I’ve found that long-term care is, without question, one of the most difficult aspects to handle in retirement planning.
In Part 1 of our LTC piece last week, we covered some of the basics of long-term care, such as costs, elimination periods, and types of payouts.
In today’s piece, we’ll “cut through the sales talk” and compare the real benefits of different products.
You want to know the benefits the policy will pay in the future when you’re likely to need care, especially since the cost of long-term care increases faster than general consumer inflation.
With traditional long-term care insurance, the daily benefit can be indexed for inflation.
With most of the long-term care annuities and Life/long-term care combo options, the future benefit usually is based on a combination of your initial deposit and the compounded earnings of the account.
Insurers have different formulas for turning your cash value into long-term care benefits. That’s why the best way to compare policies is to estimate the monthly benefit at different points in the future using the same investment and economic assumptions.
Some of the newer Life/Combo plans have a true inflation provision.
Unlimited lifetime long-term care coverage is rarely available now. While you can often select the coverage period, today’s choices usually cover six or fewer years of care.
Of course, the longer the coverage period, the more expensive the policy’s cost, or the lower the monthly benefit.
Maximum Potential Benefit
This is another way of looking at the future monthly benefit and the coverage duration. Multiplying the two gives you the maximum lifetime benefit payout. It’s a good apples-to-apples comparison.
No Long-Term Care Values
Traditional long-term care insurance is a use-it-or-lose-it product. If you never need long-term care or need only a small amount, you receive no financial benefit from all the premiums you paid. You’ll have some peace of mind from knowing the coverage is there if you need it, but you won’t receive a financial benefit.
A selling point for the Combo plans is that there’s still a benefit for your heirs if you don’t need a lot of long-term care. The beneficiaries could receive the life insurance benefit or the value of the annuity contract.
Also, if you decide you need some cash even when you don’t need long-term care, you will be able to tap an annuity or the cash value of life insurance.
For those reasons, your analysis should include the cash value of the policy for you at different time intervals, as well as the benefit to your beneficiaries.
Reduction in Beneficiary Values
You might need some long-term care, but not enough to exhaust the policy benefits. In that case, there still might be a benefit for your beneficiaries.
In most of the annuities and life insurance, if you draw long-term care benefits, the amount available to beneficiaries is reduced or discounted, though there are a few exceptions.
The insurers have different formulas for reducing what a beneficiary will receive. What’s important to understand is the amount that will be available to beneficiaries under different scenarios.
Long-term Care Benefits vs. Growth
Some of the Combo annuity and life insurance products emphasize the growth potential of the cash value. In those cases, the amount of long-term care benefits is secondary.
Other plans try to maximize the long-term care benefits at the point when you’re likely to need them, and this causes cash value and death benefits to be lower.
You’ll want to determine the primary purpose for the product. For example, do you want to maximize potential long-term care benefits, or is the growth of your cash value more important?
I can’t stress enough the importance of shopping around and considering all your options. The cost of very similar options can vary by as much as 100%, and alternatives that seem similar on the surface can provide very different benefits once the details are clear.
With most products, any long-term care benefits will be free of federal income taxes, but do verify that with the insurance representative before choosing.