Long Term Care Insurance: Safety net or premium 'Black Hole'

Mention insurance to anyone and their first response is to locate the nearest exit. Before saying a quick "I’ve got to run," most will wait to hear if the conversation will turn into a sales pitch or just a friendly discussion. I am not sure if there is another product that can raise the ire in so many and yet have saved the financial bacon of so many others.

In comparison to other types of policies, long-term care insurance is fairly new on the block with its use only recently gaining in numbers. The product’s need is clearly driven by changes in our life expectancy, family units, and medical care. Back in the 1940s and ’50s the average life expectancy did not extend that long after retirement; and, for many aging couples, their children still lived nearby. Comparing that time period to today, it is as though we have traveled through a time warp.

Children are no longer near, and their homes rarely can accommodate an additional adult needing to move in. Family ties
are not what they used to be. Children today may say, "Sure that is my mom, but I don’t have room for her in my home."

Before getting into the pros and cons of the insurance, let’s cover the facts. Our life expectancy is getting longer, and this fact most likely will not change soon. Medical advances continue to be made supporting our longer life expectancy, however, not always adding to the quality of life during our last few years. Inflation is part of our life and will always impact our finances. Healthcare costs generally increase at rates higher than general inflation. The family unit no longer remains intact, and children often live hundreds of miles from their parents. Studies continue to indicate couples have insufficient savings to meet retirement needs much less catastrophic occurrences during retirement. Federal and state governments are taking additional steps to shift the cost of long-term care to the individuals who have assets and thus can pay for their care. Most retirees do not have a plan in place to meet the demands of long term care in the event they or their spouse needs care.

If these are the facts, a couple has three ways to pay for the cost of care should it be necessary. Generally, the least desirable is to use personal assets or the assets of their children. A second way is to use the assets of the State or federal government. To utilize this option, this means Medicaid will cover your expenses which is the government’s insurance program for the poor. Most individuals hope to avoid becoming poor during their retirement, and thus this option may not be desirable. If you need the care and you do not want to use your own assets or want to become poor, then the only option is to purchase insurance.

Most couples that I speak with regarding long-term care insurance agree they need the coverage. Generally, that is not the issue. The concern normally is around the size of the premium. If they are already retired, they most often feel they can not "‘afford" the premium. If they cannot afford the premium, an obvious concern becomes "how can they afford the care."

The design of a long-term care policy is all about the language in the contract. The policy is built around defining the benefits, conditions, qualifications, facilities, and many other factors. So reading and understanding the policy is the first step in assuring you have a quality product. A product may define qualifying for benefits as the loss of two activities of daily living. While this is standard, what is "loss?" Some products may state the need of "full-time assistance" as meeting the definition of loss. While others may state the need of "stand-by assistance" meets their definition. A difference in the definition like my example can cause premiums to vary and in some cases by hundreds of dollars per year. This is one product where significant differences in premiums should be analyzed to determine if features or benefits are being restricted or given up to achieve the lower premium.

Having a qualified agent who represents many carriers and knows the differences between the policies can be a tremendous first step in obtaining a peace about your retirement. Knowing and understanding your policy at the time of purchase is critical to avoid surprises in the future, when they cannot be afforded and it is too late to make corrections.

Like any product, when you understand its use and the value you are purchasing, rarely will you become a victim of the product. Long-term care insurance when provided by a professional and knowledgeable agent, can be a valuable piece to the retiree’s independence and financial freedom. If you need assistance purchasing long term care insurance, contact us or any of the professionals in our area.

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and
Securities offered through CUE Financial, Member NASD, IPC.

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