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He works with independent financial professionals, helping them build processes for integrating insurance, broker-dealer, and investment advisory products and services to help their clients achieve their retirement goals. She has focused her research in accounting and tax issues and most recently in financial planning and law. The long-term care LTC landscape is changing and has made noteworthy shifts since the early s. Meanwhile, significant increases 58 percent have been seen in hybrid and life combination products.
Given this changing landscape, and the fact that no comprehensive financial plan is complete without addressing LTC, financial planners need to be knowledgeable on the various solutions available.
This may, at first glance, seem early considering that the vast majority of claims occur when people are in their 70s or 80s. However, those who hold out too long before purchasing may not qualify if their health diminishes. Another reason to be proactive about LTC insurance is that premiums correspond to age.
For every birthday, the annual premiums typically go up 2 to 4 percent. Once clients reach their 60s, premiums jump 6 to 8 percent every year. Characteristics of policies, such as the cost per unit of coverage, design flexibility, certainty of coverage, liquidity, investment upside, and death benefits for heirs are also reviewed. There is no one best solution for LTC insurance. Administration on Aging reported that persons aged 65 years or older living in the United States numbered About one in seven Americans, or As Americans age, it is more likely they will need some type of LTC service.
In fact, at least 70 percent of people over age 65 will require some LTC service at some point in their lives, according to the U. Department of Health and Human Services In addition, life expectancy of this demographic age group continues to increase.
Persons reaching age 65 have an average life expectancy of an additional Department of Health and Human Services. Not surprisingly, in the over population, women outnumber men With women living longer than men, they have higher rates of disability and chronic health problems, which are discussed below.
As a result, women are far more likely to need LTC. According to the U. Department of Health and Human Services , between age 40 and 50, on average, 8 percent of the working population will have a disability that could require LTC services, and nearly 70 percent of people age 90 will have a disability requiring the need for some type of LTC service.
Census Bureau , the number of those aged 90 or older has almost tripled since , reaching 1. This age group is expected to increase to more than 7. Financial planners should consider and assist their clients in anticipating future needs early on.
Chronic conditions such as congestive heart disease, diabetes, and high blood pressure increases the likelihood of the need for LTC services, according to the U. An individual who lives alone is more likely to require LTC services than individuals who are married or living with a partner, according to the U.
Census Bureau , which also reported that in more than one in four households was made up of just a single person. This is greater than at any time in the past century and a warning sign that many more individuals may need LTC insurance in the future. The average annual cost of LTC services varies by state. LTC is a huge expense, and few individuals know how they will pay for it. Unfortunately, and contrary to popular belief, the Patient Protection and Affordable Care Act failed to resolve this issue.
Medicare and private health care insurance programs do not pay for the majority of LTC services. Private health care and Medicare only cover medically necessary care by focusing on medical care, such as doctor visits, prescription drugs, and hospital stays U. Coverage may also extend to short-term services for conditions that are expected to improve, such as physical therapy to help regain function after a fall or stroke.
If an individual cannot afford the costs of LTC services through their accumulated assets because of asset and income deficits, he or she may become eligible for assistance through Medicaid. Medicaid is a joint federal and state government program that helps people with low income and assets pay for some or all of their health care bills.
Medicaid covers medical care, like doctor visits and hospital costs, LTC services in nursing homes, and LTC services provided at home, including visiting nurses and assistance with personal care U.
Unlike Medicare and private health care insurance, however, Medicaid does pay for custodial care in nursing homes or at home.
Planning for the expected costs associated with LTC needs is an often overlooked or underappreciated part of financial planning, especially retirement planning. No financial plan is complete without provisions for handling the possibility of a LTC event. Failure to plan for the expected costs of LTC is not due to a lack of tools. Fortunately, a variety of financial products can be used to effectively manage LTC risk in a financial plan.
This paper examines several different solutions LTC insurance providers have developed. The pros and cons of each will be examined. In the analysis, we will focus on seven key areas that differentiate these solutions and the client demographic that generally resonates with each.
