Recently, I discussed the huge impact that our need for long-term care has on our friends, our family, and on our business. The statistics paint a pretty clear portrait of just how wide-ranging the causes and the individual needs for long-term care can be. With that in mind, I’ve put together some long-term care insurance options for the small-business owner.
Insurance companies first began to offer long-term care policies during the mid-to-late 1980s. In its inception, many insurers used a similar model to the one that is used for life insurance. However, as lapse rates – the rate at which a policyholder canceled their policy without having ever made a claim on it – proved to be much lower than that of life insurance policies, they quickly discovered that this model was just not as profitable.
Since then, the ability to insure long-term care has gone through an extreme revolution due to its high expense. In fact, the average cost of a long-term care payout is between $200,000 and $500,000 for the length of the claim. In order to protect yourself from paying these expenses out of pocket, there are a few different coverage options.
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The most common form of long-term care protection is a pooled risk option. Basically, this is a large group of policyholders that are pooled together with those who never go on a claim, helping to supplement those who do. This is a common principle across many different types of insurance, from auto insurance to homeowner’s insurance.
When selecting a policy, ask your agent which one is best for you, but there are some basic things you should look for. Many long-term care offerings pay benefits on a daily or a monthly basis. A daily benefit will pay up to a certain amount per day for the life of your claim, whereas a monthly benefit pays a maximum benefit per month.
You can get the coverage that you need for the future while still saving some money now. Let’s say you need to insure $5000 per month, because of social security and disability benefits that you will receive, you can insure $4000 per month and have enough coverage to pay all of your long-term care expenses.
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When looking at a long-term care insurance policy, another way to save some money is to play with the deductible or the elimination period. Essentially, this is the length of time that you are responsible for the cost of your care before the benefit takes over. If you have followed along with me throughout this risk management series, you might look at this in the same way that you would look at a short-term disability policy.
In each of these cases, there is a period of time in which you are waiting for the long-term coverage to take effect and begin paying a benefit. However, unlike the short-term disability, you are expected to pay any expenses that are incurred during the elimination period. The benefit of a longer elimination period or a higher deductible is that your premiums will be lower. So, if you are able to afford it, it may be worth it to take on a longer elimination period.
Your insurance agent may explain to you that your policy has a benefit period. Rather than paying a continuous benefit for an undetermined length of time, many long-term policies use a multiplier to determine the total benefit pool available in your policy. You are paid from a fixed sum of money that is determined by the specifics of your individual policy.
In my earlier example, I stated that you could be okay with a $4000 per month policy. In order to determine your benefit pool, you would multiply the monthly benefit of $4000 x 12 x 5. The total amount that the insurance company pays in this scenario is $240,000. So what if your care only ends up costing $2000 per month and you’ve already purchased $4000 worth of insurance? That same benefit pool will now cover ten years of care.
The majority of long-term care insurance policies cover home-based care as well as nursing homes and assisted living facilities. However, the care provider must be a licensed professional that is willing to provide a detailed invoice to the insurance company for the treatment being given.
Because of the high cost of long-term care and the likelihood of claims against the policies, long-term care insurance is a medically underwritten product. Women are more likely to receive such benefits, as a result, they pay higher premiums in most cases. Likewise, people with health problems such as cancer or obesity, also pay higher premiums.
Insurance companies Assess the risk they are taking with each policy they sell. Some people pose too great a risk for the insurance company to take a chance on and are deemed uninsurable. When determining whether or not they can insure a client, they will often evaluate their morbidity and their mortality.
Morbidity refers to the client’s likelihood of making a claim against a long-term care policy, while mortality has to do with the relative possibility of death in regards to a life insurance claim. Now, death is inevitable but there are certain factors that can hasten its inevitability. However, even high-risk clients need insurance. So what can those who are uninsurable do to provide long-term care for themselves?
There are riders that can be added to your life insurance policy to protect you in the event you should need to receive long-term care. Essentially, you are receiving a portion of your death benefit in order to cover the cost of your long-term care. However, the issue of morbidity still applies here. If you are too high-risk, the life insurance company won’t allow you to add a rider to your plan.
If you find yourself uninsurable, you still have the possibility to purchase an annuity. An annuity ensures that you always have an income. Many of them have begun to offer kickers that go into effect should you ever need long-term care. So if your annuity pays $1000 per month, it might go up to $2500 per month upon entry into long-term care. Annuities come in three basic forms and your insurance provider can tell you which one is right for you.
In a nutshell, long-term healthcare is a risk that becomes a reality for a large number of people. Having the proper insurance coverages in place can shield you, your employees, and your business from such a costly risk. I hope that you never find yourself or a loved one needing long-term care. However, with proper planning, you will be ready for it if you do. Life is often complicated. At least we can live financially simple.
Many thanks to Jim Detar of Heritage Investors for his help building this article.