Q&A: LTC Substitute
Q:
For those who can't qualify for traditional Long Term Care (LTC) Insurance due to pre-existing health condition, what strategy would you recommend to fund LTC, assuming that self-insurance is not realistic? The options that I am aware of are some type of Life Insurance with LTC rider, self-insured, or some type of annuity. We can comfortably budget 5-6k per year while still putting 20% toward our retirement plans/IRAs. Our average age is 53. Thanks in advance for your insight!
A:
Tough question with no good answer. Most of us tend to forget that the main point of insurance is to make money for the insurance company or, at least, avoid paying out more than premiums bring in. That’s why most insurers won’t cover high-risk customers, as you have discovered.
Long-term care insurance (LTC) has grown increasingly difficult to obtain and more costly because the insurers miscalculated the need for and growing cost of care. Because of that profit motive (which makes perfect sense), there is no magic means for those at higher risk of needing long-term care to get a policy of much value.
Your typical cash-value life insurance policy, with a long-term care rider, allows the policyholder to draw down some of the death benefit to pay for care. However, even the best of these policies are structured to avoid paying out much more than the amount of premiums paid plus a small interest rate. In other words, if you put $5,000 a year into life insurance with an LTC rider and need care in 20 years, your total lifetime LTC benefits will probably be less than $125,000.
If you invested this same amount each year into a balanced portfolio of stocks and bonds, you could have more than $200,000 (based on performance over the past 20 years). That, when combined with the large sum accumulated in your retirement plan should last through many years of long-term care. After you deplete those dollars Medicaid will kick in.
I would suggest that, should you wish to protect some money for other members of your family, you consult with a good elder law attorney to eventually move some of those assets into protective trusts.