The following LTC solutions will be evaluated: The goal of this paper is to provide objective insights on where each of these solutions may fit in the planning process. The seven areas used for comparisons are: As previously stated, 70 percent of people turning age 65 can expect to need some form of LTC during their lives. In the following cost comparisons Table 1 we used a year-old, healthy couple for price and case design comparisons.
For case design purposes, benefits and durations were kept as similar as possible. It is important to normalize the cash flow when comparing the costs of LTC products Figure 1. For example, some products are structured as single premium policies lump sum , some require premiums to be paid in all years, while others are assumed to be paid for a limited duration.
To normalize the data, we discounted the premium flows to uncover the true cost of each product. For discounted cash flow purposes, we used the average year Treasury note over the past week period 2. Additionally, we used joint life expectancies for purposes of calculating the duration of cash outflows.
Life expectancy for two year-old healthy clients, at the time of the analysis using mortality tables, was This approach allows products to be examined on their cost structure alone, ignoring all other features and design parameters as shown in Figure 1. Figure 1 shows the extreme variance in costs between traditional LTC insurance and combination solutions.
This cost discrepancy stems from the ancillary benefits provided through combination products, including premium certainty, liquidity, upside potential, death benefits, and underwriting requirements.
The days when cost was the only driver associated with the decision to purchase LTC insurance have ended. The marketplace has shifted and the pitfalls associated with some of the lowest-cost products have been exposed. Many clients are now seeking a prudent assessment of the various costs and benefits of combination products.
The following discussion highlights some of the most important features of these new products. With regard to flexibility, there are two areas of focus: The type of policy selected will play a major role in meeting the current and future needs of a policyholder. For example, traditional LTC offers the most case design flexibility; however, traditional policies offer the least flexibility in terms of certainty of premium, liquidity, death benefits, and market upside.
On the other hand, a hybrid LTC and combination product allows for the least case design flexibility while providing the most flexibility in investment upside, liquidity, and death benefits. These issues are summarized in Table 2. For example, consider a widow who is receiving spousal pension and Social Security benefits in excess of her current standard-of-living need who also has limited investable assets. Traditional LTC coverage, or insurance with a rider, may be the best option for her given the fact that she has excess cash flow compared to her living expenses and no survivor to provide home care as her health declines.
Conversely, consider the same widow who lives comfortably off of her pension and Social Security benefits but also has certificates of deposit maturing at a rate of less than 1 percent.
Different scenarios will lead planners to very different case designs, depending on the goals of the widow. Case design flexibility varies widely among products and insurance carriers. Table 2 compares these case design factors across products. Certainty of coverage has two applications. The first area of certainty pertains to premium payments remaining constant during the life of the policy. In the price analysis in Figure 1, traditional LTC insurance is four times less expensive than some of the alternatives.
It is important to remember, however, that premiums beyond the first year are not guaranteed. Moreover, more rate increases are on the horizon as the industry leader in sales has recently stated that they may have to suspend new sales if rate increases on current policies are not approved by state insurance commissioners. Such a rate increase would affect policyholders who were issued contracts between and Combination products are typically sold either as non-cancellable or as fully paid up at issue.
Combination policies generally provide LTC insurance, as well as an additional type of coverage. These additional coverage types include life insurance, cash liquidity, and investment flexibility. These products usually are built on an annuity or life insurance platform. Non-cancellable policies guarantee both the benefits and premiums for the life of the policy, providing security to the policyholders so that they know the benefits will be available and at what cost.
The second factor associated with certainty consists of the claims paying ability of the insurance provider. This consists of using solutions from companies that make prudent financial decisions and are committed to continued service to existing policyholders.
For example, in California, only 12 carriers are actively selling LTC insurance. An additional 46 carriers which represents nearly 80 percent of policies in force have existing policies, but are no longer writing new business. Liquidity has become a topic of discussion among financial planners and consumers in the current economic landscape. Many consumers have reduced the risk of their investment portfolios by increasing their existing cash reserves.
In effect, they are waiting for an opportunity to invest. As planners struggle to find investments that offer guaranteed yield in a low interest rate environment, they have identified opportunities to provide benefits other than yield for their clients.
These benefits come in the form of principal protection, liquidity, death benefits, and LTC coverage.