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Is Self-Insuring Long-Term Care a Good Option?

It’s safe to say the long-term care (LTC) landscape has changed quite drastically over the last 30 years.


During the LTC insurance “boom” of the 1990s, most of these providers were targeting the middle class for coverage. A variety of factors influenced this.


First, affluent clients assumed they could self-insure all ranges of claims. After all, the potential costs and impending effects of undertaking such feats were still unknown variables. On top of that, many of the lower income families either couldn’t afford the coverage or planned to rely on government programs for support.


Major Process Flaws


But, once claims began to occur, the carriers realized two major flaws in their process:

  1. They insured virtually everyone, meaning adverse selection was working to their detriment

  2. The money being paid out for claims far exceeded premiums received


Many of these early carriers exited the LTC market altogether while others decided to tighten up their underwriting protocols and increase premiums for existing policies to make up for their previous shortfalls.


Furthermore, the clients who experienced these rate increases were faced with a tough decision: surrender these policies and forfeit all premiums paid, or find additional revenue sources to keep these policies intact.


Hybrid LTC Policies in Play


These shortcomings certainly narrowed the pool of potential insureds and dissuaded many future clients who otherwise would have been eligible. Enter hybrid LTC policies. Here, the client has a deductible of either a death benefit or annuity that pays out in the form of LTC claims.


Once this total has been exhausted, the carrier then provides additional payouts to the extent of the product features. This model now allows for a more liberal underwriting process and flexible premium options.


You can now choose limited payment options and the premium(s) are guaranteed to never increase. If you choose to opt out, there’s a cash value or return of premium assigned to each plan depending on the product or carrier.


Many of these newer hybrid designs are still unknown to advisors and clients alike. The LTC insurance of old has left a lasting impression on many who aren’t willing to give it a second chance.


For this reason, many middle-aged individuals assume self-insuring is the most efficient method. Imagine a couple has saved $1 million in assets and retired at age 65. If they lived to age 85, this would equate to about $50,000 per year for expenditures.


Now, imagine one or both spouses become impaired. Taxes are still owed, market timing is unpredictable, and Christmas and birthday gifts are still necessary.


How would this “upper class” couple afford to pay an additional $45,000 a year (per insured) for home health care or assisted living? How much of their $1 million net worth is capital in nature?


The implication here is a dollar spent is no longer earning elsewhere. Without a plan to cover these unforeseen health issues, what effects could this have on the rest of the family?


If a loved one becomes a full-time caregiver, what does this do to their well-being? Or their financial situation and family dynamics?


A Changing Landscape


With a massive deficit is the cost of living more likely to go up or down?

The previous $45,000 per year is expected to be over $80,000 by 2038. Many folks only plan for the average duration of claims occurring. This equates to drawing a line down the middle of the data. It also assumes your claim falls at or below this duration.


It’s no secret life expectancy is increasing as medical technology is enhanced. The brain is struggling to keep up to this pace. This leads to more cognitive impairments and less of the short-term claims.


Imagine you have a three-year LTC insurance policy and are suddenly diagnosed with Alzheimer’s; with the average claim being more than eight years.


The Silver Tsunami is imminent and the Baby Boomer population is expected to make up almost a quarter of the US population by the year 2030.


Going Forward


What does this suggest regarding the cost and availability of assisted living facilities and nursing homes moving forward?


These hybrid solutions allow you to avoid most, if not all, of these consequences. You now have the ability to transfer the catastrophic risk to the insurance company. With flexible funding options, all are guaranteed never to increase. That makes it possible to structure a case design that fits most family budgets.


It’s even possible to show a lifetime or unlimited benefit so you can never outlive your claim. Advisors of the future are proactively having these conversations with clients. And the popularity of these hybrid designs is exponential in growth.


These models minimize both the financial risk and familial consequences associated with self-insuring. They allow you to earmark off a portion of your portfolio to protect the rest of it.


The paradigm has shifted. Middle- to upper-class retirees used to assume these risks themselves. Now, they’re searching to mitigate this risk since the catastrophic loss is much greater for them.


Moreover, imagine the alleviated sacrifices and hardships LTC provides to those close to the insureds in their time of need. Instead of a loved one being the caregiver, they can now serve as a care supervisor. Here, both the portfolio and dignity are kept intact.

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