Non-Investment Risk Management: Weighing the Costs Versus Benefits
We have focused quite a bit on the market as of late so let’s move on the something a bit different; non-investment risk management.
Frankly, needs of long-term care can fall upon anyone, not just those nearing or transitioning into retirement. Some of these statistics may be surprising. In the State of Alabama, the average cost of a nursing home private room was $74,825 per year. The median yearly cost for all nursing homes in the United States was just over $100,000 per year in 2018. According to the 2019 U.S. Department of Health and Human Services, every day until 2030, 10,000 Baby Boomers a day will turn 651 and 7 out of 10 people will require long term care in their lifetime. Medicare does not pay for long term care. According to the National Nursing Home Survey the average length of a nursing home stay was 892 days or just under 2 and a half years. It’s easy to see that hundreds of thousands of dollars worth of expense could easily be incurred in just a few years.
You may find those figures surprising and wonder how to utilize assistance programs such as Medicaid to offset these costs. Alabama is an income cap state, meaning in order to be eligible for long term care benefits, there is a hard income limit at the time of application. Generally, that limit is $2,250 of monthly income. There is also a resources test, which is limited to $2,000 at the beginning of any given month. I strongly advise clients to consult with elder care attorneys for advice when it comes to the disposition of estate, and the creation of qualified income trusts and other tools that may be of benefit when it comes to planning for needs of long-term care.
Obviously having a long-term care insurance policy can be of tremendous benefit when it comes to paying for these expenses. So how does one obtain such coverage? For most, the traditional long-term care policy comes to mind, but there is another way to seek coverage for these expenses. Many companies offer hybrid life insurance policies that come with chronic illness riders. If the insured is unable to perform two of six activities of daily living, most of these riders will provide for the payment of half the death benefit of the policy, to the insured, over a 60-month period of time. These policies build cash value and can serve multiple purposes. In addition to being life insurance and providing a death benefit, they’re also a tax-sheltered source of savings, and a source of indemnity against costs of long-term care. Generally, these hybrid policies are easier to underwrite because they’re based on mortality assumptions. The underwriting of traditional long-term care polices is based on assumptions of morbidity.
Lastly, the benefit under such hybrid life insurance policies is paid directly to the insured, regardless of the source of care. It could be a non-medically qualified spouse or child that is actually providing the care at home, but the benefit is payable so long as the insured cannot perform two of six activities of daily living. For most traditional long-term care policies, before benefits are payable, care must be received from a qualified medical source, which for many, means through an institution or at home through private duty nursing.
Is one option significantly better than the other? It depends. The traditional policies can be jointly underwritten, and to some extent, a portion of the premium may be deductible. The hybrid life policies may be easier to underwrite however, and benefits paid more easily. It all depends on the unique needs and circumstances of the family. To make this decision, it is important to meet with a trusted financial advisor to explore the option that would make the most sense for them.