While education costs are top of mind for people in their forties and fifties, concern about health care costs rises to the top of people’s list as they enter their sixties. Like education, the rise in medical and long-term care costs has outpaced inflation over the past few decades. People are rightfully concerned about their ability to combat this, especially given the fact that people are living longer, healthier lives today. Many people who enter their eighties and nineties reach a point where they can no longer take care of themselves and find a need to enter a nursing home or skilled care facility.
The catch is that these facilities can be extremely expensive and unaffordable for individuals if they need to live there for several decades. That is why long-term care (LTC) insurance was created. It is a planning device that individuals can use to protect against the possibility that they will need to pay for unexpected long-term care needs over an extended period. Like life insurance, this insurance is used to replace income you would need to help pay for long-term care expenses. Most people incorrectly assume that Medicare will cover any health-related costs, including LTC, which is why it is important to consider LTC insurance as a planning strategy. However, there are several different ways to purchase LTC insurance and it is important to know your options because different products may be a better fit for you depending on your situation.
The first type of LTC Insurance is simply what we would call traditional LTC. These policies are simply set up for you to pay premiums over the life of a policy so that you can cover home health care, assisted living, and other LTC expenses when they arise. These types of policies can be beneficial for individuals who have smaller net worths because you can choose your amount of coverage and can drop the coverage at any point in time. However, if you drop the coverage, you will lose out on future benefits from the policy. An important consideration is that traditional LTC insurance does not have fixed premiums. Over time the premiums can increase which can make it difficult to continue the coverage if you do not factor in potential increases. It is also not always easy to decide how much coverage you will need for LTC costs if you are ten to twenty years away from needing them. Thankfully, many companies will allow you to reduce coverage if the premiums get too expensive or if you realize you do not need as much coverage as you once thought.
Another option could include combining your life insurance and long-term care needs into one, which is called a hybrid policy. These types of products have become more popular over recent years for several reasons. The first is that they serve several needs at once by allowing you to pay premiums for long-term care coverage and some amount of life insurance if you never use the long-term care benefits. Another attractive feature is that certain products offer a lump sum or fixed premium payments, eliminating the threat of your premiums increasing over time. But these types of policies are typically more expensive up-front than traditional long-term care. Additionally, because there is a life insurance component the underwriting is stricter than a standalone LTC policy and there will be a higher health standard that will be required. However, these policies are a great fit for individuals who want to be protected if they pay for long-term care insurance but never get around to using it before their death.
Finally, a second hybrid policy option can be either a fixed or variable annuity contract that has a LTC rider attached to it. These policies are usually better for individuals who are slightly older (68-70) and are concerned about the underwriting process with a Life/LTC policy. Additionally, these policies are a fit for individuals with higher, liquid net worths because they can require a single premium to be paid into the annuity contract up front. This allows you to invest money inside of an annuity but eventually use the monthly payouts for qualifying long-term care expenses. Certain annuities may even cover benefits above and beyond the initial annuity premium (e.g. a $100k annuity may pay out $200k in benefits). Just like a Life/LTC policy, this is more expensive than traditional LTC, but it can provide a LTC benefit and allow you to leave unused proceeds to a beneficiary if there is value leftover after your death.
It is very important to do your homework on exactly how these products work and what they cover. One of the biggest mistakes people make is that they think LTC policies will cover any expense they incur. Spend time reviewing what will and will not be covered before you commit dollars to a LTC policy. There is nothing worse than spending money on a benefit you’ll never receive. By being thorough you’ll be able to determine the appropriate amount of coverage and how you’ll be able to utilize that coverage. As always, our advisors here at McCabe stand ready to help you navigate this conversation. We hope this finds you well.
George McCabe, CPA
Financial Advisor
Registered representative offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Investment advisory services offered through AdvisorNet Wealth Partners. Cetera is under separate ownership from any other named entity. 110 Cheshire Lane, Suite 200, Minnetonka, MN 55305.
Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period.
There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 ½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account values will fluctuate with changes in market conditions.
An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts.
Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. The prospectus contains this and other information about the variable annuity. Contact McCabe & Associates at 9480 Enterprise Drive, Suite 1, Mokena, IL 60448 or 708-479-7755 to obtain a prospectus, which should be read carefully before investing or sending money.
