Financial Preparedness

Long-Term Care and Funding: You Have Options

November 05, 2019

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Planning for your Long-Term Care (LTC) needs can be complicated and wrought with confusion. Especially when you begin to consider how you’ll handle the expenses associated with the care itself.  

Today’s care extends beyond nursing homes, as more families are receiving care in their own homes. Funding decisions shouldn’t necessarily be based on where your care is received, but it is something that should be considered since some funding options are more flexible than others. 

AMA Insurance Assistant VP of Brokerage Marketing, Mike Hegwood, a bona fide insurance expert, sat down with Dr. Aaron Lewis.  Aaron is a CFP® Candidate, a board-certified anesthesiologist, and the founder of Money Nerd, MD.  Check out the conversation below.

MH: What questions should physicians be asking about Long-Term Care?

AL:  If you’re starting to ask questions, you’re doing the right thing. The first step is to start thinking about this issue. In addition, I would recommend consulting with a fee only financial planner who serves as your fiduciary before you purchase any product. 

Here are five key questions to consider:

1. Think about the need. How likely am I to need long-term care? Research shows that if a female needs long-term care, her need would be for 2.5 years while a male’s need would average 1.5 years.

2. What’s my family history?  Do my family members tend to live long lives? Do we have a history of dementia?  If so, the risk of an LTC event is higher than if we live shorter lives and have a strong history of cardiac disease, for example.  

3. How much will it cost? Costs vary nationwide, so what’s the cost in your area?  A private room in a nursing home facility may cost $100,000 or more per year today.  As well, it’s important to consider inflation in these costs.

4. How will inflation impact that cost?  Inflation in the cost of long-term care has, historically, exceeded consumer inflation and so the impact could be significant and must be considered.

5. What are my financial resources (or my funding options)?  How will I cover the cost?  Can I self-fund?  Am I willing and/or will I be able to cover a possible need of $250,000.00 or greater? Or will there be a shortfall?  Can I insure the balance?  

MH: Great points, thank you. Oftentimes physicians want to understand what their funding options are, to cover costs associated with long-term care, and which ones might be better for them.  What are some questions they can ask when making their decision? 

AL:  In terms of funding options, there are three basic options available: 

1. Self-funding, in part or whole.

2. Insurance, through traditional LTC plans or hybrid plans (or even through a 1035        Exchange), or

3. Medicaid, which is how most LTC expenses are paid for in our country – although it’s probably not a preferred option for most physicians.

To determine which option might be best, find a trusted financial professional that is fee only and who operates as your fiduciary – and have them help you work through these different calculations and scenarios.

MH: In recent years, a number of traditional long-term care insurance providers have left the market and many of those remaining have increased their prices considerably.  But these traditional plans are still popular with a lot of physicians.  Are these plans still worth considering?  Why?  

AL:  Yes, they may still be worth considering.  In fact, all options are worth considering during a comprehensive long-term care needs analysis.  But the number of options available has been declining.  In 2000, there were approximately 125 insurance companies offering standalone LTC policies, but by 2014 the number dropped to 15 carriers.  This is because many of the actuaries from these companies had a hard time accurately predicting the costs – and eventually were left with either becoming insolvent or increasing prices considerably.  

In some cases, these plans are still popular with physicians simply because they're not familiar with other options. 

MH: Are these traditional plans hard to qualify for?  In other words, are these insurance companies being more selective in their underwriting – and only offering to cover those individuals that are in great health?

AL:  Yes, they can be hard to qualify for because the insurance companies have tightened their qualifications.  As you get older, these plans become harder to obtain.  According to  MorningStar, for those in their 70s, the average declination rate is 45 percent.  But those in their 50s only see a 14 percent declination rate.  Many don’t consider long-term care insurance until they’re older – and in some cases, it’s too late, and they won’t qualify for many of these traditional plans.  This underscores the importance of beginning to think about your future as you age long before you have an age-related care need.  

MH: I’ve also heard people use the phrase “use it or lose it” when referring to these traditional long-term care insurance policies.  Can you explain what that means?

AL:  Yes, “use it or lose it” policies are like auto insurance or term life insurance.  If at the end of the year you’re not in a car accident or you haven’t died, no benefit is paid and in fact you have to pay for another premium next year to retain the coverage. Likewise, these traditional LTC insurance policies will only pay a benefit in the event you qualify for a claim.  If the coverage is never needed, a benefit is never paid.

