Rule 9: Get Your Insurance Premiums Back

Below is an excerpt from the book Downsize Sooner than Later – 18 Rules for Retirement Success available on Amazon.com.

One of the biggest risks to security in retirement is the cost of healthcare. Much has been said about this in the media, and projections for the future look daunting. The issue is compounded by the fact that by 2030, roughly one in five Americans will be of senior age. It follows that a surge of demand for healthcare is coming, and the cost to cover these services will be unparalleled.

There are two major categories of healthcare expenses that stand out as serious concerns for seniors. These are “health insurance” and “long-term care.”

• • Health insurance. Health insurance for seniors in the United States is called Medicare. It can be accessed in a variety of ways. Premiums for certain components of Medicare may vary, based on income. For those below certain income levels, states administer a program called Medicaid to provide additional help. An essential resource to learn about health insurance options for seniors is the medicare.gov website. Everyone approaching the age of 65 would benefit from downloading and reading the booklet, Medicare & You. This free resource outlines the basics of how Medicare works, important deadlines for signing up, and how to find help with questions on a state and federal level.
  • Long-term care. Long-term care expenses are costs associated with extended care that are generally not covered by health insurance. Many people hear the words “long-term care” and mistakenly think “nursing home” insurance, but the issue is much further reaching. Examples of long-term care expenses over and above nursing home care include costs associated with assisted living, home care, adult day care, respite care, and Alzheimer’s care. Other related costs include paying for modifications to a home, in home help, custodial services, housekeeping services, therapist visits, private nursing care services, and more.

The ins and outs of Medicare are beyond the scope of this book. Given that there can be penalties for failing to sign up by certain times or under certain circumstances, it is a good idea to visit the medicare.gov website and get to know the basics. Sometimes insurers or other organizations offer Medicare “educational events,” which provide free information about Medicare. Such events are helpful, and, by law, no one is permitted to try to sell you anything at a Medicare educational event.

The issue of long-term care is a separate concern.

Long-term care is a modern-era problem and the unintended consequence of the evolution of societal structures, as well as ongoing improvements in healthcare.

In the past, families often lived their entire lives in the same region of the country. In many instances, extended families even lived together in the same household. When an individual became old or infirm, the family took responsibility for providing needed care. Family-based care, as this is known, was more viable in the past because healthcare was less costly and more limited in scope. Together with this reality, people didn’t live as long, and they did not survive with many of the chronic conditions with which they can survive today.

In modern times, families are more geographically spread out and, in many ways, life has become more complicated. Frequently, in households of adult children, both spouses work and have children of their own to raise. Such demands make the logistics of reliable family-based care more difficult.

The overall cost of providing extended care has also increased dramatically. It used to be that spending hundreds of thousands of dollars caring for an elderly individual wasn’t possible. But those days are gone. It is a wonder and a blessing that people can live longer and more comfortably through many heretofore debilitating health concerns, but doing so comes with a price.

One solution to help defray the costs associated with long-term or “extended” care is insurance.

But there are several challenges with insuring this risk.

A few examples include:

• • Because long-term care expenses can be considerable and have a higher probability to manifest, premiums for long-term care insurance can be costly.
  • You can’t wait until you are already sick and in need of care to purchase long-term care insurance. Individual policies are medically underwritten and must be put in place before debilitating conditions occur.
  • Buying long-term care insurance requires the ability to anticipate far in advance of ever needing benefits. Many people – especially men – feel invincible and avoid such planning, believing, “It won’t happen to me!” Such feelings align well with human nature and survival instincts but are unreliable as a basis for predicting the future need for extended care.
  • A person buying long-term care insurance in their 50s may pay premiums for 30 years or more before ever seeing a benefit. This is a very long haul, and many are tempted to throw in the towel along the way.
  • Some end up shouldering the burden of costly long-term care insurance premiums through the whole of their senior years without ever needing to file a claim.

The good news is there are ways to protect yourself from the risk of extended care and avoid at least some of the above pitfalls. It may even be possible under certain circumstances to “get your premiums back” if you don’t end up needing care.

Before diving into the “how to’s,” one more important point.

The Hidden “Why” for Long-term Care Planning

You’ll note in our discussions of issues ranging from downsizing, to finances, to estate-related concerns, how often the question of planning – or failing to plan – results in a direct impact on the continued wellbeing of the surviving spouse after the first spouse is gone. The reality about extended care planning is similar. It turns out, people who get sick and need extended care generally end up getting the care they need, one way or another. The real concern is, as after a hurricane, the damage that providing such care leaves in its wake.

