Let's face it; most individuals don't see themselves in a skilled nursing home or in assisted living in their future. At least this is the conclusion that can be drawn if we look at the number of individuals who actually own long-term care insurance. Perhaps this is because we believe that a family member will be available to provide care for us if it is needed. On the other hand, it could be that our psyche just does not allow our mind to dwell on this possibility. Unfortunately, the statistics tell another story.

According to the US Department of Health and Human Services website, at least 70% of people over 65 will require some long-term care services at some point in time. They forecast that more than 40% will need care in a nursing home. The chart below, using data from the American Association for Long-Term Care Insurance 2014 Sourcebook, provides some additional perspective on the likelihood of needing care as well as the types of claims being filed.

If there was only a 40% chance of your home catching fire, would you consider forgoing insuring for this type of disaster? (By the way, the odds of a house catching fire in the U.S. are less than 1%. Of course those odd vary by location and other relevant circumstances.)

So, why are so many individuals reluctant to purchase long-term care (LTC)? Over my career as an advisor, I have had this conversation many times. From my experience, there are two major barriers: (1) the cost of LTC insurance, and (2) the fear that the insurance would go unused.  

The chart above provides the annual cost of nursing home care (private room) by state. In Pennsylvania, the annual cost is approximately $120,000. Clearly, LTC insurance is costly, but it is easy to see how a LTC policy can pay for itself if one spends any extended time in care. If one is able to sell his/her personal residence and divert annual income (pension/social security) to pay for care, then some or all of this cost can be covered without liquidating assets. However, if the family home cannot be sold and/or if the income is also supporting a healthy family member, other assets will be needed to cover the cost of care. This may impact the family balance sheet quickly. Some people make the decision to spend down assets for care (self-insuring) should the need arise. But when there is concern about the impact that chronic illness can have on one's assets, LTC insurance can also be evaluated as a form of long-term portfolio protection.

Even if one can accept the annual premium cost of LTC insurance, the fear of never using the policy still deters many individuals from moving forward with purchasing the insurance. Although it has been available for a few years, many people are not aware that LTC insurance is also offered in another wrapper, and this wrapper helps to address the concern that the premiums may be wasted. Some life insurance policies now provide (through the use of a LTC rider) the ability for individuals to access funds to pay for assisted living and nursing home care as well as in-home health care and adult day care. A Long-Term Care Rider is designed to accelerate a portion of the Death Benefit under the policy to reimburse expenses classified as LTC. These benefits kick in when the policyholder needs help with at least two activities of daily living. In addition, the premium for this permanent life insurance is usually fixed, which avoids the unknown annual increases to stand alone LTC policy premiums.

Here is a very simple example. Mary purchases a $500,000 life insurance policy with a LTC rider. Mary never uses the LTC benefits under the policy before she passes away. Her son, George, is the beneficiary of the policy and receives a check for $500,000 upon Mary's death. What if Mary enters an assisted living home? The insurance company will reimburse Mary monthly under the terms of the policy. Assuming Mary selected the 1% of face value option, she could receive up to $5,000 monthly to provide for covered care. Upon Mary's passing, if the face value of the policy has not been depleted, George receives any remaining death benefit.

This is a fairly new product/concept to the long-term care industry, and it is an important one. It is important because it provides some additional flexibility to purchasers of LTC insurance. The hybrid policy captures the benefits of life insurance with the peace of mind of paying for long-term care if needed. However, there are still considerations that must be reviewed:

1. Cost - individuals can now buy life insurance with a LTC rider. The LTC rider is less expensive than a traditional LTC policy; however, the life insurance premium must be considered. 
2. Necessity - one must evaluate the need for life insurance. The life insurance may be able to fill an important role in one's overall plan, but if not, it may be more advantageous to only purchase some level of LTC protection.

The purchase of LTC insurance, as with any financial decision, should be reviewed in the context of your overall financial goals and objectives. If you would like more information or just need assistance putting this decision into a big picture perspective, talk to your financial advisor.