MH: Regarding how benefits are paid from these insurance plans, can you explain the difference between a “reimbursement plan” and an “indemnity plan”?

AL:  This refers to how benefits are received. With a reimbursement plan, you collect the bills associated with your long-term care expenses and submit the receipts back to the insurance company.  They determine what’s eligible for reimbursement and send you payment in that amount.  

With an indemnity plan, you file a claim during an eligibility period and you get a check for the monthly benefit, up to the maximum amount you decided to receive. And you can keep the difference, even if your expenses are less than the benefit amount. These plans are also easier to process, in most cases.

MH:  More recently, insurance companies have introduced plans they refer to as “hybrid” plans – using either a life insurance policy or an annuity product – and pairing them with a long-term care benefit.  How are these plans different from traditional LTC insurance plans?

AL:  Underwriting standards can be less stringent with these plans, which might be one reason for some to consider. Even if the LTC benefit is not needed, the policy will still payout a death benefit to heirs.  If LTC is used, then the cash value [and/or the death benefit] of the policy will be reduced.  Many of these plans are paid with a single “lump sum” amount.  That means you won’t be subject to future premium increases, like you might experience in traditional LTC policies.  

Understand that the cost is that this lump sum premium, which the policyholder pays, won’t participate in any potential, future market gains would they have retained and invested the premium amount.  This, again, demonstrates the cost/ benefit analysis that is required.  You should have a fee only financial professional who serves as your fiduciary help you through these calculations.

MH:  How do these “hybrid” plans compare in cost to traditional LTC insurance?  

AL:  Costs will vary by each individual, but generally hybrid plans can be more expensive, initially.  They might cost you more per year, but for fewer years. Traditional plans require a premium every year until a long-term care benefit is needed and, therefore, may end up costing more in the long run.

MH:  A number of insurance carriers are also now offering “LTC riders” with their life insurance policies.  What’s the benefit of using something like this to cover potential LTC expenses in the future?

AL:  These riders “bolt on” to a life insurance policy, creating an added benefit to the plan, similar to a hybrid plan. The cash value in the life insurance policy can be used to cover qualifying long-term care expenses, but if LTC is not needed the policy will still pay a tax-free death benefit to the beneficiary.

In many cases, these policies may be easier to qualify for than a traditional standalone LTC plan because the underwriting standards may be less stringent.

MH: How does age factor into the equation? Are there restrictions? Are there certain plans that are better suited for physicians based upon their age at getting the policy? 

AL:  As we age, we accumulate the normal medical conditions associated with aging, so we are less likely to qualify for insurance coverage as we get older.  That’s why hybrid plans or life insurance policies with LTC riders might be good options for some.  They may have less stringent underwriting standards.  It also means that it’s cheaper to initiate a policy earlier in life, and your odds of getting declined if you apply early, such as in your fifties, are lower.

MH:  Do you have any advice for physicians looking for ways to cover potential long-term care costs in the future?

AL: The most important first step is to simply start thinking about it and discussing it with your family. The biggest mistake you can make is to put your head in the sand about this issue. 

The key question is “how much of the potential cost are you able/ willing to cover?”  Self-funding means you’re willing to pay out of pocket, while purchasing insurance is an effective way to transfer the risk (or some of it) to a third party.  Also, family health history should play a role in this decision, as well as your appetite for risk. Ultimately, though, you should consult a fee only financial advisor, who serves as your fiduciary, to talk through these scenarios and make an informed decision – one that fits into your broader financial plan.

I would also encourage physicians to…

1. Think about long-term care needs.  Ask questions about the topic.  Don’t bury your head in the sand.  Acknowledging the potential scenarios is a key first step.

2. Make a plan.  Determine how likely you are to need long-term care.

3. Assess the cost in your area.  Costs vary across the country.  And understand the impact inflation might have on those costs.

4. Assess your financial resources.  Can I self-fund?  Is there a gap?  Should I insure part of the risk (or all of it)?  If so, what options are available?  Traditional LTC insurance?  Hybrid plans?  Or can I repurpose an existing life insurance policy using a 1035 Exchange?

5. Work with a fee only professional who serves as your fiduciary. 

In addition to practicing medicine, Dr. Aaron Lewis works with his physician peers as a financial coach to empower them to live their best financial lives. 

Contact him at aaron@moneynerdmd.com, and learn more about his coaching business here.

Request more information now about the AMA Insurance Long-Term Care Program here. 

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