of these policies, there are three important things for you to know about hybrid long-term care insurance.

1.) First, you can typically get your money back.

For example, if you fund a hybrid policy today with, let’s say, $100,000 and next year you change your mind and you don’t want it anymore, you can often reclaim some or all of your premium. Now, the catch is that your $100,000 will not earn any interest while it’s in the insurance company’s hands, but this return of premium feature provides an attractive exit strategy. The exact terms, of course, vary by insurer, so be sure to read the fine print and or work with your trusted advisors before purchasing.

2.) Second, these are not free products.

I’ll say that again, these are not free products. Insurance agents often pitch hybrids as no cost because there’s no visible transaction fee and you can typically get your money back in the future if you change your mind. But make no mistake, costs are baked into the policy economics. For example, the life insurance and long-term care coverage you receive in exchange for your lump sum payment is reduced to help cover what the insurance company spends on marketing, administration, and even commissions to their salespeople. For example, going back to our friend John for a second, if his policy was truly free, maybe he would have received $600,000 of long-term care benefits instead of $500,000. You are most certainly paying fees, you just might not see a line item for them.

3.) Lastly, commissions can be massive.

In fact, advisors and insurance agents can earn up to 5 to 7 percent commissions on these policies. That’s $5,000 to $7,000 for every $100,000 sold, and perhaps explains why over 500,000 hybrid policies are sold each year compared to just 60,000 traditional policies. Nothing is free. Insurance does cost money. But understanding the compensation structure of the person enthusiastically recommending the policy to you is an important consideration.

Okay, with those things out of the way, let’s now break down the advantages and trade-offs of hybrid policies so you can evaluate whether they fit your situation.

1.) The first advantage is that they have lower minimums and some extra flexibility.

In addition to lower minimums providing more accessibility, it also allows purchasers to get creative and buy multiple smaller policies. For example, instead of just one $100,000 policy, you could potentially buy four $25,000 policies, allowing you to cancel one of the policies in the future if you no longer need it while keeping the others intact. With a single large policy, it’s all or nothing and you lose that flexibility.

2.) The second advantage is that they are 1035 exchange eligible.

Unlike traditional policies, you can transfer funds from an existing cash value insurance policy like an old whole life policy that you don’t need into a hybrid long-term care policy through what’s called a 1035 exchange. This defers capital gains taxes and converts an asset that you may not need anymore into potentially valuable coverage, all without touching your cash savings.

3.) The third advantage is that they are easier to qualify for.

Underwriting is typically less strict than traditional policies, so if you have pre-existing medical issues and are declined for traditional coverage, you may have better luck with a hybrid.

4.) The fourth advantage is a big one.

Unlike traditional policies that require licensed professionals, many hybrid policies allow you to compensate family members or friends for caregiving. Some insurance companies even skip the reimbursement process entirely and just send you cash to compensate those who are helping. So if you anticipate needing at-home care and you prefer for a loved one to help, this flexibility could significantly reduce costs and mitigate the administrative burden.

5.) The last advantage is guaranteed premiums.

In other words, your single lump sum premium payment locks in your coverage, and you aren’t at risk of future increases like you are with traditional policies. With a hybrid policy, you know exactly what you’re paying and exactly what you’re getting in return.

So to recap the advantages of hybrid policies, lower minimums and improve flexibility, 1035 exchange eligible, easier to qualify, the ability to potentially pay family and friends, and guaranteed premiums.

But before you get too excited, let’s go ahead and review the drawbacks.

1.) The first drawback is that you’ll typically receive less coverage per dollar paid.

Since you’re bundling two products here, life insurance and long-term care, the insurance company is accepting more risk when selling these policies, which means they have to adjust the costs accordingly. Just like buying term insurance and investing the difference is a better deal than buying whole life cash value insurance, a traditional long-term care policy typically provides better coverage value than a hybrid policy.

2.) The second drawback is limited customization.

