What Your Long-Term Care Insurance Won’t Cover

No one wants to become a financial burden on their families as they age. In fact, every one of my clients who has made the decision to purchase long-term care insurance cited this concern as a driving factor. They felt that with the purchase of a LTC policy, they would ensure that their children would never be saddled with the responsibility of having to provide for them as they age.

But you know what they say about the best-laid plans.

Certainly, LTC insurance can be a wonderful thing, and thousands of American families would tell you truthfully that it’s been a lifesaver during their time of need. But in the last year, several of my clients have been disheartened to discover what their LTC policies don’t cover — and, consequently, what they hadn’t budgeted for.

So I’ve come here with a warning that, while LTC policies can be excellent once you’re sick enough to need round-the-clock nursing care, they do nothing to cover you during those in-between years.

You know the ones, even if you don’t like to talk about them. It’s the years when you’re still able to, say, get dressed and make a sandwich, but you’re unable to do things like drive to the grocery store or clean the house. I’ve come to think of these years as their own “doughnut hole” of eldercare, so to speak, because during these years we’re in need of more care than Medicare will provide, but we’re not sick enough to trigger the start of LTC policies.

Of course, all of this is to say nothing of the loneliness we may feel when we find ourselves smack in the middle of this eldercare doughnut hole, because it’s during these years when we may be learning to live without a spouse for the first time. This transition will be difficult enough without the realization that we don’t have enough money to see us through until our LTC policies kick in.

Imagine the disappointment you’d feel when you realize that the very things you were trying to prevent when you bought your LTC policy — needing to move in with your son or daughter, or selling your family home — you’ll have to do anyway, because you don’t have enough saved to hire a home health aide or someone to take you out grocery shopping.

As a society, America has planned for retirement with the kind of passion that only a Wall Street trader could love. Seriously.

The industry has instructed us to channel all our money and energy into estate planning, retirement planning, tax planning and mitigating end-of-life risk with products like LTC insurance. But these products that Wall Street so eagerly sells us only help us tell part of our end-of-life story.

Yes, LTC policies can offer us a hedge against some of the worst-case scenarios, but it’s a costly and oftentimes depressing mistake to believe that old age can be “taken care of” with a wave of an LTC magic wand. There’s so much more to it than that.

In my more-than-40-year career as a financial advisor, the dialogue around life expectancy has changed significantly. Just 10 years ago, when I mentioned the possibility of living to age 88 or 90, my clients would laugh. Today, many of them actively ask to hear about strategies for funding their lives until age 95 and beyond. In other words, living until 100 is no longer a pipe dream; it’s a reality.

And not only do we want to ensure that our money lasts as long as we do, we want to ensure that we can retain our independence for as long as possible. Thankfully, there are steps you can take now to make certain you never become a financial burden to your children.

Don’t over-insure yourself if it means not having enough money to live. In other words, don’t spend so much on LTC insurance premiums that you render yourself unable to save for things you might need when you hit the eldercare doughnut hole window. The worst thing you can do is give up living your life today in order to maintain your insurance policy.

Yes, LTC can be a wonderful thing once you’re in serious need of care, but don’t bankrupt your ability to live independently or forego that trip to Disney with your family because you’re worried about scraping together enough cash to afford your annual rate increases.

When it comes to purchasing LTC insurance, make sure you compare plans. Look at those that might offer a smaller current benefit, but that come with an unlimited cost-of-living (COLA) increase. Then compare those plans to ones that come with a high current benefit, but offer no COLA increase.

Typically, a $150-per-day plan with a three-to-five-percent annual COLA increase will be more expensive than a $250-to-$300-per-day plan that doesn’t come with a COLA increase. Why? If you give an insurance company a predictable risk, they can deliver reasonable rates. But if they have no idea what their exposure is going to be in years to come, they have an unlimited liability potential, which means they’ll have to charge you enough to cover every ounce of their risk.

By choosing the plan without the COLA increases, you’re limiting the insurance company’s risk exposure, which means you’ll pay less in premiums now, and reduce your chances of getting hit with future rate increases. You can then put any extra funds that you might have spent on LTC premiums towards covering expenses during your time in the eldercare donut hole.

Instead of LTC insurance, look into old-fashioned participating “whole life” insurance policies, with a chronic illness rider. With these policies, if you wind up needing to move into a nursing home or other LTC facility, you can spend your death benefit completely tax-free for your care. If you shuffle off earlier than expected, your heirs will receive the benefit at your death. These policies are also a safe place to park your cash if you need it. No, they aren’t right for everyone, but if done correctly, no other product on the marketplace really compares. I give a more thorough breakdown of exactly how it works here.

Understand that every retiree’s real risk is running out of money, so save as much as you can now. Remember that having liquidity in your portfolio will eventually be more important than tax deferral, and paying your taxes sooner rather than later (in other words, drawing down on your accounts more than you think necessary) actually increases your financial security as you age.

The next time you hear someone say something to the effect of, “I don’t have to worry about healthcare costs when I get older because I have long-term care insurance,” I hope you’ll send them this article, and remind them that the doughnut hole of eldercare comes for almost all of us eventually.

Advise them to look at an old-fashioned whole life insurance policy that can help them bridge the gap, and remind them that LTC insurance is much more like hurricane insurance than it is like Medicare — it’s there for you when disaster strikes, but you need other means of protection to help you weather life’s smaller storms.

Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an investment advisor representative of Capital Investment Advisors in Georgetown.

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