Take a moment and answer this question:

“Of course, it could never happen to you…but in the unlikely event you can no longer care for yourself, who in your life would be the first to drop everything to make sure that you receive the care you need?”

Well, who would it be? Your spouse? A partner? A sibling? A child? A lifelong friend? Name this person and call the image of him or her to mind.

Whoever the person is, he or she has the most to lose.

This individual – or sometimes, a combination of individuals – clearly cares about you deeply. But without an advance plan for the possibility of extended care, he or she will be the one boxed into figuring out what to do for you – essentially, shouldering a responsibility you have decided to look past or avoid. What’s more, as in many other areas we have discussed, he or she will be forced to deal with these issues under enormous stress, in the face of great cost, and with little time to lose.

You may try to tell this person, “Wait! Don’t do it. Leave me alone. Keep living your life. Don’t feel responsible for taking care of me!” It is wishful thinking to imagine that someone so close to you would abide by such words.

I once spoke to a multi-millionaire who had two adult daughters. In his late 60’s, he lived alone in a high-rise luxury condo. When I asked him about planning for long-term care – an issue he could have easily resolved in about 60 minutes and with a check he wouldn’t even miss – he said, “They can just push me off the balcony.”

As far as I know, that was the extent of his planning. The abdication of his responsibility to formulate a plan places the burden squarely on the shoulders of his daughters, who are living their own lives and surely have their own problems to worry about. If and when extended care is needed, solving for it will be necessarily more reactive, stressful, costly, and emotionally painful – especially for them.

In terms of my own planning, I know my wife would step up, but I also have a daughter who would insist I got the care I needed. When I think about it, the thought of my daughter’s involvement really stands out. I know her. She is a determined individual. Regardless of the personal cost, she would chew through a wall to be sure I was cared for. Denying this fact and the resulting consequences doesn’t help her or my wife. In truth, it only puts them at greater risk.

Consider the following progression of dealing with an extended care event:

• • As a long-term illness or extended impairment unfolds, the level of care required gradually increases. Sometimes it happens quickly, sometimes almost imperceptibly. If you have a surviving spouse, the weight will generally fall first on his or her shoulders.
  • Most spouses are not professional caregivers. Even if they were, a buffer is optimal for emotional and physical protection. This is why surgeons don’t generally operate on family members.
  • Without such a buffer, harmful consequences begin to arise. The physical and psychological stress of observing the slow degradation of the health of a partner, in the midst of increasing demands to provide round-the-clock care, compound. This often leads to unrecoverable damage. For example, a spouse attempts to lift a suffering partner for toileting and suffers a herniated disc of his or her own.
  • Frequently, in families with children, one or more of the children will attempt to step in to assist the struggling spouse, in the exhausting effort of providing ongoing care.
  • Because the need for care can be constant – every day, all day, and even through the night – meeting the demand for care requires great allocations of time and energy.
  • A child forced to step in to help carry the weight can experience fallout, affecting his or her relationships with spouse and children, relationships with friends, career, personal pursuits, avocations, individual health, involvement in the community, and more.
  • Frequently, the extensive financial drain for funding extended care leads to encroachment on nest egg funds earmarked for other purposes, such as future income. This can significantly threaten the financial security of a surviving spouse and extinguish any hope of legacy for heirs.

The key to success in extended care planning is to establish a plan in advance that provides a buffer for those closest to you.

• • Most people prefer to be cared for at home for as long as they can.
  • Ideally, the goal should be to empower loved ones to hire and organize professionals to provide care, rather than forcing them to provide care themselves. This is better for you and safer for them.
  • Finally, where suitable, seek to reduce or eliminate the cost of providing such care through the leverage of long-term care insurance.

How to Get Your Long-term Care Insurance Premiums Back

What if there were a way to secure long-term care insurance, but if you didn’t end up using it, your heirs could get the money you put into the policy back?

Over time, the shape and form of long-term care insurance has continued to evolve. When the first long-term care insurance policies were introduced decades ago, they were new to everyone, including insurers. Companies tested many different plan options and actuarial assumptions for pricing policies adequately. In some cases, insurers overestimated their future ability to meet expenses and ended up having to raise premiums.

