Insurance Options for Funding Long-Term Healthcare

Insurance Options for Funding Long-Term Healthcare

We’ve written a good deal about the problem of funding long-term healthcare costs.

People are living ever longer, with the average life expectancy in the US currently standing just shy of 80 years. That’s exceptionally good news, but another statistic may bring pause: almost 70% of us will need LT healthcare in our golden years.

It’s expensive. The average length of care is three years, and today, a private nursing home room costs nearly $9,000 per month. Other forms of care are available, at home, in hospital or in various kinds of treatment facilities – but no matter the extent or location, the price will be very high – easily $100,000/year for nursing home care.

Insurers have a wide and sophisticated range of products to offer clients interested in planning ahead to cover these nearly assured costs. Standalone policies are available at an average annual price just shy of $3,000. We recommend that customers buy one with a cost of living adjustment feature to assure future inflation doesn’t eat the benefit alive.

We think customers should seriously consider adding a cost of living adjustment rider – your agent will call it COLA – to any insurance policy aimed at covering future healthcare needs. LT care in particular has risen dramatically in price over the last decade and the future trend line points steeply upward. A COLA rider is particularly valuable for younger customers, who have a long way to go before needing coverage. This feature can be costly, but if it’s affordable to the client, we believe it’s money well spent.

The downside to standalone policies is the bad luck factor: if you die before needing the coverage, the policy’s cost is sunk – there’s no death benefit, cash component or any other leftovers. Premiums on standalones have been rising of late, making this option less than optimal in current conditions.

Hybrid life policies that contain long-term healthcare riders can be purchased. These allow accelerated benefits, which can be used to cover LT care costs, provided the policyholder passes the standard ‘two of six activities’ policy. These commonly comprise bathing, dressing, toileting, eating, transferring and continence. A severe cognitive debilitation like Alzheimer’s disease would also suffice. In these cases, up to $6,000/month can be withdrawn from the policy. The total amount taken out would then be deducted from the eventual death benefit.

Annuities with long-term care riders are also appealing. First off, the IRS says money can be withdrawn from them tax-free to fund qualified medical costs. The annuity still passes to heirs at the establishing party’s death, less any amounts taken to pay for LT care. Unfortunately for some customers, funding an annuity requires a considerable up-front payment: for those with LT care riders, $50,000 seems to be the minimum start-up price. There’s also a lockup period attached to the funds of five or ten years. Nevertheless, we rate annuities with the proper rider as a particularly effective tool for funding LT care, mainly due to the overall flexibility they offer to holders.

Short-term care insurance is an economical approach to providing at least some coverage for LT care expenses. These policies can be structured for a daily payout, usually $30-300/day, covering six or twelve-month periods. This isn’t much, perhaps, but if the insured party has other resources and can qualify for Medicare, this approach offers a sound, low-cost alternative. It’s certainly better than the self-insurance approach, whereby people simply set aside cash to pay for eventual LT treatments. This works sufficiently for well-off clients, but for most customers, insurance is definitely needed.

Critical care policies, sometimes termed critical illness insurance, generally offers a large lump-sum payout to holders diagnosed with major illnesses. Some carriers, though, offer policies that pay regular benefits, by the day or month, that are useful for funding long-term care and rehabilitation services. The premiums tend to be reasonable, making critical care policies an appealing option. However, coverage generally doesn’t’ apply to preexisting conditions, so extreme care needs to be taken before purchasing these policies.

LT care funding can also be locked in by employing deferred fixed annuities. Distributions from these annuities can be used to cover any expenses, not simply LT healthcare – you can just as easily take the monthly cash infusion to the casino, not a course most advisors or insurance agents would recommend, to say nothing of heart specialists, but feasible. For customers planning to fund future healthcare costs, any dependable source of funding is a good idea, and we particularly like these products, once again due to their flexibility.

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