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What Is Long Term Care Insurance And How Do I Know If I Need It?

Brant Steck provides clarity on what Long Term Care Insurance is and who is best suited for this often-talked-about but not often understood insurance coverage.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion, by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today’s question will be answered by Brant Steck, Risk Management Consultant with First Element Insurance Planners and Brant, what is long-term care insurance and how do I know if I need it?

Brant Steck:
Long-term care insurance is insurance that provides care when we’re unable to provide care for ourselves. So those are called activities of daily living. So just think about how we got on this call today. We both got up, got ourselves out of bed, moved around our rooms, dressed, showered, fed ourselves.

Brant Steck:
When we’re unable to do two of the six activities of daily living and we need help with care just for our normal lives, that’s where long-term care insurance comes in. It’s not replacing health insurance. A good way to think about it is it pays for what health insurance does not.

Tim Maurer:
So it’s not really replacing health insurance. What about Medicare?

Brant Steck:
Medicare is going to provide… is basically health insurance so if you were to have say a heart attack and you ended up in a hospital and needing care for that, that’s going to provide for the medical cost but it’s not going to help you or actually living beyond the hospital.

Tim Maurer:
Okay. So then Medicare is not necessarily long-term care insurance. I think that there are some elements of it that might be categorized as such but for the most part, you can’t count on your health insurance. You can’t count on your Medicare to take care of long-term care insurance.

Tim Maurer:
Now, how do I know if I need it?

Brant Steck:
There’s an emotional side of it and a financial side of it. So from an emotional perspective, anyone who’s ever cared for a parent or a loved one knows the toll that it takes. It’s significant.

Brant Steck:
So on average, the average family caregiver is spending 24 hours a week providing care and that’s not just for a short period of time. 94% of the time that goes beyond a year and 50% of the time that goes beyond five years. You think about 24 hours a week, what does that do to your job? What does it do to your marriage? And what does that do to your finances? And that puts a lot of strain on that caregiver and emotionally, you want your children to come and see you because you want to maintain the relationship not because they have to take care of you.

Brant Steck:
I’ll say just from my own personal standpoint, long-term care insurance played a major role in my life and not from a negative standpoint but from a very positive standpoint.

Brant Steck:
So my grandparents were married for 70 years. My grandmother passed away and my grandfather lived another two years and he had long-term care insurance. So every Thursday I would go over and I take him to the Cracker Barrel, which is where he’d want it to go every week and we go out to dinner, I’d come home and we’d watch the Cardinal game and then someone would come in and help him use the facilities and get showered and get fed before bed and it really meant a lot to the family that we able to maintain a favorable relationship and not have to care. So the emotional side of long-term care insurance is a big deal.

Brant Steck:
Then you look at the financial side and depending on where you are in the [inaudible 00:03:30] it’s expensive anywhere but especially on the coast, it’s really expensive. One of the advisors that we commonly work with at Buckingham runs a Monte Carlo and he runs the typical Monte Carlo simulation. So out of thousands of iterations of returns, what’s the probability of success with this portfolio, just as you normally would. Then he runs it and says, “Okay, well, what if you pay for long-term care insurance and never use it?” Which is the biggest concern many people have and commonly, it’s still a successful portfolio, a successful Monte Carlo simulation.

Brant Steck:
But then what if you have an extended stay at a facility, a cognitive issue, which is typically where the longer stays come from, and you have that long stay and you don’t have long-term care insurance and what does that do to the portfolio? A lot of times it doesn’t survive.

Brant Steck:
Then you look at a market downturn like we’re in right now, and somebody who is planning to use their portfolio for income but also for long-term care insurance may be in a very difficult position at a time like this.

Tim Maurer:
Sure. So not everybody necessarily needs long-term care insurance from a financial perspective. They may want it from an emotional perspective but once you start taking those steps into exploration, you learn pretty quickly that long-term care insurance looks really complex and it looks really expensive.

Tim Maurer:
What do you think about those two factors?

Brant Steck:
Well, starting with the want versus the need. So, some people can self-insure but does it make financial sense to do so? That same person may drive a luxury vehicle, that if they totaled they’d be able to buy a new one tomorrow and it wouldn’t have a major effect on their life but they have collision coverage because it makes sense to [inaudible 00:05:19] for risk and with those folks that is the conversation a lot of times is, how much risk do you want to retain and how much do you want to transfer.

Brant Steck:
In terms of the expense of the product and the complexity, there is complexity with the product but it can be very simple as well. At the end of the day, usually if you look at the ledgers on these products, the internal rate of return on the premium, if used in the client’s eighties, which is a typical claim time, the internal rate of return is usually around 6-7%. So it’s actually, while it may be expensive up front, the probability of needing care is high and therefore it’s actually a good risk management tool.

Tim Maurer:
All right. You said it can be made simple. So make it simple for us.

Tim Maurer:
What are the few factors that we need to be considering if we’re looking at a long-term care policy? What are a few of the moving pieces that we want to make sure we nail down?

Brant Steck:
Well, the most common products today are what are called hybrid products. They’re life insurance policies with long-term care riders. I don’t really like to describe it that way because it sounds like you’re buying a life insurance policy and tacking something on but nobody’s buying these for long-term care, or I’m sorry for life insurance. They’re buying them for long term care and they have a very simple design.

Brant Steck:
There’s a pool of long-term care funds, there’s a death benefit, and there’s a return of premium features. So the easiest way to communicate it is live, die, quit. If you live, there’s a big pool of long-term care funds available to provide for your long-term care expenses. If you pass away the debt, there’s an income tax free death benefit and if you quit, and just want out, you can surrender and get back all or some of your premium, depending on how you designed the product.

Tim Maurer:
Sure. So it seems to also satisfy that perceived risk that we all have of paying into an insurance policy that you’re never going to get anything out of it.

Brant Steck:
Yeah. You’re going to get something out of it.

Tim Maurer:
So, Brant, if somebody’s more curious about what they could do with long-term care insurance, how would they get that process started? What suggestions would you make about the next steps they could take to inquire into long-term care insurance?

Brant Steck:
My suggestion would be explore early. So clients in their fifties are great candidates. The average client purchases long-term care at age 57. By the sixties, still clients are very insurable but the price is going up and by 70, half of all applicants are rejected due to health.

Brant Steck:
So my recommendation would be get education early in your fifties. You don’t necessarily need to make a decision but if you explore it in your fifties, you’ll have time to educate yourself and learn what options are available to you so that you can ultimately make a decision rather than having the decision made for you because it’s too expensive or because you’re no longer insurable.

Tim Maurer:
Absolutely and I would also suggest that not everyone will end up concluding that they need long-term care insurance. Quite frankly, as Brant just said, not everybody is going to get it depending on numerous health factors, but everybody needs a long-term care plan. So take a look at your family history, take a look at your current history and anticipate what plans may need to be in place in order to ensure that you don’t end up in a very challenging situation as a result of a long-term care risk.

Tim Maurer:
Well, Brant, thank you so much, and thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or by emailing your question to question@askbuckingham.com or just clicking the corner of the screen, it’ll take you directly to the website.

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