Dorion-Gray: Hybrid option for long-term care policy
It has been a reality for several years now that the premiums for traditional long-term care insurance coverage have been escalating to help keep pace with the cost of care.
Consumers have seen increases of as much as 23 percent in a year for coverage that they may or may not benefit from. This is not an annual increase but we never know when the increase will come or how often. Subsequently we begin to question whether or not we can afford the premiums, many times as we near the age when we may most need it.
The latest MetLife Mature Market Institute Survey of Nursing Home, Assisted Living, Adult Day Care Services and Home Care Costs shows that the cost of care continues to rise. Depending on where you live in the country will dictate the cost of care – the closer to a large metropolitan area generally the higher the cost.
Clearly there is the risk that we may need long-term care at some point in our lives. But the premium hikes raise the question: Is this a losing proposition? Should we just take the risk that we will not need care or ultimately depend on our portfolio, children or the government to take care of us at a time when we can’t take care of ourselves?
If you have already bought a policy which you have had for several years, you should pay the additional premium and come to the realization that this will likely not be the last increase you will experience. Healthy individuals, particularly women who have a long life expectancy, may determine that long-term care policies are not a great deal in terms of value for the money.
One alternative to reducing the cost of care is to decline or scale back on the inflation rider. Although this will keep the cost down it will not eliminate the increases. Comparing your coverage to another traditional policy currently available will assure you that you most likely will not be able to replace your policy for a better price.
If you have not purchased a long-term care policy you may want to consider an alternative to the traditional pay-as-you go coverage. In my experience the best LTC solution for those entering retirement in good health is to combine a hybrid life policy, which includes LTC coverage, with longevity insurance that pays guaranteed income for life with a premium that is guaranteed not to increase.
Unlike the use-it or lose-it coverage of the traditional long-term care policies, the hybrid policy lets beneficiaries inherit the death benefit if the care is not needed. Most standard policies have a five- to six-year cap on their benefits so that if you have an extended illness such as Alzheimer’s or Parkinson’s disease you could easily wipe out your savings, leaving your surviving spouse with the fear of living the remainder of his/her life in poverty or without viable options.
Longevity insurance provides highly leveraged monthly payments for the rest of the person’s life assuming you trigger the benefits.
Most hybrid policies, which include life insurance and fixed annuity contracts, are paid with a single premium which can be funded with IRAs or CDs. When a claim is filed, the single-premium provides the coverage for the first three to four years of benefits depending on the policy design. A lifetime rider, which would be utilized when the single-premium portion has been depleted, has a fixed cost – guaranteed not to increase. This feature by itself is extremely attractive for those attempting to calculate the expenses during retirement.
The single-pay premiums may not be feasible for younger clients still dealing with costs of raising a family and saving for retirement. But someone approaching or in retirement or finding herself with a lump sum not needed for current income should take a moment to review this hybrid option for long-term care.
• Please send any financial questions you wish to have answered in this column to Dorion-Gray Retirement Planning Inc., 2602 Route 176, Crystal Lake, IL 60014. You may also fax them to 815-455-4989 or email firstname.lastname@example.org. Paula Dorion-Gray, CFP, is a registered representative of Securities America Inc. member FINRA/SIPC.