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Many individuals contemplating retirement and the potential of needed, at some point in their lives needing assistance in their place of residence consider long term care insurance as a means to provide for future care.This type of insurance provides an array of services ranging from home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities.
If home care coverage is purchased, long-term care insurance can pay for home care, often from the first day it is needed. It will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to 7 days a week, 24 hours a day (up to the policy benefit maximum).
Premiums paid on a long-term care insurance product may be eligible for an income tax deduction depending on the age of the covered person. Benefits paid from a long-term care contract are generally excluded from income. One disadvantage of long-term care insurance is that traditional policies, if not used, had no payback option. The insured never received reimbursement for years of premiums paid to the insurer. Another disadvantage of long-term care insurance is that the insurance is depleted. For example, an individual purchasing daily benefits of $150 for three years would have a total of $164,250 available to cover costs associated with assisted living, nursing home care, adult day care, or homecare if a homecare provision is provided in the policy. This coverage is dependent upon the insured needing assistance with activities of daily living or when you need help because you have a severe cognitive impairment.
What Happens When the Money is Gone?
When the balance of money available is depleted, you have no more coverage. Because of the disadvantages of traditional long-term care insurance policies, many older adults choose to rely upon their own savings, arrange to have family members take care of them, or if they have adequate financial assets they self-insure by placing by setting up an investment account they self-fund during middle age.
The Hybrid or Linked Long Term Care Insurance Policy
In an effort to address the concerns with traditional long-term care policies, insurance companies have designed hybrid or linked policies. These policies combine elements of an annuity or life insurance agreement with traditional long-term care insurance. With hybrid policies, the consumer is provided the financial benefits of long term care insurance, and if care is not needed then they, or their beneficiaries, are provided a cash payout.
How does a Hybrid Policy Work?
There are several ways in which hybrid policies provide benefits to the insured. One option is to link the policy to life insurance. With this plan a set premium is deposited into a policy. Once the money is deposited, a set balance of money is created for long-term care. At the same time, an immediate death benefit life insurance policy is created. Genworth Insurance Company provides this example:
A 60-year-old purchases a $50,000 long-term care annuity with 5 percent inflation protection compounded annually with a 200 percent coverage maximum and a six-year benefit period. So, his initial long-term-care coverage maximum is $100,000 — double the premium he paid. (If he had refused inflation protection, then he could have chosen three times the premium, or $150,000.)
If he makes no withdrawals over 20 years at a 3.5 percent compound interest rate, minus administrative fees, he would have — under the 5 percent inflation-protected scenario –$265,330 available in long-term-care insurance. Or a monthly maximum of $3,685.
If this person never needs long-term care, then the annuity can be redeemed for its accumulated value when it matures at 20 years — or it can be left to accumulate further interest and the long-term care policy will remain enforce.
When this person dies, his heirs will inherit the greater of the accumulated annuity value, if there have been no withdrawals, or the single premium he paid initially less the amount of long-term care paid.
If you would like more information on long-term care insurance, visit the U.S. Department of Health and Human Services National Clearinghouse on Long-Term Care Information.
Photo by: Ambib
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- Carefully Scrutinize Long Term Hospitals
- Health Care Bill Changes Medicare and Medicaid
Randy Ryder is a Professor Emeritus at The University of Wisconsin-Milwaukee and is a publisher of Elder Parent Help.