Roughly half of Americans turning 65 today will require long-term care. As life expectancy continues to rise and the cost of care creeps up, there's a growing need for financial advisers to be knowledgeable about long-term-care funding mechanisms to help clients choose the best one — or combination.
Long-term-care coverage is delivered primarily through "private" means. Roughly 55% of expenditures from age 65 through death are via these private forms of payment, with 2.7% of that from insurance and the remainder from out-of-pocket expenses, according to the U.S. Department of Health and Human Services.
About 45% of long-term-care funding is from the "public" sector, mainly from Medicaid.
Public and private options have respective benefits and drawbacks concerning expense, level of long-term-care benefits and quality of care.
There are a few insurance options to hedge long-term-care risk: traditional long-term-care insurance, and life insurance policies and annuities with long-term-care features.
In 2017, the national median cost for a private room in a nursing home is roughly $8,100 per month, according to an annual report published by the insurer Genworth. An assisted living facility costs $3,750 a month.
Traditional LTC insurance is a stand-alone policy devoted specifically to providing benefits for long-term care if a need arises. This insurance delivers LTC benefits at the lowest cost and offer inflation protection, observers said.
Sales of these policies have dwindled over the past several years. While insurers sold 700,000 of these policies in 2000, the American Association for Long-Term Care Insurance estimates the industry will close out this year with 75,000 policy sales.
There's been negative consumer sentiment in the marketplace as insurers have had to raise premiums in recent years on in-force policies due to initial policy mispricing, following a misjudgment in lapse rates and interest rates, said Jesse Slome, executive director of AALTCI. A number of insurers also have abandoned the marketplace.
Advisers typically use traditional LTC insurance if clients have a tolerance for a potential premium increase in the future and if they don't have a life-insurance need, said Phil Jackson, insurance planner at ValMark Financial Group.
Life insurance-LTC combination
Sales have shifted more to combined life insurance-LTC products. These products drew $3.6 billion in new premiums in 2016, a 500% increase over the $600 million in 2007, according to Limra, an insurance industry group.
Broadly, advisers like the flexibility of these policies. Mr. Jackson explains it in terms of "live, quit or die": Clients get a long-term-care benefit while living, but can also surrender the policy for a portion of their premium or provide heirs with a death benefit. The latter options aren't available for traditional policies.
Further, premiums and benefits are guaranteed, he said.
Combo policies come in two flavors: hybrid LTC, and life insurance with LTC riders. Hybrids provide more of a long-term-care benefit and have a "very small, very modest" death benefit, whereas policies with LTC riders are more life-insurance focused, Mr. Jackson said.
One key difference is hybrids typically have an inflation-protection feature allowing a client's future LTC benefit to grow annually, whereas the benefits are fixed in policies with riders, Mr. Jackson said.
Among LTC-related sales year-to-date at ValMark, 45.9% have been hybrid, 49.5% LTC riders and 4.6% traditional LTC.
Annuity products are the least-used among insurance products for providing LTC benefits. Combination annuity-LTC sales were $480 million last year, up from $285 million in 2011 but little-changed since 2014, according to Limra.
The products deliver a lifetime income stream, and increase that income in the event of a long-term-care need.
"Annuities are pretty much a last resort for long-term care," said Jess Rorar, a planner at ValMark. Life insurance products provide more of a benefit and give more value for the money, she said.
However, in the event insurers decline a client from buying traditional LTC or combined life insurance-LTC, annuities can serve as a backup because the underwriting requirements are easier, said Jamie Hopkins, the Larry R. Pike Chair in Insurance and Investments at the American College of Financial Services.
"Almost every adviser you talk to has clients that end up on Medicaid. It's just the reality of aging and living a long time," Mr. Hopkins said.
The government assesses income and asset levels when determining individual qualifications for Medicaid. Generally, individuals have to essentially run out of money before Medicaid kicks in, Mr. Hopkins said.
Clients often need the help of an elder-care attorney to structure their assets appropriately — for example, there are several exceptions for assets, such as a home, that get protected from a Medicaid spend-down calculation, and an attorney can help protect those to the largest extent possible, Mr. Hopkins said.
Medicaid facilities, though, often aren't as nice as those provided by private care; so private insurance would likely better protect one's quality of life, he said.
Clients concerned about asset flexibility and freedom, as well as those with an aversion to medical underwriting, are often candidates for self-insuring if they have the appropriate wealth, Mr. Jackson said.
"Generally, even if you have the assets to self-fund, you'll get a better return on your dollars if you use an insurance solution," he said.
Clients also "tend to have to hold a lot of assets hostage to that self-insurance," Mr. Hopkins said. "You're not really allowed to touch them," which sometimes leads to a reduction of lifestyle when young people set assets aside in a separate account for LTC purposes.