Do We Need Life Insurance?

     Last week I went to the dentist, which in a perverse sort of way got me thinking about insurance -- maybe because getting insurance is about as much fun as going to the dentist. But like going to the dentist, it’s something we need to do.

     So of course we all have health insurance (or we'd better!). If we own a car we have car insurance. If we own a home we have home insurance, and if we rent we might have renter's insurance, at least if we own clothing, jewelry or electronics that are worth anything.

     What about long-term care insurance, or life insurance? Personally, I have long-term care insurance; I do not have life insurance. I gave up life insurance when I retired, about the same time my dependents went off to college and started work.

     But there are other reasons to have life insurance, so I arranged to consult with Brett Wilson, vice president of Ethos, a new company that avoids traditional insurance agents to provide "easy access to modern, simple and ethical life insurance." Wilson himself, with an MS in management from Stanford University, has a decade-plus experience in the insurance industry.

     I started off by admitting that I have no life insurance and asking why I would need it.

     If you don’t have any financial dependents, and don’t have any debts that loved ones would have to assume -- and you also have funds set aside for funeral expenses -- then it isn’t necessary to purchase a life insurance policy. But if you do have dependents – for example, a spouse who is not eligible to continue receiving your pension, or a child who depends on you for college tuition – then you should strongly consider life insurance.

     Okay, so what kinds of life insurance are there? I’ve heard of term insurance, but I know there are others.

     There are two broad categories of life insurance: term life insurance and permanent life insurance. The main objective of term insurance is to provide protection for a specific period of time – presumably the time when you are financially responsible for anyone else such as a spouse or children. The main objective of permanent life insurance is the accumulation of capital, and it generally requires higher premiums than term life insurance. Examples of permanent insurance are whole life and universal life insurance.

      Most of us who are retired no longer have dependents. But I’ve heard that some life insurance can provide long-term care payments. Is that true?

     First of all, to explain, typical stand-alone long-term care insurance policies provide benefits only when the insured needs long-term care. Benefits are provided for services assisting them with activities of daily living like bathing, dressing and eating. To qualify, policyholders have to meet certain criteria such as the inability to perform two or more daily activities, or be diagnosed with cognitive impairment. These services can generally be used at home or in an assisted living environment. The downside to long-term care policies is that they are only accessible when the insured suffers from a qualifying condition. If long-term care services are not needed, benefits are not payable.

     Some life insurance policies combine the death benefit of a life insurance policy with “living benefits” to provide the insured with care while still living. They are sometimes referred to as “combo policies.” These policies (or attached riders) allow for the acceleration of the death benefit related to specific qualifying conditions such as long-term care or terminal illness. The insured can request that a portion of the death benefit be made available for medical bills or long-term care. Accelerating the death benefit will of course reduce the amount payable at the time of death.

      Is there any role for life insurance in estate planning?

     Yes, there can be. Death benefits paid from life insurance policies are generally not subject to federal income tax and, in many cases, state inheritance taxes. There may also be tax benefits associated with the investment component of permanent life insurance policies, although they can be complex. It's a good idea to seek the advice of a tax expert when thinking about this.

     So if I need, or want, life insurance, how much should I get?

     It depends on your financial circumstances. You can compare your current debts and financial obligations against your assets and aim for life insurance to cover the difference. So ask yourself if your spouse or partner could assume any debt payments (like a mortgage) and living expenses in your absence. If they have their own income, how long would that sustain them in the event of your death? Have you already put away money for your own funeral costs? Again, you want to cover with life insurance what you can’t cover with the assets you leave behind.

     One last question. If we buy life insurance now, how can we be assured that 10 or 20 years from now, when we die, that the company will still be around and able and willing to pay benefits?

     Ethos partners with industry giants including Legal & General America as carriers, as well as reinsurance companies like RGA, to make sure the financial assets are sufficient to pay benefits for many years into the future.

