‘Pre-Qualifying’ Yourself for Long Term Care Insurance
Updated: Sep 23, 2020
Note: I have no insurance licenses, receive no compensation of any form in writing this article. I write this article to simply offer my personal extensive experience and to serve as a guide to help our clients decide if Long Term Care Insurance or No Insurance based on their personal set of circumstances. The ‘Prequalification’ Process we offer is a flat cost service designed to help clients make an objective decision on Long Term Care planning, with or without purchasing insurance.
By reading the entirety of this article, you are saying to yourself you are open to the concept of Long-Term Care Insurance for your later years in retirement. If you don’t believe in the concept, have made your decision, or the decision has already been made for you, then you can save yourself a lot of trouble. You’re largely off the hook and have successfully saved yourself the time and energy. If that's not you, then prepare yourself some unfun decisions. Insurance is creepy, but the decision to have it (or not have it) should always be a non-emotional and methodically driven personal decision.
The 1% Rule for the Sustainability of Premiums
As a general rule, we do not recommend that someone consider a standalone long term care policy if policy premiums are starting to exceed 1% of investable assets. The reason for this is that your retirement assets already have a lot of heavy lifting to do. You have inflation to consider, growth to keep up with. This is all in addition to generating the income needed to cover basic and discretionary expenses. So adding another 1%+ in premiums on top starts to get expensive. However, I'm only suggesting isolating that specific cost variable in the overall mosaic of a final decision. The clarification I would offer a client would revolve around the analysis of the sustainability of premium payments over the long haul.
Let's just say you went to a bank, and they happened to be having a “sale.” For having your money managed by the bank, they’ll cover your Long Term Care needs. And the cost for this service is a quarter of a percent a year on the money managed. That might not be a horrible deal. You got to use the money, probably got substantial capital appreciation, and if a Long Term Care need arose - you were covered. You don’t need to worry about keeping all that money earmarked for Long Term Care and sitting on the sidelines for your later years and can spend it in the early years.
However, if the cost to have the coverage had cost your more like 2 or 3 percent - then there exist substantial sustainability concerns. This is not an easy decision. Many people want and deserve the peace of mind that they’ll be cared for, but if purchasing a policy is just not sustainable, and takes too much from retirement assets, then that has the potential to be a problem down the road. There just may need to be another solution considered.
Look For Strength, Not Price
With some rare exceptions, Long Term Care insurance companies cannot guarantee they will not raise your policy premium rates at a later date. That’s because no one really knows how the cost of care will change over time, and of course, the states don’t want carriers going out of business, not fulfilling their policy obligations to our seniors. The cost of care is likely to increase, and there is a pretty good chance that any policy you buy will eventually go up in cost. Of course, if you self-insured you’d be covering the same cost increases out of pocket, so it is a relative decision. When a Long Term Care insurance company is not profitable and is subsequently required to raise rates it's done through an appeal to the state. The state then approves or doesn't approve the rate increase. Information on California’s carrier rate increase histories can be found here.
If the appeal is approved, then the company will send a letter announcing the rate increase for that particular block of business. Carrier strength matters because when underwriting, the better companies can be more selective with individuals they permit into their risk pool. Competitively speaking, a weaker company may have a risk pool that ultimately results in higher claim rates. This, in turn, affects the stability of the insurance carrier. So the strength of the carrier (and the competitiveness of their underwriting guidelines) greatly determines the likelihood of a rate increase in the future. It is ideal that individuals who qualify from a health standpoint, make every attempt try to underwrite with a company that is as strong as possible and has a minimal rate increase history.
It’s Not a Scam. It's Not for Everyone.
One of the key benefits that many insurances can offer is the ability to spend your money freely. It just so happens that there is a high likelihood of a long term care event happening, so it costs more than other forms of insurance due to the risk being higher. In a way, the insurance can offer permission to spend more money in those early retirement years. If the plan is to simply ‘self-insure’ with assets, then we do find many are not as comfortable with aggressive spending in early retirement years, due to a concern for a long term care need later. Of course, if the money will be there no matter what, then that can change the dynamic. I recommend that if you plan to pay for the care yourself, expect to be able to create a large portion of money for later years that is liquid and available. This probably shouldn't be money that is in, for example, rental property because the income won’t be there for any survivors. Just be realistic about what will be needed and what indeed is extra money available to pay for care as it's needed.
The Hybrid Policy Design
I’m not referring to the Life Insurance Hybrid policies. You can ask my opinion, but in general, those kinds of policies do not make sense for the vast majority of people. Life insurance with Long Term Care policy typically has a specific client profile where it could make sense. In fact, it could act as a lifeboat.
