Hidden Long-Term Care Planning Issues

I can tell you that planning for long term care (LTC) expenses comes up in most of our client meetings. And for good reason.

Most people are concerned about how they will afford care when the time comes.

The fact of the matter is that medical care will only get more expensive.

And since these costs are usually not something you can plan around or avoid, having a plan for long term care expenses is not optional in my opinion.

So the real question is, how are you going to cover these costs?

If you have significant assets, you might choose to self insure. This simply means you pay your own way.

In my experience, clients who go this route comfortably typically have at least $2 to 3 million in investable assets, though even then it depends on the situation.

Keep in mind your budget will naturally shift as you age.

Most clients who need care are no longer traveling or spending on expensive hobbies, just to give you some examples, so those discretionary dollars move toward medical needs instead.

But for this newsletter, I want to focus on LTC insurance specifically.

In my opinion, it is one of the most misunderstood financial products out there and I want to clear a few things up.

The Basics

Just to make sure we are on the same page, here are some basics behind LTC insurance.

When picking an LTC policy, you can choose traditional plans or hybrid models.

Traditional policies involve paying premiums for a future benefit.

You pay a monthly or annual premium for as long as the policy stays active (unless it's in a pay status).

Traditional policies work similarly to auto or home insurance. If you never need care, you do not receive any money back.

The biggest issue, in my experience, is increases in LTC policy premiums that can be very significant.

It's not uncommon for our clients to see their premiums periodically go up by 20% or even up to 66% in one case I've been involved in.

This can come as a real shock if you are unaware of the industry-wide issues.

One more thing worth mentioning here is the inflation rider which is perhaps one of the most important features.

Care costs rise over time and a benefit that looks generous today may not go as far in 10 or 15 years.

Not every policy includes this automatically, so it is worth asking about.

Just to give you a rough sense of cost, a policy with a $500,000 benefit for an average 65 year old will run somewhere in the range of $5,000 to $10,000 per year in premiums.

The actual figures can vary quite significantly depending on your age, health, state, and the specific policy design.

Hybrid LTC plans essentially allow you to prepay for your care.

They are a more modern alternative and some of them can get quite creative.

Without getting too technical, these plans combine LTC coverage with a life insurance component.

You often pay with a single lump sum or over a set number of years.

Once you finish paying, you are guaranteed a certain amount of coverage.

Many policies also return the premiums to your estate if you never use the benefits.

These plans offer more certainty but usually require more cash upfront.

Just so you know how hybrid policies work, one example is making annual payments of $13,500 per year for 10 years in exchange for $500,000 of guaranteed LTC coverage.

With the basics covered, let's talk about some issues that I think most people are simply not aware of.

Qualifying for Benefits

Buying a policy is often the easy part. Using it is where the real trouble starts.

To collect benefits, you must meet a very strict medical definition.

Usually you must be unable to perform two of six activities of daily living (ADLs).

These include bathing, dressing, toileting, transferring, eating, and continence.

A licensed health care practitioner must certify that you need help with these tasks for at least ninety days.

In my experience, most families are caught off guard by this part. They assume coverage kicks in automatically once someone starts to struggle. That is not how it works.

One of our clients, we will call her Paula, began to struggle with her mobility and needed help getting in and out of the shower.

Her family assumed the policy would kick in immediately. But the insurance company disagreed.

Getting the physician's sign off proved difficult, as her doctor decided she could still dress and feed herself well enough to be denied.

Paula was stuck in a gap where she needed help but did not meet the exact definition required by the policy.

There is another way to qualify through cognitive impairment, which can be easier in some cases but not always.

This includes conditions like Alzheimer's or dementia. If you have a severe cognitive issue, you usually do not need to fail the physical daily living tests.

Waiting or Elimination Period

In my opinion, the waiting or elimination period is one of the most overlooked parts of any LTC policy and many people are not even aware it exists.

A typical traditional LTC policy comes with a ninety day waiting period.

What does this mean?

It means that even if you qualify for coverage, you will still need to cover your own expenses for those first 90 days before benefits kick in.

This can be very expensive if you truly need this level of care.

The bottom line is you need to have enough in reserves to cover your expenses while you wait.

I usually recommend making sure you have a strong financial plan for this before you ever need to use the policy.

Reimbursement and Reporting

The reimbursement structure is another issue that catches people off guard.

Most policies do not pay the nursing home or home health agency directly.

You must pay the bill first out of your own pocket, then submit receipts and wait for the company to reimburse you.

So you need to have enough liquid cash on hand to cover these costs, potentially for a long stretch of time.

What I've seen repeatedly is that the reporting burden falls on adult children at exactly the wrong time.

Unless you have a paid professional handling this for you, someone in your family will need to submit ongoing updates and medical records to the LTC company.

The person receiving care is rarely in a condition to manage this themselves.

I can tell you that the clients who fare best are the ones who designate someone in advance to manage the claims process.

It is a heavy responsibility for a family that is already dealing with a health crisis and having a plan ahead of time makes a real difference.

Timing Matters

I want to add something that does not get enough attention.

People wait too long to buy LTC coverage (assuming they actually need it).

Most people think about it in their late 60s or early 70s, but by then premiums are much higher and health issues may make you uninsurable altogether.

The sweet spot is usually somewhere in your mid-50s to early 60s when you are still healthy and premiums are more manageable.

What Does This Mean for You?

Don't get me wrong. I am certainly not saying that an LTC policy is not worth it.

I also don't believe that everyone needs one, even if they can afford it.

The point I am trying to make is that an LTC policy is not a hands off solution.

You still need a clear plan for who will manage your care and claims when the time comes.

You still need to have enough set aside to cover your expenses during the waiting period and when you wait for reimbursement.

So please think about the big picture and not just the policy itself.