     So, I'm convinced that life insurance can be complicated, but it can also be important. Right now, Wilson told me, some 70% of families in the U. S. would go bankrupt within three months if their primary breadwinner died. As a result, more and more people end up relying on crowdsourcing tools like GoFundMe, just to raise money for funeral costs. I, for one, would not want to leave my partner or loved ones with that burden.

     I'm not promoting Ethos. I have not dealt with them. And I probably will not get life insurance, mostly because I already have long-term-care insurance. But this is all something to think about, to discuss with your loved ones and perhaps your financial adviser. And I have to say, if I had it to do over, I might just go another way.

FAQs on Long-Term Care

     Realistically speaking, most of us will need some kind of personal care at one time or another. I posted an article on the subject, Is Long-Term Care Insurance for You? that covered many of the basics, brought to us by Jeremy A. Kisner, a financial expert at Surevest Wealth Management in Phoenix, Ariz.

     Kisner is a Certified Financial Planner and Chartered Life Underwriter, with a degree in economics from UC Santa Barbara. He also writes an informative Retirement Blog that covers various aspects of personal finance and retirement issues.

     As Kisner reports, not much has changed on the issue of long-term care. But there are always more details, more questions. So here are the Frequently Asked Questions he sees regarding long-term care:

Q: What is long-term care?

A: Long-term care is both medical and non-medical assistance that hopefully you will never need. However, as you age, at some point you may need help performing the activities of daily living such as bathing, dressing, eating, toileting, transferring. Long-term care is not designed to cure or rehabilitate you. It is just to help you do the things you need to do each day.

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Q: What is the probability that I will need long-term care?

A: Approximately 68% of 65-year olds will require some long-term care during their lives. The statistics vary depending on the source, but a rigorous study of the incidence of long-term care, which was cited in Forbes, projected that 58% of men and 79% of women who are currently 65 or older will need LTC services at some point in their lives.

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Q: How long do people typically require long-term care services such as home healthcare, assisted living, or nursing home?

A: Some LTC events are brief. Half of them last one year or less. The other half have an average duration of 3.9 years. Many times, the services can be provided by family members. Other times, the need for care is beyond the scope of what friends and family can do for you.

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Q: How much does long-term care (e.g., home healthcare, assisted living, or nursing homes) cost?

A: The cost depends on the type of care and where you live. The least expensive type of care is non-medical home care (e.g., bathing, eating, etc.). The national median cost for non-medical home care is around $20 per hour or about $46,432 annually if you need this help 8½ hours a day, 5 days a week. The other end of the cost spectrum is a private room in a nursing home (AKA: skilled nursing facility). The median cost for a private room in a nursing home is $253 per day or $92,378 annually. Look up Long-Term Care Costs in Your State. These costs are typically not included when most people plan budget for healthcare costs in retirement.

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Q: Who pays for long-term care services?

A: There are basically three funding options:

1. Self-fund using your income, savings, and/or liquidating assets to pay for care,
    
2. Buy private insurance
    
3. Qualify for Medicaid. Medicaid is a welfare program that is only available after you have spent down your assets and do not have enough income to pay for care. There may also be free or subsidized long-term care coverage for veterans through the VA.

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Q: What does long-term care insurance cover?

A: Once upon a time, LTC was thought of as nursing home insurance. Most policies today cover home healthcare, assisted living, memory care communities, and skilled nursing facilities. Some policies also cover hospice care. Most long-term care services required are non-medical and provided in the person’s home.

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Q: How do I find the right LTC facility for my loved one?

A: Step 1: Ask friends and family whether they have any suggested facilities.

Step 2: You can use these two tools: the Eldercare locator from the Department of Health and Human Services, and /or Medicare’s online nursing home comparison tool. Medicare’s comparison tool can help you evaluate nursing homes based on quality to see whether there are any blips in health and safety inspections. It also offers insight into how people rate a facility’s staff.

Step 3: There is no substitute for boots on the ground (AKA: the good old-fashioned site visit). While you are there, do not hesitate to ask residents and their families how they like the facility and staff.

