February 9, 2010
The New Long Term Care Insurance
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Categories: Current Events, Estate Planning, Retirement, Insurance, Financial Planning
The Long Term Care (LTC) Insurance industry is currently undergoing a makeover. LTC Insurance is insurance that you purchase to protect against healthcare costs related to in home care, assisted living facilities and everything else in between. Traditionally it is purchased for an annual premium that covers either you or you and your spouse giving you a daily, monthly, or annual dollar benefit for a specified period of time. This benefit is designed to cover part or all of the expenses associated with in home and assisted living facilities. The premium is not fixed meaning it can go up. However for years the premium did not rise. Then a few years ago LTC premiums began to rise across the board at all companies. Insurance companies argued that they needed to increase premiums to cover their costs. LTC premiums have now reached a point where people are unwilling or unable to pay. It is becoming a lose-lose situation. If you don’t get a LTC insurance policy the expenses related to the care will drain your assets quicker then you can imagine. If you do pay the premium and don’t end up needing the care you get nothing in return for the money you have spent. The rise in premiums and the previously mentioned factors have forced the industry to take a step back and come up with a better solution. Because of this companies are moving away from the traditional straightforward LTC insurance. Where you pay an annual premium for a specific benefit. Some examples of new LTC products that have come to the market or soon will be on the market involve tying LTC insurance to annuities and other insurance. Some of these products were previously, but very rarely sold. These products allow you to invest your money in an annuity or life insurance as well as LTC insurance For example let’s say you purchase a $100,000 fixed annuity. This product will provide you long term care insurance protection as well. The LTC insurance has 2 features. First a lifetime limit (sometimes over a period of years and sometimes for an unlimited amount of time). In this example the lifetime limit is 3 times the initial annuity investment. So $300,000 ($100,000 initial investment x 3). The second factor is the daily benefit (how much the insurance company will pay you each day that you require long term care). Some new products use a divisor around 700 for this calculation. So in this example your daily benefit would be $142.85 per day ($100,000/700). The LTC coverage can be provided for no additional premium but some companies will charge you a percentage of you assets lets say 1% annually. In this example ($100,000/ 1% = $1,000 per year) but remember this is taken from your assets so you do not need to write a check for this. Your annuity continues to grow from $100,000 at a fixed annual rate. Now when and if the benefit kicks in (you now require LTC) you have a $300,000 lifetime benefit. The first $100,000 of expenses will come from your initial $100,000 investment and the next $200,000 of expenses will be paid by the insurance company. If you pass away without using any or all of your $100,000 annuity investment your heirs will receive the remaining annuity or cash. This repairs some of the lose-lose situation described above. Now please keep in mind LTC insurance is not cut a dry in any of these products. The numbers used above are just for example purposes. There are riders that can be attached and analysis that must be done based on the region you plan to retire to, etc. These products are very new and the companies that create them will be tweaking them for some time. However as we wait to see what type of products these companies create related to LTC one thing is for sure, people will most likely continue to live longer and therefore incur more expenses related to LTC. Because of this I believe that some form of LTC insurance is arguably necessary for every individual regardless of income level or net worth. As always you can reach me .(JavaScript must be enabled to view this email address) with any questions you have.
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