Suze School for Long-Term Care Insurance

LTC insurance pays when you need help with at least two of the six daily activities that we all do (bathing, dressing, transferring, toileting, continence, eating) but we have to be expected to need that help at least 90 days. It will also pay if we have a cognitive impairment severe enough that we can’t be left alone.

The odds of needing that type of care once we hit age 65 are 52% for men and 62% for women. The good news is it probably won’t be nursing home care.

In fact, most care is not in a nursing home (less than 15%). Some people have all their care at home. People who can’t stay home usually move to an assisted living facility. The really nice ones cost $5000 - $8,000 a month, depending on where you live.

For care that lasts longer than a year, men average 3.8 years and women average 4.7 years. Alzheimer’s and debilitating strokes can last a lot longer.

Medicare and health insurance can help in the first three months by paying for a rehab center or some home care visits. After three months, the options are:

Pay with your own money

Use some type of long-term care insurance

Go to Medicaid (MediCal in California)

To get Medicaid to pay, a single person has to spend savings down to $2,000 in most states. The states combine all the assets of a couple, regardless of who’s name they are in, and the most the healthy spouse can keep this year is about $160,000. The rest of the savings must be spent down to $2000. A pre-nup doesn’t protect assets for the spouse who doesn’t need care. (Click here for spend down amount for all states.)

A revocable living trust does not protect assets from Medicaid spend down. An irrevocable trust (one you can’t change) protects assets only if it is set up at least five years before applying for Medicaid.

The exception is a Long-Term Care Partnership policy that protects the assets equal to the benefits paid out. You can buy that type of policy in most states, but it has to be a traditional

Types of LTC Insurance Policies

TRADITIONAL (50% of the sales)

Works like health insurance – you pay the premium and if you never need care, your premium goes to pay for someone else’s care, just like health insurance, homeowner’s insurance and car insurance. The premium stops when you start receiving benefits. Rates can increase. A couple of companies (National Guardian Life and Thrivent) will let you pay it off in 10 years, and the 10-pay premium for NGL is guaranteed to never increase. These plans are available in the open market. New York Life and Northwestern Mutual policies are available only from agents of those companies.

An inexpensive solution in many states for people with health issues provides one year at home and one year in a facility. This is called short-term care, but it’s potentially two years as a private pay patient. It can be longer if you recover and have needed care less than a year as the benefits can be restored up to 730 days for facility care and up to 730 days for home care. Manhattan Life’s policy allows you to buy an inflation benefit.

HYBRID, aka COMBO, aka LINKED BENEFITS (50% of the sales)

LTC insurance linked to either life insurance or an annuity make it possible to return a death benefit to your family if you never need care. Healthier people get better leverage from the life insurance version.

Premium is guaranteed so you never have to worry about a rate increase.

These policies require $100K or so to be meaningful. They cost more up front than traditional LTC policies, but most allow you to spread the premium over several years.

Many products just advance the death benefit but the best ones continue paying for several more years. OneAmerica has an unlimited benefit period and a shared product that makes it less expensive for couples. Nationwide also has a shared policy.

Three companies pay a monthly benefit in 100% cash so you can use the money however you want, including paying family members and other non-licensed caregivers.* [Brighthouse (spinoff from MetLife), Nationwide and Securian (Minnesota Life). The value is no one knows what care will look like in the future….robots, anyone? And you don’t have to submit bills/receipts, etc. to document all of your care. Lincoln Financial’s MoneyGuard Fixed Advantage lets you have half of the monthly benefit in cash.All of the hybrid policies offer an inflation benefit.

Like traditional policies, other hybrids pay when claims are filed up to a daily or monthly maximum.

Benefits from all of these combo policies are tax-free when funded with after-tax money.

OneAmerica allows you to use money from a retirement plan like a 401(k) or Traditional IRA and pay the income tax over 10 years , after which 100% of the benefits are tax-free.

People that have health issues can apply for LTC insurance linked to annuities. There are still some health questions but much easier to get. Three companies offer this (OneAmerica, EquiTrust Bridge and Global Atlantic’s ForeCare). You can roll the cash value over from an old annuity and the LTC benefits pay the gain out tax-free.

The new EquiTrust Bridge product is a fixed index annuity that grows the accumulation value based on the S&P 500 index. However, it has a separate LTC account that is guaranteed. The benefit triggers are the same as LTC insurance (expectation to need help with at least 2 Activities for at least 90 days or severe cognitive impairment) so the benefits are tax-free. The first year premium gets multiplied by a % anywhere from 25% to 325% based on health and age, but no one is turned down. Then that is guaranteed to grow at 2% compound for the earlier of 20 years or going on claim. Plus, a wellness plan is designed for each person and if the person follows it, another 15% will be added to the LTC benefit account. If care is never needed, the account value goes to a beneficiary.

Whichever kind of policy you buy, be sure to consider inflation. Phyllis Shelton, my go-to person for long-term care insurance expects the cost of care to almost triple in 20 years and quadruple in 30. Buy what you can afford, but whatever the insurance pays is that much that doesn’t come out of your retirement savings.

People who can’t get any kind of LTC insurance can get a fixed index annuity with only one health question which is are you able to do your daily living activities (dressing, bathing, transferring, toileting, continence, eating) today? There are two versions of this:

Most will pay double the lifetime income for up to five years (or to when the cash value runs out) when people need help with two daily living activities. After that, the payout goes back to the normal lifetime income for the rest of that person’s life. You have to be in a facility for most of these policies, but a few companies offer this for home care as well as for facility care: F&G, SILAC, North American, Investor’s Heritage, American Equity and Allianz. However, only Investor’s Heritage will guarantee the double income for five years whether or not there is cash value.