What I’m referring to is a Long Term Care standalone 'use it or lose it' plan design that has specified benefits to ‘buy time’ should the need arise. Some designs may only have insurance on one partner. This may because clients may want to “play the odds” knowing, at least based on today's statistics, that women tend to live longer. Word is women use the policies more than men, but interestingly not by that much nowadays. In our traditional couple example, the policy may be a way to obtain benefits on what could be perceived as a higher risk while also reducing the premium overall by having one spouse possibly take care of the other. And then, the survivor has benefits as the partner is likely not around when the survivor needs care. It's not an ‘all-inclusive’ solution, but in some cases, it fits just right given the circumstances. The point I’m trying to make is that it does not need to be 'all or nothing.' Finally, designs should always consider the unexpected outcomes of both the risks in a relationship.
I describe the benefits as a runway. Even if self-insuring a substantial amount of the risk, sometimes it's nice just to have the time to figure out what the heck to do. This need often comes up suddenly, hits people in their late 80s and 90s typically when living on a form of fixed income. It’s essential to have the money available and not have to worry about selling properties and disrupting income for the survivor. Having 1 to 2 years of benefits seems to be a valuable benefit. Then once a plan of care can be determined, and it reality sets in, I find that a ‘self insure’ strategy, such as a reverse mortgage, can help round out the tail end of the expense. Were talking about trying to be efficient from the client's educated opinion.
Can't We Just Invest the Money
I love this one. Yes, you can. But be aware that you will need to be realistic in your calculations. If you assume a premium amount for a couple and compound that out over a number of years (say age 84) with a specific rate of return, you then need to back out the taxes and fees. Yes, you will owe tax on any gains.
Furthermore, possibly in the early years, you can attain a higher rate of return, but I’m not so sure you should assume that same number in those later years. I use a 3 or 4% net pre-tax rate of return for this calculation. What you will find is the investment will approximately end up buying 1 year for 1 person versus 3 or more years for 2 people. It’s insurance, so it will hypothetically either be the best investment you ever made - or the absolute worst. As such, I have labeled standalone long term care policies as 'use it, or lose it.'
As hard as you try, unfortunately, you will never be your own insurance company. Like it or not, Insurance companies get to enjoy the world of large numbers. That means they can offset their risks by making another bet on another person, or simply offsetting with a different product offering. Often times the bean counters in the basement of the insurance company can calculate it, so the net risk to the insurance company is zero. It is arguably one of the most stable business models that exist. Yes, I know you hate me now, but it’s my job to be the voice of reason and explain it objectively. There is nothing with well-intentioned insurance.
The “Creative” Solution for Long Term Care
I’ve heard em’ all when it comes to the long term care plan that is no-cost or low-cost. Some being quite practical and perfectly suit a client's lifestyle. Others I have purposefully forgotten. The point being, there MUST be a plan. If you have no plan, you are effectively putting your head in the sand and ignoring the realities of this very highly likely to happen risk. Planning where several things can quickly and likely go haywire, is not a plan - its just avoidance. Plenty of people have had retirement success and not had Long Term Care Insurance. Whether you have money or not, the point is you will want a plan to which you are 100% committed. The fact is, many who arbitrarily opt-out and choose to self insure 100% and come up with something later, do often change their mind or are not in a mental capacity to follow through with the original plan. A no-insurance solution must be well thought through, revisited, and an individual must be unequivocally committed to that plan.
About Our ‘Pre-Qualification’ Service
We describe our service as a box that we may or may not open up. You decide to open the box, not us. In a pleasant way, we will take a look inside the box and have a conversation about the good, the not so good, and help you develop an objective Long Term Care game plan. Your plan may or may not involve insurance of any kind. In fact, we find that our plans will 50% involve applying for insurance (in no way associated with our services) and 50% of the time completely 'self-insure' the need either by choice or necessity. As stated above, it is a personal choice, and every case is different- and not always is it simply a money decision.
We believe all plans should include some form of self-insuring the risk. At the end of the process, the client will then close up the box and set it aside. The Long Term Care box is not to opened again or discussed unless the client chooses to do so.
Our firm goes great lengths to protect privacy, especially when it comes to long term care planning. We do not store or write down any personal information during the ‘pre-qualification’ process. We go great lengths to ‘forget’ any personal health-related information as we find this information can disrupt the remainder of the financial planning relationship. At a certain point, you may prefer that certain specific health-related information be disclosed to the properly licensed insurance agent, and not us. The goal is for any ‘pre-qualification’ client, and only the client, is to get the answers they need to make an informed decision to develop their unique Long Term Care plan. We generally have a company policy of conveying no judgment and understand that the right choice is your decision - and only your decision.
This service is available to California residents, and in general, only in states, we are registered to do business. No compensation, referral fees, or revenue share agreements are in place for our firm. We are paid solely by invoice always after services rendered. In rare cases, at your expressed un-solicited request, we will anonymously ask our resources for guidance. This aspect of our service is to help answer for a client a potential health-related question that may pre-determine a likely outcome when applying and avoid a decline or rating by the insurance company. The purpose of our service is to help you determine if obtaining long term care insurance is likely and worth the pursuit.