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Q: Do you recommend LTC insurance?
A: Everyone should have some plan to pay for LTC if the need arises. This is most important for married couples so that one spouse does not use up all the assets and then leave the other spouse destitute. The plan to self-insure (i.e., pay out of pocket) may be appropriate for mid to high net-worth households (typically over $2 million). Another option is to depend on Medicaid, which is not a great plan unless you do not have a lot of assets to protect. Medicaid is a welfare program that is only available after you have spent almost all your assets. The third solution is to buy insurance so you don’t have to spend down your hard-earned savings. The prime target for LTC insurance solutions are couples with $200k - $2 million in investible assets.

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Q: Can the insurance company increase my long-term care insurance premiums?
A: It depends on the type of policy. Traditional LTC insurance (pool of funds) are “guaranteed renewable,” which means the insurance company may increase premiums, but only on an entire class of policies, not on an individual policy. This used to be rare, but now almost every company has raised rates on in-force business. Hybrid products are classified as “non-cancellable,” which means that the insurance company cannot change the rates.

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Q: What are “hybrid LTC products”?

A: The insurance solutions include: traditional LTC insurance, as well as hybrid insurance products. The hybrids include life insurance policies that allow the death benefit to be used to pay for LTC or an annuity with a rider that increases your payments during a qualifying LTC event. There are a couple of obvious advantages to the hybrids. Specifically, the death benefit on the life insurance or account value of the annuity is paid to your beneficiary if you do not use the funds for LTC while you are alive. This is a big difference from traditional LTC insurance, which does not have a cash value or death benefit.

These products become more attractive at older ages for two reasons:

1.  Inflation protection associated with traditional LTC insurance becomes less important when purchased at older ages.
2.  Underwriting guidelines are more lenient on the hybrid products than on traditional LTC insurance. The one downside of hybrids is a large single premium is usually required to fund these products.

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Q: How do I qualify for Medicaid?
A: You must spend all your non-exempt assets, which includes investment accounts, savings accounts, retirement accounts, and the cash value of any life insurance—down to $2,000 if you are single before Medicaid kicks in. If you’re married, there are spousal impoverish standards that allow the healthy (community) spouse to keep assets up to the “community spouse resource allowance,” which is set by your state—ranging from $24,180 to $120,900 and monthly income “minimum monthly maintenance needs allowance” of $2,030 - $3,022 (as of 2017).

Exempt assets are not counted and include your wedding ring, one car, and your house. However, there are limits on home equity ($560 - $840k) depending on your state, and many states will put a lien on the house to collect retroactively after both spouses have passed or sold the house.

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Q: What is the best age to purchase long-term care insurance?

A: The average purchaser of LTC insurance is 57 years old. Naturally, all insurance solutions (traditional LTC insurance, hybrid life insurance and annuities) have a lower annual expense when purchased at younger ages.

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Q: Is it difficult to qualify for long-term care insurance?
A: Yes. If you have a hang nail, you will not qualify. Okay, that’s a slight exaggeration, but it has gotten significantly more difficult to quality for traditional LTC Insurance. The insurance company bases its underwriting on your medical history, family health history, current health status, and lifestyle. When you apply, you must be mentally fit and able to perform all activities of daily living, which are defined as bathing, dressing, eating, toileting, continence, and transferring. Life insurance with a LTC rider is easier to qualify for, and annuities with LTC riders are the easiest. In fact, most of the annuity solutions do not have any medical underwriting. Sadly, they also provide the least effective LTC coverage.

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Q: What do these LTC insurance terms mean: elimination period, benefit period, and pool of funds?
A: Traditional long-term care works like most types of insurance. There is a deductible, which is known as the “elimination period.” This is the time -- typically 90 days -- when you must pay out of pocket before the insurance kicks in. Once insurance starts, you have a daily or monthly maximum the insurance will cover. For example, you would be required to pay the $50 out of pocket if your cost of care is $250 but your daily max is only $200.