North American’s Secure Horizon Plus pays the LTC account over seven years. If you don’t live that long, your beneficiary gets the rest of the years.

These products are fixed index annuities which means your premium grows based on various stock indices like the S&P 500 but can’t decrease due to market risk because your money isn’t in the market. The fee for the LTC rider can decrease what you put in if the market is down every single year but so far that has never happened. However, the products make sure the LTC account is greater than the cash value. You will pay ordinary income tax on the gain.

State Activity

Phyllis also brought to my attention that some states are gearing up to require workers to have long-term care insurance. For example, beginning in July, 2023, Washington State required most workers who don’t have their own LTCi policy to contribute 0.58% of their salary into a state program that will provide eligible residents up to $100 a day in LTC benefits. Employees who wish to opt out had to purchase a private policy before November 1, 2021. Most companies stopped selling before that date as they got too many applications to handle before the deadline.

But the lifetime limit on benefits is just $36,500 in today’s dollars, with very small increases. Plus, the state reserves the right to increase the tax to keep the program financially stable. The program is clearly not designed to provide full protection. Keep in mind that right now, daily at-home LTC costs can run around $6,000 a month. That means the lifetime benefits from the Washington state program would cover just six months of care based on today’s costs.

Washington is the first state to enact such a program. But others are moving in the same direction. California has appointed a task force to put together a plan and figure out how much payroll tax it will take to fund it. New York, Pennsylvania, and Minnesota are working in the same direction. Other states that seem to be considering it are Alaska, Colorado, Hawaii, Illinois, Michigan, Missouri, North Carolina, Oregon and Utah.

If you live in a state that will be requiring participation in a public LTCi program, please don’t assume it will provide everything you need. As the Washington state program shows, the lifetime benefits can be a lot less than many families will need.

I encourage everyone to carefully consider the value of their own private LTC insurance policy. I think it can be a very smart addition to your retirement security strategy. Plus, many companies have care coordination services which means they will shepherd you and your family through the claims process and help you find good caregivers.

If you don’t have an LTC insurance specialist to consult with, check out Phyllis Shelton at www.GotLTCi.com, for I know she and her team will answer any questions you may have and guide you to the best choices for you. However, Phyllis tells me that many of you have gone to her and her team, then disregard their advice when your financial advisor tells you that you can self-insure. She has developed a list of questions to ask your financial advisor to be certain the advisor has a concrete plan for your long-term care.

Checklist: Financial Advisor Questions

How long have you estimated I might need care?

If the answer is a couple of years, that’s the average time people need nursing home care, but most care is not in a nursing home. The average for people who need care longer than a year is 4.5 years (4.7 for women & 3.8 for men) and that’s for home care as well as for care in an assisted living facility or nursing home.

What is the current cost of care you are using?

You can use the area in which you plan to live when you retire. You can look up the cost of care here. Add $1500 to the monthly cost of an assisted living facility to get the current cost of a nice facility or about eight hours a day of home care.

What inflation factor are you using to determine the future cost of care?

Given the shortage of quality caregivers, inflation on the cost of care has been greater than 5% in recent years. At 5%, the cost of care would double every 15 years. For example, if you are 50 years old, the cost of care will double twice by the time you are 80.

After putting this information together, what is the specific amount you are allocating for LTC?
If you are 50 years old and the current cost is $6,000 a month, the financial planner might project $24,000 a month by the time you are 80. If you don’t have Alzheimer’s in your immediate family, your financial planner could allocate four years at $25,000 a month to allow for inflation during the four years. $25,000/month x 48 months = $1,200,000. This amount could easily be double or more if you were to get Alzheimer’s. Round the clock home care? Make it $3M.

What will I do if I need care for more than four years?
Your financial planner should ask if Alzheimer’s runs in your family with your parents or siblings. That average is eight years but could be much longer. You don’t have to have a family history to get it though. You could just live a long life. The greatest predictor of dementia is age itself. A severe stroke with paralysis is another common reason for needing many years of long-term care.

Is there a chance that my self-funding account could lose money or not grow when I need care? 
Paying for LTC out of your savings at $15-$25,000 a month is like a bear market that won’t go away. Your account value may drop every month, and that money may not grow back.

Will I have to pay taxes on the money I use for care?
Paying out of your savings means paying after taxes and investment fees. LTC insurance may be more efficient when the LTC benefits are tax-free. There are certain tax deductions as well with some policies. Ask your agent to share those with you.

Anyone can have an accident or develop a disabling condition at any age. Long-term care insurance provides guaranteed benefits the day you get the policy. Self-insuring can mean you have to wait for your savings to grow. And if you pay with money that has never been taxed like from a 401(k), 403(b), 457 or IRA, you are overpaying for the cost of care as you have to allow for how much tax you have to pay. 

 Another advantage of having LTC insurance vs. self-insuring is that it gives your children a specific vehicle to fund your care instead of them having to figure out which asset to sell. Without that, many adult children take on the stressful role of caregiving because they are afraid to spend your money down.

Disclaimer: Suze Orman makes no referral fee or any compensation on any level for any personal recommendations she makes.