On August 17, 2006, the Pension Protection Act (PPA)* went into effect and altered the long-term care insurance landscape even further. Importantly, the PPA opened the door for insurance companies to offer riders to qualifying life and annuity policies to provide tax-free withdrawals for the purpose of funding certain long-term care expenses. This set the stage for the introduction of new hybrid or asset-based long-term care policies. Under the right circumstances, such policies can serve as an alternative to traditional long-term care insurance.

*2006 PPA documentation link: https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/pension-protection-act

A few characteristics of hybrid or asset-based long-term care insurance:

• • Asset-based long-term care insurance is a life insurance policy or annuity that includes a rider (or riders) which expand coverage to help pay for qualifying long-term care expenses.
  • In general, if you don’t end up using the policy for long-term care services, you won’t “lose” the money you put into it. This is because the underlying policy will still carry out its primary function as either an annuity or a life insurance policy.
  • If benefits are never needed, either the death benefit of a life insurance policy or the accumulated funds of an annuity can be left to heirs (i.e. pre-tax accumulations from annuities are taxable to beneficiaries).
  • Insureds can live a long life with the peace of mind of having long-term care coverage, but without the anxiety of constantly paying premiums which they or their beneficiaries may never recover.
  • Most hybrid policies require a fixed, upfront premium to be paid, though some contracts may allow for ongoing contributions.
  • Internal funds grow on a tax-deferred basis and qualifying long-term care expenses are generally paid on a tax-advantaged basis (i.e. subject to state and federal rules).
  • At the time of writing, at least one insurer offers a policy that can be purchased jointly. This allows both individuals in a couple to benefit from coverage under a single policy.
  • Depending on the contract, additional riders may be available to provide protection for inflation as well as other extended benefits.
  • Asset-based policies are medically underwritten, but some individuals may find it easier to qualify for certain types of these policies.

When to Avoid Long-term Care Insurance

For some people, it doesn’t make economic sense to buy long-term care insurance because premiums will consume too much of their available savings or income. This is a big concern, as many traditional policies expect premiums to be paid for a lifetime. I have heard multiple seniors speak unhappily about bearing the weight of ongoing long-term care insurance premiums, especially in their later years.

Individuals below certain asset and income levels may qualify for state Medicaid programs that assist in paying for long-term care. However, qualifying for such help frequently requires an individual to “spin down” his or her assets to extremely low levels.

Spinning down assets is no fun.

Even after doing so, choices for care can still be limited. Individuals may “get what’s available, where its available,” with limited power to choose. Most will want to avoid this path, especially those with a surviving spouse who must live on after assets are spun down. There are provisions in Medicaid for some funds to remain with a surviving spouse, but the thresholds can be onerous.

Which Is Better, a Traditional or a Hybrid Policy?

As time goes by, I am less and less enamored with traditional long-term care insurance policies that expect premiums to be paid every year for a lifetime. Frequently, it seems, the older people get, the more fatigued they become with maintaining such policies. What a shame to face dropping or downsizing a policy after decades of payments because you became weary of or could no longer afford the premiums.

This will surely ruffle the feathers of a few advisers, but so be it. When suitable, I have come to believe that hybrid policies – either life insurance or annuity based – are the most preferable options for long-term care insurance. When paid for with an upfront single premium, such policies are as close as possible to “paying off” your risk and avoiding a lifetime of unending premiums. Add to this the not-insignificant detail that your heirs can get your money back if you don’t end up needing care, and these policies are hard to beat.

If you feel long-term care risk is something for which you need to solve, at least consider the possibility of assembling the funds – earn them, save them, allocate a portion of the after-tax sale of a home or business, use after-tax inheritance funds, or potentially roll over (i.e. 1035 exchange) unused cash value – only when suitable – from an old life policy or annuity, to help solve the problem.

It’s also worth noting, even if you have substantial assets, the hybrid approach still makes sense versus self-insuring your risk. This is because of the leverage of the insurance and the tax-favored treatment for covering the cost of care should it ever be required.

Saying all this, there is still no “one size fits all” solution for long-term care insurance. You’ll have to study the options, weigh the benefits, and decide what works best in your individual situation. An excellent additional resource is the National Association of Insurance Commissioners: A Shopper’s Guide to Long Term-Care Insurance.

It is available for free online at:

https://www.naic.org/documents/prod_serv_consumer_ltc_lp.pdf

Questions or comments? 

I can be reached at this link – contact Ted Stevenot.