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Considering long-term care coverage? Here's a reality check

  • Retirees with portfolios between $1 million and $4 million may be the most sensible market for long-term care insurance. It makes less sense for wealthier or less-advantaged people.
  • New, less-expensive LTC products include life insurance hybrid plans, LTC annuities, short-term care policies and "long-term partnership" programs.
  • Purchasing LTC insurance is not just for older clients anymore.
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Gary John Norman | Getty Images

As more people are thinking about long-term care planning for their elder years, the industry is responding with ever more options.

However, complete coverage may be out of reach for most people. Younger generations are taking notice, whether to encourage their parents to prepare for possible late-life infirmities or to make preparations for themselves earlier in their own lives.

Increased interest

Long-term care has been a hot topic since about 2000, said Brock Jolly, certified financial planner and partner and co-founder at Veritas Financial. He attributes this increased interest to market declines, modern medicine keeping people alive longer and the evolution of the LTC industry.

Pricing insurance products has been tricky, he noted.

"The big unknown is how long the person may live," Jolly said. "Life insurance is easy to price, because we have actuarial tables, but with long-term care it's not about mortality, it's about morbidity."

Interest is escalating.

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"In the last year and a half, I'm seeing more interest from baby boomers going through it with their parents," said Kerry Peabody, long-term care specialist at Clark Insurance. "They're saying, 'I don't want my kids to go through this.'"

In fact, adult children are getting more involved, said CFP Eric Mancini, a wealth advisor with Traphagen Financial Group.

"We have seen where sons and daughters are paying the long-term care premiums," he said.

Reality check

"When most people come in, it's black or white in their heads — Do I get [long-term care insurance] or not?" Mancini said. "Half of our job is to dispel that, to educate them that it's more like a spectrum."

Who can afford long-term care insurance? Mancini breaks down the numbers:

  • People with portfolios of more than $4 million at age 45 to 65 have enough to self-insure with earned income and Social Security and don't need to purchase long-term care insurance.
  • Those with portfolios of $1 million to $4 million ($2 million or $3 million is best) is where these products make sense.
  • For those with investable assets of $1 million or less, long-term care insurance may be not worth the risk and reward. He gave the example of a couple in their early 60s in sound health with a $750,000 portfolio ($400,000 in an individual retirement account, $350,000 in brokerage accounts and $40,000 in annual Social Security for both.) The premiums could be $4,000 per year to get a $4,500-per-month benefit. The insurance would not be worth it, because both the premiums and eventual out-of-pocket expenses would quickly drain their cash.

Furthermore, many people buy long-term care policies that do little to address their risk, said Scott J. Witt, fee-only insurance advisor with Witt Actuarial Services.

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"In my experience, the vast majority of consumers come away from this process with a false sense of satisfaction and confidence that they have adequately covered this risk, when in reality they could still be wiped out by a catastrophic long-term care episode," he said.

By the time most clients buy a policy, they have skimped on a number of areas to get an affordable premium, Witt said. They may have dropped inflation protection, shortened the benefit period, lengthened the elimination period or lowered the monthly benefit.

"The end result is that the protection they have against a catastrophic event is really just a drop in the bucket."

Evolving products and attitudes

The industry, however, has been developing more affordable products to help more people hedge their risks. Peabody of Clark Insurance discussed several newer options:

  • Life insurance hybrid plans. These can be available as a life insurance policy with a long-term care rider, allowing the policy holder to dip into a portion of the death benefit; or with a chronic illness rider for those who cannot qualify for regular long-term care coverage due to an ongoing condition.
  • Long-term care annuities.These can provide coverage at two or three times the amount of the policy holder's premium total.
  • Short-term care policies. These provide coverage for up to one year for situations such as elimination periods required by long-term care policies.
  • Long-term partnership programs. Offered by many states, these provide additional asset protection to those with qualified long-term care policies, allowing to them to keep additional assets should they apply for Medicaid.

Veritas Financial's Jolly has also worked with limited-pay long-term policies, whereby a consumer pays a premium for a limited number of years. When the payments are completed, the policy owner does not owe anything more and can receive the allotted level of coverage indefinitely.

Purchasing long-term coverage may not be just for older folks anymore.

"Life insurance is easy to price, because we have actuarial tables, but with long-term care it's not about mortality, it's about morbidity." -Brock Jolly, partner and co-founder of Veritas Financial

"I reject the broad brush that one must wait until age 50 or 60 to purchase coverage," said Kent Schmidgall, CFP and wealth advisor with Buckingham Strategic Wealth, who purchased coverage eight years ago at age 27.

He said his main reasons for doing so were:

  • At any age he could become disabled from a disease or accident.
  • He may not qualify for coverage later if his health deteriorates.
  • Statistically, either he or his wife will need long-term care during their lifetime.

"My philosophy is that the right time to buy it is when you can," Schmidgall said. "If you are healthy but can't afford it, then that's not the right time.

"If you can afford it but are no longer healthy, then that's not the right time, either."

— By Deborah Nason, special to CNBC.com

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