For example, elimination periods, the waiting period before your benefits kick in, elimination periods often start at 90 days for hybrid policies. At let’s say $8,000 per month for care, that’s $24,000 out of your pocket before insurance pays a dime. Worse, many hybrid policies don’t offer inflation protection riders, which is problematic given rising long-term care costs.

3.) The third drawback is the large upfront requirement.

Single lump sum premiums of $100,000 to $200,000 are not uncommon to get the coverage you truly need. Not everyone has six figures sitting in cash, and even if you do, investing that money in a separate account earmarked for long-term care over the next 20 to 30 years might generate better results than handing it over to an insurance company.

4.) The final drawback is the complexity of these products.

These policies are inherently complex, and with a skilled salesperson highlighting the benefits while downplaying limitations, they can often seem like no-brainers. But the devil is in the details, and many buyers don’t fully understand what they’re purchasing until they try to use it.

Hybrid policies serve a purpose, particularly for people who want the money-back guarantee feeling or who have existing life insurance that they can exchange into a policy tax-free. But they’re not the superior solution that they’re often marketed as. For most people focused on maximizing long-term care coverage, traditional policies typically provide better value despite some of their drawbacks.

At the end of the day, the smartest strategy is not necessarily about finding the perfect policy. It’s about making sure the plan you choose actually works when it matters most.

Whether you go traditional, hybrid or decide to self-fund entirely, there are three critical details that can make or break your long-term care strategy that I want to share with you before we part ways today.

1.) The first is to plan for cognitive decline.

When you need your long-term care policy, you’ll likely be older, less sharp, and possibly dealing with cognitive decline. Insurance companies excel at creating bureaucratic hoops, like endless paperwork, documentation requirements, and back-and-forth delays. It’s not terribly uncommon for policyholders to simply give up and just pay out of pocket.

One solution to consider is to hire what’s known as a long-term care advocate. Long-term care advocates work with insurance companies on your behalf until all benefits are paid out.

If this sounds interesting and useful to you, or perhaps fitting for a loved one in your life, I’ll link to two advocacy organizations in the episode show notes. One is the Alliance of Professional Health Advocates, and the other is the Professional Patient Advocate Institute.

2.) The second important detail to share is to consider only insuring one spouse.

Given the cost of long-term care insurance, some couples strategically decide to insure only the female spouse.

Why?

Because women have longer life expectancies and are far more likely to need care. In fact, women consistently receive about 64% of all long-term care insurance claims every single year.

This strategy can help cut insurance costs by up to half while providing substantial protection for your family, and works especially well if you can sell fund for one spouse but need insurance for the other.

Just ensure that both spouses understand the risk, that if the uninsured spouse needs care first or longer than expected, you’ll be paying out of pocket.

3.) Lastly, number three, don’t count on Medicare.

In a recent Lincoln Financial Study, 65% of people said that they would rely on Medicare for their long-term care needs. Medicare covers limited skilled care, short-term home health, and hospice when specific conditions are met. But custodial care, what most people actually need, is not covered. Now, Medicaid, on the other hand, does cover long-term custodial care, but it requires near poverty income and asset levels in order to qualify.

To recap these three final important details to take into consideration, plan for cognitive decline, consider insuring just one spouse to help reduce costs, and do not count on Medicare.

At the end of the day, everyone, and I mean everyone, needs a plan for long-term care. You may still have questions after listening to this week’s episode, and that is expected. My goal was not to make you a long-term care expert. It was to educate and inspire action.

That action might be buying insurance, earmarking savings to self-fund, having honest family conversations about expectations and responsibilities, or a combination of all the above. Just be sure that you work towards taking action because hoping it won’t happen is not a plan. It’s a recipe for catastrophic financial consequences when you’re least prepared to handle them.

As mentioned last week, if you need or want professional help with evaluating your long-term care needs and building a fully coordinated retirement and tax plan, my team and I would be honored to have a conversation to see if we would be a good fit to work together.

You can follow the link in the episode description right there in your podcast app to schedule a free retirement strategy session.

Thank you, as always, for listening and once again, to view the research and resources referenced in today’s episode, just head over to youstaywealthy.com/258.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.