How To Pay For Long-Term Care

We know that providing for long-term-care (LTC) expenses is an important part of retirement planning. As people live longer and face possible physical or cognitive impairment, most will require some degree of help at a certain age with at least two “activities of daily living”—eating, bathing, dressing, toileting, transferring to or from a bed or chair, and controlling bathroom functions.

What’s less clear is how to pay for it.

“There are three basic ways to pay for long-term care,” observes F. Michael Zovistoski, a CPA, certified financial planner and managing director at UHY Advisors NY, based in Albany and New York City. “Be rich … and pay out of pocket. Be poor, and apply to Medicaid for coverage. Or be insured.”

Linked Benefits

Private health insurance and Medicare won’t fully cover LTC expenses, which can be so enormous they completely upend a client’s retirement. So what should advisors recommend to mitigate this potential liability?

One choice is traditional, stand-alone LTC insurance. Premiums have been on the rise, however, and this coverage typically comes with strict underwriting standards. You have to be young enough and healthy enough to qualify.

In recent years, the fastest-growing areas of the LTC market have been asset-based or hybrid products. These are life insurance policies and annuities with linked LTC benefits.

“More people are looking into the hybrid plans than ever before,” says Brian Gordon, president of MAGA, an LTC planner and insurance provider in Riverwoods, Ill. “One of the big reasons is so they can have a guaranteed premium and a guaranteed benefit.”

Many clients, says Gordon, don’t want to pay for LTC insurance they may never need. With LTC benefits linked to a life insurance policy, on the other hand, clients are ensured a payout one way or the other. Whatever benefits they don’t spend for LTC costs remain in the death benefit.

What’s more, it’s easier to qualify for this type of LTC coverage. “Hybrid policies have become very valuable as a means to pay for LTC,” concurs Edward Kohlhepp Sr., a certified financial planner in Doylestown, Pa. “With a life policy, this [LTC add-on] will add a cost to the policy, but then the death benefits—the face value of the policy—can be accelerated to the policy holder if needed for LTC issues. Even though underwriting will be needed for the life policy, it might permit the applicant to get LTC insurance when he might be [otherwise] turned down for the LTC.”