Long Term Care Planning Process

As a follow up to last month’s wealth tip wherein we discussed the risks associated with needing long term care, we are now going to discuss the planning process.  As one begins to weigh the options of purchasing long term care insurance or self insuring, there are a variety of factors one must consider:

  • How much of your long term care expenses are you willing or able to pay out of your own resources?
  • Where do you want to receive your care, i.e. your home, a facility, etc?
  • Where do you plan to live when you retire?

Many people have asked themselves, “should I wait to consider my long term care needs until I reach my seventies or later?”  There are important reasons to address long term care needs earlier than later, health being the number one factor as to whether or not you will be able to qualify for long term care insurance.  According to the American Association for Long Term Care, the following percentages of applications were declined coverage due to poor health:

  • Under Age 50              9.5% applications declined
  • Ages 50-59                  14% applications declined
  • Ages 60-69                  23% applications declined
  • Ages 70-79                  45% applications declined
  • Age 80+                      66% applications declined

It is obvious the older you are when applying for long term care insurance, the higher the costs.  The not so obvious fact, though, is the longer you wait the more risk you run of being uninsurable.

Additionally, the annual premium for someone purchasing a policy at age 50 can be significantly less costly than that exact same policy purchased at age 60 or older.

Since you will inevitably go through an underwriting process in order to qualify, the company will have the opportunity to review not only your medical history but also your morals, driving record, etc.  The insurance company may classify you in one of up to eight risk categories.  Naturally, the longer you wait to apply for coverage, the greater the likelihood that health issues may arise, causing increased costs or possibly even disqualification from being able to obtain coverage.

Interestingly enough, little more than half of all long term care insurance buyers today are couples.  Couples represent 54% of all new policies sold.  Since women are statistically more likely to need long term care, some couples choose to only insure the greater risk between them.  The problem with this approach is it creates a far greater financial problem and potential emotional toll should the other spouse need care prior to his insured partner.  Regardless of who is covered, the risk of needing care, and the subsequent care giving and financial responsibilities that follow, will impact both people’s quality of life and financial situation.

93% of the long term care buying population currently self insures, taking on the entire risk of paying for long term care themselves.  This could be due to the fact that people may overestimate their ability to pay for care over an extended period, or they convince themselves they’ll never need care.  Whichever reason it is, the risk of needing and paying for care remains, but in many cases it is far less costly to use someone else’s money – in the form of an insurance policy – than using one’s own money.

However, having said that, it is possible to continue to self insure and use an insurance company at the same time to provide the leverage of additional benefits.  This approach allows one to continue to earn interest on their self-insuring dollars, but at the same time increase the total coverage available to them if the need for long term care should arise.

There are actually three approaches to covering long term care costs.  They are:

1)  Self insuring 100% of all costs relating to long term care

2)  Purchasing a traditional long term care policy with a non-guaranteed annual premium

3)  Repositioning some of your assets in an asset based insurance approach, whereby you continue to self insure a portion (the repositioned assets) and co-insure the remaining balance (the purchased coverage).

Depending on one’s assets, where they live, their needs and health, it is critical to explore the needs for long term care protection.

Part 3, Variables Impacting Premium on Long Term Care Policies – will follow in upcoming article.