There is also a “benefit period,” which is the number of years the insurance will cover you if your cost of care is equal to or greater than your daily maximum. You can figure out your total “pool of funds” by multiplying your daily maximum x 365 days x the number of years. For example, if your daily max is $200 and your benefit period is 3 years, you would have a pool of $200 x 365 days x 3 years = $219,000. Your benefits would last longer if your care costs less than your daily max. For example, your pool of funds would last 6 years if your care was only $100 a day, even though the stated benefit period was 3 years because you would still have money left in your “pool.” These policies have a host of riders that enable you to customize coverage. This is why it really helps to work with an agent who is well-versed in LTC.

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Q: Are LTC Insurance premiums tax-deductible?

A: Premiums for “qualified” long-term care insurance policies are treated like any other medical expense for tax purposes. You only get a deduction for the amount of total unreimbursed medical expenses (including Medicare premiums) that exceed 10% of your Adjusted Gross Income (AGI). A policy is “qualified” if it was issued after January 1, 1997 and meets certain requirements.

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Q: Are LTC benefits taxable?

A: Benefits are tax-free as long as they are less than $360 a day or the cost of care, whichever is greater.

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Q: What is the LTC Partnership Program?
A: The Long-Term Care Partnership Program is a Federally-supported initiative that allows individuals who purchase a qualified long-term care insurance policy to protect a portion of their assets from Medicaid spend down.

For example, if you purchase a qualified LTC policy and subsequently collect $300k in benefits, you (or your spouse) would be able to qualify for Medicaid while keeping $300k of additional countable assets. Here's a list of states that participate in the Partnership program.
 

Is Long-Term-Care Insurance for You?

     Many Baby Boomers ask:  should we get Long Term Care insurance to help pay for our personal needs if, for whatever reason, we find ourselves unable to take care of ourselves?

     I related my own experience purchasing a LTC policy in two previous posts:  The Basics of Long-Term-Care Insurance and Are You Getting Alzheimer's? I'm happy to report that my medical history was apparently good enough to suit the insurance company. So I was accepted for the policy.

     I now have the dubious honor of paying a little over $2,000 a year, for the rest of my life, in the hopes that my insurance company will still be around and will agree to pay for my care if and when I need it.

     But those two posts just cover my own experience. I thought I'd go to an expert to offer a more objective, overall view of LTC.

     So I consulted Jeremy A. Kisner, president of Surevest Capital Management in Phoenix, AZ. He is a Certified Financial Planner and Chartered Retired Plans Specialist, with a degree in economics from UC Santa Barbara. He also writes an informative Weekly Insight blog that covers various aspects of personal finance and retirement issues.

     So here's what he says about LTC:

    

LTC – No Good Solutions?

You would think that with 10,000 baby boomers hitting age 65 every day, Long Term Care (LTC) insurance sales would be booming. They are not. In fact, sales of traditional LTC insurance have been declining since 2004.

Why? In part because the policies are expensive. A decent policy for a 60-year-old couple now costs in the range of $6 - $7,000 per year. Also, insurance companies have become more selective about who will qualify for a policy, since companies are only now getting a good grip on the true costs of claims. Many companies have stopped issuing policies, because they have not proved profitable. A decade ago, over 100 companies offered LTC insurance; now there are fewer than 20. Those that remain -- such as Genworth, American General, John Hancock -- are charging more and have more stringent underwriting (no, Obamacare does not help you get long-term-care insurance).

Many people who buy LTC insurance assume their premiums will remain level for the rest of their lives. But that's not necessarily true. Insurance companies do have the ability to raise rates on in-force policies. Some people have never had their rate raised. But others have seen significant increases, forcing them to reduce or even terminate their coverage.

Do You Need LTC?

