San Antonio Express-News (Sunday)
LOOKING AHEAD
The Smart Money S.A.: Michael Taylor breaks down long-term care insurance.
Last week, I took a deep dive into a financial product I previously knew little about.
My 90-year-old father can no longer take care of his day-to-day activities by himself. He requires live-in care at home, which my mother set up this summer, to our great relief.
This wasn’t easy to arrange for a variety of reasons, including worries about how much this would cost and whether those costs were sustainable over the long run.
Families purchase longterm care insurance precisely to ease that cost and that worry. In exchange for premiums paid either upfront or over the course of many years, an insurance company will agree to reimburse a family for licensed care, whether at home or at a nursing or hospice facility.
By instinct, I am somewhat anti-insurance. I have it for auto, home and health, of course, which is key. I have a small term life policy, which I may not renew when it lapses in a few years. I’m against overinsuring. I generally prefer bare-bones policies and discourage whole life and all optional-type insurance like warranties, preferring to take my chances and try to self-insure my family’s safety through income, savings and investments.
Having expressed my antiinsurance instinct, long-term care insurance is something I’m working my way through understanding. That is to say, I am considering it. I called my insurance provider, USAA, for a long chat with a specialist in long-term care insurance.
In the course of our conversation, I was most impressed with two things I learned about the product.
First, you can purchase this long-term care insurance in a wide variety of amounts — $100,000, $250,000, $500,000, $1 million. Of course, we don’t know how much future care we will need or how much costs will be when the time comes. Insurance company flexibility allows you to buy an affordable-to-you amount now, then add more later if you want.
Second, insurance companies have obviously thought of the natural objection that you might pay upfront for a lot of long-term care insurance — but then drop dead too quickly to “get your money’s worth.” In the policy I discussed, any unused face amount of the insurance would be paid out to beneficiaries upon death. So if you only used $100,000 of a $250,000 policy, the remaining $150,000 would become a death benefit. That acts just like ordinary life insurance.
Not all long-term care policies offer this. There are good reasons for not combining a life insurance payout with long-term care — specific to the person or the household — but I was interested in at least learning about the option. Especially as I am (knock on wood) unlikely to need the long-term care benefit for another three decades or so.
Like any insurance product that takes into account life expectancy, pricing is primarily driven by age and then by health factors. The policy I discussed was available to anyone between ages 20 and 75. Prices are dramatically lower for young people.
I got the impression from the insurance agent I spoke with that she found my 49year-old self (and 47-year-old wife) on the young side as potential customers, so we would enjoy a relatively lowseeming premium. The monthly premium for me, as a nonsmoker (although, sadly, she didn’t ask about my sixpack abs even once), was $220.08, for a $250,000 policy. My wife (also nonsmoking, six-pack abs obviously) would owe $184.67 per month for the same amount.
If I paid upfront in a lump sum for the $250,000 policy, that would cost $51,870. The same policy would cost my wife $45,452.
I learned you can pay upfront in a lump sum, or agree to monthly, quarterly or annual premiums, or even some combination of lump and periodic. The insurance company doesn’t care. After you specify how much coverage you want, it’ll take your
money on any payment schedule that fits you. I’m considering paying daily, with dollar coins, but that’s just how I personally roll.
Roughly speaking, I see three categories of households when it comes to needing, or not needing, longterm care insurance.
Category one probably does not need it because they have high enough wealth and income that they are relatively bulletproof, in terms of paying for long-term care. Got more than $200,000 in disposable income in retirement? Over $5 million in net worth? I’m making up these numbers, but barring unexpectedly high costs of care, you should be fine without long-term care insurance. (Important evergreen reminder: Never take advice from a random finance columnist you read in a newspaper. Make your own decisions about this.)
Category two are people in the middle. Some assets. Some income. And some high uncertainty about how to pay for the unknown extraordinary expenses of long-term care. Do we need six months of care? Do we need six years of care? We can’t know in advance. This might make your financial-planning brain go crazy. I think of long-term care insurance as plausibly useful for category two.
Category three households, with minimal income or assets in retirement, probably cannot afford to pay in advance for long-term care insurance. The solution for these households is to throw themselves at the mercy of Medicaid, which will pay for some level of care. A simplistic view of the Medicaid deal is that you have to spend down all your assets almost to zero, but the federal government will then pick up the tab in the end.
If you somehow did manage to purchase long-term care insurance, this policy would not count against your asset limits. In the fine print of Medicaid rules, we learn that different states have vastly different category three rules, so hiring a skilled eldercare attorney (not an insurance salesman!) to navigate this scenario is likely worth every penny you spend.
A few other key details are worth mentioning.
On the $250,000 policy I looked at, for example, the insurance company would pay a maximum of $10,000 per month to reimburse for licensed care. That implies coverage for 25 months’ worth of insured care, if we drew the maximum per month. And then obviously more months of care if we drew less than the $10,000 maximum.
In addition, families have to first pay an initial 100 days’ worth of care, which is called the “elimination period” and is analogous to a deductible with other insurance products. Analogous in the sense that it’s the amount you’re on the hook for, before insurance starts to kick in.
Were I to get serious about shopping for this, my personal approach would probably be to purchase less than I expect to need. Partial coverage only. I hope to mostly cover these future costs through my savings and investments. I would also personally try to pay in a lump sum, as I hate the idea of paying for insurance periodically, only to have the policy lapse because of an interruption in monthly payments in the future. But that is specific to this type of policy. For others, it would make sense only to pay over time.