Thursday, September 23, 2021

‘Double Bind’ Makes LTC Insurance Extra Challenging for Women

Women typically live longer and earn less, so making informed decisions about long-term-care insurance is critical.

Kimberly Foss
Kimberly Foss

In my financial advising practice, I often find myself counseling women who are nearing retirement or already there. One conversation that occurs with regularity centers on the uncomfortable realities of the “double-bind” that women in retirement frequently face: They will statistically live longer in retirement than men of the same age, and yet they have typically spent fewer years in the workforce and have earned about 85% of what their male counterparts have garnered.

In other words, they can expect more expenses, but they have fewer opportunities to accumulate the assets needed to pay for them.

This is nowhere more true than in the area of long-term care expenses. Contrary to the assumptions of many, Medicare does not pay for most long-term care expenses (sometimes called “custodial care”).

On the other hand, according to WiserWomen.org, “Women spend twice as many years in a disabled state as men do: 2.8 years if they live past 65, 3 years if they live past 80.” And the costs of providing the care needed for those unable to care for themselves can be very significant.

Insurance provider Genworth estimates that provider costs for services like extended stays in a nursing home, home health aides, or adult assisted-living facilities can range from $19,500 to more than $100,000 per year, depending on where you live.

One way that women can address the looming prospect of long-term care expenses is through the purchase of a long-term care insurance (LTCI) policy. LTCI falls under the authority of each state’s insurance laws, and each state has differing products available at prices (premiums) calculated from the costs typical for that state. The National Association of Insurance Commissioners maintains a website (NAIC.org) that provides basic information about long-term care policies along with a listing of contacts for each state. NAIC also provides a basic “Shopper’s Guide to Long-Term Care Insurance” that provides useful information on general policy types and provisions, along with state-by-state resources to help consumers make knowledgeable decisions about LTCI purchases.

Product Basics

LTCI policies come in different packages, including individual policies, group plans (offered by some employers), federal and state government policies (available to federal and state employees), and association policies (offered by AARP, American Heart Association, Meals on Wheels, and others). But regardless of the type of plan, all LTCI policies have certain basic components, and these are the most important factors women should consider when comparing LTCI policies.

1. The waiting (elimination) period. This is the amount of time the policy owner must experience eligible long-term care expenses before the policy begins paying benefits. Waiting periods typically range from 30 to 180 days, and the shorter the waiting period, the higher the premium paid for the policy.

2. Benefit period and amount. This is the time during which benefits are paid by the policy. Benefit periods typically range from a year to the lifetime of the policy owner. Policy owners choose their benefit amount, and it is important to know the average prices for various costs in the policy owner’s area, such as nursing homes, assisted living centers, and home health agencies. Obviously, the higher the benefit amount and the longer the benefit period, the higher the premium.

3. Inflation protection (optional feature). Because a policy may be in force for some time before benefits are needed, most policies offer an option for inflation protection. This is an optional feature, and it costs more. However, because it is such an important part of the decision, most states require a person considering the purchase of an LTCI policy to receive a 20-year illustration comparing policies with and without inflation protection. Typically, if the policyholder elects not to purchase inflation protection, this must be in writing.

What Clients Should Ask

When should I buy? Like life insurance, the younger and healthier the purchaser, the lower the policy premiums. But there’s a tradeoff to consider, since it can be years before the policyholder actually needs the benefits. According to AARP, more than 95% of LTCI claims are filed by persons 70+, and 70 percent are filed by insureds 81 and older. In other words, buying a policy when the insured is in her 50s, though it may result in a lower premium, can add a lot of years of premium expense before any benefits are received. Some advisors suggest the “sweet spot” is around age 60, and most agree that those needing LTCI should own it by the time they reach 65. Remember: Because of their longer lifespans and higher likelihood of needing custodial care as they age, women’s premiums are higher than men’s.

Is the policy portable from one state to another? Yes, an LTCI policy, like any other insurance policy, is basically a legal contract, and it remains in force even if you no longer live in the state where you purchased it. The only caution is that costs for custodial care differ significantly from state to state, so it’s wise for the policyholder to know what their benefits are and how they will stack up in the state where they would be filing the claim for benefits.

Are there any exclusions I should worry about? Common exclusions (reasons expenses are not covered by the policy) include costs incurred outside the US, costs due to alcoholism or drug addiction; costs covered by VA benefits or other federal programs; costs for care provided by immediate family members (though some policies permit coverage of paid care by family members); and costs incurred for certain types of mental illness (though Parkinson’s, Alzheimer’s, and dementia are usually covered).

How can I decide if the cost is worth the benefit? This is the crucial choice. For those with family members nearby and able to provide assistance, or for those whose family history indicates a low likelihood of needing custodial care, LTCI may not even be necessary. For those lacking such advantages, it is vital to carefully consider the average daily costs for common custodial care services in the area over the likely period of need (on average, women need services for 3.7 years, compared with 2.2 years for men). They should also consider any other assets that would be available to help defray expenses, with a strategy of having LTCI cover the most basic costs and using other assets for “extras.”

Because LTCI is regulated by the states, federal legislation is unlikely to have any foreseeable major impact on the product or its use by policyholders. For women clients, it is vital to understand the role LTCI can play in protecting retirement assets from being eaten away by costs for custodial care.

 Kimberly Foss, CFP®, CPWA®, CFT-I™ candidate is president and founder of Empyrion Wealth Management™ and author of Wealthy by Design: A 5-Step Plan for Financial Security. Kimberly combines a technical expertise with a real passion for her work with her clients, including family stewards, women in transition and thriving retirees. Kimberly regularly shares her financial expertise with leading media outlets.

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