A LTC event is the single biggest risk to your retirement plan. It's estimated that at some point in their lives 7 out of 10 people will require long-term care  -- non-medical care that involves helping a person eat, bathe, dress, walk. In reality, the majority of this care is provided by family members, often with a heavy emotional toll. Home health care agencies are the second most common provider of care, and the nursing home is generally considered a last resort. The costs of these options can easily run into hundreds of thousands of dollars, and Medicare does not pay. Once you have spent essentially all of your money, Medicaid will kick in, but that could leave a surviving spouse broke and virtually nothing in your estate.

If you are single, you have to spend all your non-exempt assets -- including investment accounts, savings accounts, retirement accounts and the cash value of any life insurance policy -- down to $2,000 before Medicaid will pay your bill. If you're married, the spouse can keep up to the "community spouse resource allowance" which is set by your state -- ranging from $23,448 to $117,240. Exempt assets include your wedding ring, one car, your house. 

LTC Insurance, like other forms of insurance, is designed to transfer financial risks from the individual to an insurance company for a fee. So who can benefit from the policy? People with over $2 million in investible assets tend to self-insure. They can afford the average LTC event without wiping out their life savings. People with low net worth, under $200k in investible assets, tend not to buy the insurance because the costs are too high. They will spend down whatever money they have until Medicaid kicks in. It is the folks in the middle who have the toughest decision.

What Is Your Situation?

Traditional LTC insurance makes sense if you are in decent health and have surplus income from pensions, Social Security, and other sources. The most common age at which people buy LTC insurance is 57. 

Here's how it works. First, policies do have an elimination period (typically 90 days) during which the insured has to pay out of pocket, before the insurance kicks in. Once benefits are triggered, the policy typically offers a daily or monthly maximum. If your daily maximum is $200, but your care is $250, then insurance covers $200 and you pay $50. Most policies are reimbursement policies. Indemnity policies are better because once benefits are triggered, the insurance company automatically pays the amount of your coverage (ask your LTC agent to explain the difference in more detail).

Some LTC policies only pay if you go in a nursing home. Others will also pay for at-home help, as long as you meet the requirements. Naturally the policy is cheaper if it only covers a nursing home. However, I would never recommend such a policy. Four times as many people are receiving care at home compared to the number who are in nursing homes. Some policies have 100% coverage for home health care, meaning the daily limits are the same whether you are in a nursing home or receiving help at home. Other policies may limit the at-home payment to 50%, as home health care is usually (but not always) less expensive.

Finally, many people worry about what might happen to their insurance company over the next 20 or 30 years. But insurance is possibly the most regulated industry in America. Companies have to have their product approved by every state in which they issue policies. They have to keep reserves, and they also pay into a state guarantee fund which makes good on policies if the insurance company were to go out of business. In reality, when a company gets into trouble a stronger company buys them out, sometimes with financial help from state guarantee funds. Insurance companies do occasionally fail, but I have never heard of a client not being able to collect on their life insurance, annuity or long-term care for that reason.

Are There Other Options?

 

Some people in the middle turn to hybrid products, rather than traditional LTC,  such as life insurance with a LTC Rider. These policies enable policy holders to use the death benefit while they are still alive to pay for LTC costs. There are also annuities with LTC riders that will double the monthly payout if the owner cannot perform two of six activities of daily living. Lastly, there is always the reverse mortgage, which enables homeowners to tap their home equity. Funds from a reverse mortgage could be used to pay for long term care, or to provide money for a surviving spouse.

Life insurance with an LTC rider makes sense if one of your financial goals is to leave money behind (assuming you don’t use it all up for your care). You either need funds to buy a policy or you may already have a life insurance policy with cash value that could be exchanged for one with the LTC rider. The annuity is the best option if you already have health problems and would not qualify for traditional LTC or life insurance. Annuities do not have any health underwriting.

The LTC decision is a very important part of your overall retirement plan. Many people avoid it until it is too late, because the insurance has become too expensive or medical conditions limit your choices. I strongly suggest working with a professional who can look at your entire financial picture and help you think through your options. There may not be a "perfect" choice, but with a little work, you can find the best solution for you.