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New Hybrid Extended Care Plan


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Having a discussion about extended care or long-term care is not a favorite conversation of a lot of people.  It is a must-have conversation.  It would be very helpful to us when we are doing financial planning to have a real good crystal ball.

Most financial plans are built around the Primrose Plan; you live a long healthy life and then drop dead at 90.  A great plan but is it realistic?  You have to ask yourself, where would you like to receive any care should the need arise one day? Most will say in a home setting, preferably in their own home.  Great, so who is going to be there every day providing it? Bathing and feeding and moving someone can be hard work that can take all day.

If we knew for certain how long we were going to live and just what our future health was going to be, we would have no problem making decisions on such risk management ideas as insurance. It is impossible to tell what is going to happen in the future and we have to make those important decisions based on rather uncertain factors.

Extended care is what you get when you need help with daily life, such as eating, dressing and getting around.  How do you manage this specific risk?  It is better to get a handle on the real unfunded risk.  Shouldn’t you talk through who you would like to take care of you, when you can no longer manage on your own?

Long-Term Care is expensive.  In a Genworth 2012 Cost of Care survey the median annual cost for a semi-private room in a nursing home was found to be just over $81,000 per year.

Who needs Long Term Care Insurance? The answer to that question is quite simple. It is really the people who have a lot to lose who need it the most.

What’s the risk?  With medical advances in healthcare, increasing longevity, and a growing senior population, the need for long term care is greater today than ever before. The need is even greater for women since their risk is twice that of their male counterparts.

With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, resources or ability to provide around the clock care to a loved one.

Between 35 percent and half of today’s 65 year-olds will someday use a nursing home.  Of those, 10 percent to 20 percent will stay for more than five years.

Five years at $80,000 a year is exactly the sort of large, uncertain expenditure risk for which insurance would seem to be most valuable.  Whether having insurance is solution is beside the point.  It’s having a plan in place.

Most folks think that government programs such as Medicare or Medicaid will take care of long-term care needs but unfortunately, that is usually not the case. Medicare will only pay for long-term care if you are getting better and it covers only 60 days. Medicaid has very stringent stipulations around the support that they will provide in a long-term care setting (that varies by State but budget cuts have negatively impacted most programs).

There are really just two alternatives to buying long term care insurance.  One is to have enough money saved to feel secure should a nursing home or other care services be needed, and the other is to spend down all of the savings and qualify for a government program.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm. Policies could be designed to cover care expenses for a few months, or much longer, even providing benefits for the insured’s lifetime.

When the pool of money was depleted, the traditional policy would provide no more benefits. However, if the policy was never used, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.

There are different funding sources available for long-term care. The funding sources range from family to personal assets, federal government and long-term care insurance.

The first funding source for long-term care is your family. Your family is affected the most because of the emotional decisions that must be made for the person needing care. Your family must decide where that person will receive the care needed. The different places can be home, assisted living, adult day care and a nursing home. The cost of each place can be very different based on the level of care needed for the person. The money for these different places will be paid by the family. This can cause a financial hardship for all the family members.

The second funding source is someone’s assets, like cash, retirement money, and property. With the cost of care at $40,000 to $100,000 a year, the question is how long will someone be able to pay for this cost?

The third source is two programs of the federal government called Medicare and Medicaid. Medicare is based on your health and will pay for home health care for a limited time. Medicaid is based on your wealth and will pay only for nursing home care. Most people will qualify for Medicaid after they have spent down their assets and income. If you are married, the spouse at home can keep $2000 of income to live on and little more than $100,000 of assets. If you are single all your assets are to be spent down to qualified. These rules for Medicaid are different for each state and I would call your local social security office to know your state rules.

The fourth source is long-term care insurance and has been around since the eighties. This policy is designed to give people options on the amount of money to available for long-term care and the different places where the money can be used. The money can be used for home health care, adult day care, assisted living and a nursing home. The amount of money set aside for care will be decision by the amount of premium paid by the individual.

The fifth and newest source is The Long Term Care Annuity. The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed. The part seniors like  best is if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.  This feature addresses the concern that if  the policy was never used, the owner would lose the investment of his or her premium payments.

These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Friday, April 5th, 2013 Wealth Management, Wealth Preservation

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