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The Physician Dilemma of Funding Long-Term Care
By J. Michael Hegwood, Assistant Vice President of Brokerage and Marketing at AMA Insurance
As part of National Long-Term Care Awareness Month this November, make sure you’re prepared for your and your spouse’s future long-term care needs.
Funding long-term care expenses has emerged as a top financial concern for physicians, according to AMA Insurance’s Reports on Physicians’ Financial Preparedness1. But nearly 70 percent of physicians do not have coverage in place for themselves. Of physicians without coverage, 36 percent plan to self-insure (or self-fund) while another 33 percent said they aren’t sure how they’ll handle a potential long-term care expense.
But what if you purchase coverage and don’t end up needing care? You could be spending a lot of money on something you’ll never use. On the other hand, if you do have a long-term chronic health issue, it may be very costly—so purchasing coverage would make sense. Understanding your funding options can help you make the best decision for your financial and health situation.
3 Traditional Funding Options
The three main funding options for long-term care that people have relied upon for the last few decades have been based in part on the individual’s financial means and risk tolerance.
A note about Medicare: Many people believe Medicare will cover their long-term care expenses. This is not the case. It may cover some of the initial expense, but it was never intended or designed to support long-term care.
As you might expect, this option is typically a possibility for those who have the financial means to pay by themselves for this very expensive form of care. When self-funding, you’re essentially taking on 100 percent of the risk—which means the entire burden of paying for long-term care falls to you.
On the upside, if you don’t ever need long-term care, you’ve paid $0 for the coverage. On the downside, if you’re confined to a nursing home facility for 4 years, you might be tagged with a $400,000 bill for a private room. The self-funding solution may work well for those with a great deal of financial resources, as well as those with a good history of family health. But be prepared because the burden of payment is entirely on you.
Medicaid is the primary payer for long-term care services in the U.S., but it’s not typically an option for physicians. Because it is a social health care program for those with lower incomes and very limited assets (usually less than $2,000), you would have to “spend down” your assets to qualify.
3. Long-Term Care Insurance
This third option rose to popularity in the 1990s and 2000s. Long-term care insurance plans help consumers shift the risk to a third party—an insurance company.
In exchange for the payment of premiums, long-term care insurance policies promise to pay benefits for custodial, intermediate and/or skilled care. When you apply for coverage, the insurance carrier determines your rates based on the policy features selected as well as your age and health status. The younger and healthier you are, the better your rates. Benefits from these plans are generally triggered when an insured is unable to perform any two of the activities of daily living: feeding, toileting, dressing, grooming, bathing and transferring.
Long-term care insurance is a great concept, but some early generations of these plans were not priced adequately as a result of poor underwriting and cost projections. These pricing flaws have resulted in some hefty premium increases for existing policyholders. For instance, late this past summer Genworth Financial, Inc. received approval from state regulators to raise long-term care insurance costs an average of 58 percent on some of its policies.2
For those who stop paying the premium, they’ll lose all the benefits and get nothing. Or you could pay the hefty premium increases and never need the coverage—and again, no cash would be paid out. But some people have benefited greatly from these plans, protecting their family from what might have otherwise been a financially catastrophic event for them.
2 New Flexible Funding Options
In recent years, alternative funding options have emerged. Let’s take a look at the two most common ones:
1. Hybrid or Linked-Benefit Plans
If you choose this funding option, the policy will pay benefits to cover long-term care expenses in the event you need long-term care. If you don’t need the coverage, the plans are designed to pay out another benefit—typically in the form of a “death benefit.”
Many of the early hybrid plans required the insured to “reallocate” existing assets to fund the policy premium—which could require a substantial “deposit” of $50,000 or more. Those with the means to self-fund were some of the early adopters of these plans, simply because they had the financial means to fund the initial premium. They were able to transfer part of the risk to an insurance company while still guaranteeing a benefit would be paid whether or not they needed the long-term care.
2. Long-Term Care Riders (as Part of a Traditional Life Insurance Policy)
Carriers are now beginning to offer long-term care riders as part of their traditional life insurance policies. These riders provide access to “living benefits” in the form of an accelerated benefit provision, in which the insured can tap into 50-90 percent of the policy’s death benefit before actually dying.
The amount paid under an accelerated benefit provision tends to vary from company to company, but there are numerous competitive plans to choose from. The general premise is this: When a policyholder uses the living benefits, there’s an offset to the original death benefit. In addition, these riders add flexibility to the coverage as well as to the premium payment schedule, making them a very attractive option for many people.
Just like the original hybrid plans, these riders create a scenario in which a benefit is always paid if the insurance remains in effect. As a result, this has become an increasingly popular way for many people to fund their potential long-term care expenses.
Resolving the Dilemma
When most people prepare for retirement, they consider what’s needed to fund the lifestyle they’ve always envisioned. As a physician, however, you’re no doubt keenly aware of all the health issues and expenses people often face as they age.
But have you taken the time to determine just how you will fund your long-term care expenses? The dilemma is that physicians are concerned about funding their long-term care, but only about 30 percent have a concrete plan in place—and there are a number of different funding options to choose from.
Take the opportunity this holiday season to discuss your options and make funding plans that make the most sense for you and your family. Your financial advisor or insurance broker should be able to help you compare and select the right funding plan for you.
Contact the AMA Insurance Physicians Financial Partners program at (855) 210-4015 or amainsure.com/pfp to learn how you can gain access to its nationwide network of independent, local and experienced financial professionals who can help you reach your unique financial planning goals—including funding long-term care. These professionals have undergone a comprehensive due-diligence process by AMA Insurance, which has been serving physicians for 30 years.
Now’s the time to address long-term care expenses. Talk to your family and your financial advisor, and put concrete plans in place today that can let you look toward the future with confidence.
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