Two ways to defray this retirement risk: How to choose what's right for you

  • The national median annual cost of staying in a nursing home is approaching $90,000, according to Genworth Financial.
  • Options to help address this expenses include traditional long-term care insurance or life insurance that covers some care benefits.
  • Customers have faced premium rate increases for traditional long-term care insurance policies.
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Here's one retirement risk that you can't quite save for: The possibility that you'll need long-term care either at home or at a professional facility.

Individuals who are now at retirement's doorstep can expect to live and plan for another two decades of life.

Perhaps the biggest threat looming for these individuals is the possibility that they may require long-term care as they age — and that they'll be unable to pay for it.

That's where financial advisors come in.

"One question I get all the time is, 'Should I buy long-term care insurance or self-insure?'" said Thomas J. Henske, a certified financial planner and partner at Lenox Advisors.

For those who don't have the resources to cover all of the expenses out of pocket, there are two options: life insurance with some form of care benefit or traditional long-term care insurance.

Here's how to decide what is right for you.

Rising expenses

Senior couple in senior home
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In the 1990s, there were more than 100 insurers selling traditional long-term care insurance, according to the National Association of Insurance Commissioners.

That is, a policy for which you would pay monthly or annual premiums with the expectation that you'd receive coverage for five years, 10 years or for an unlimited period.

Insurers struggled with the business: They faced prolonged periods of low interest rates, too few customers surrendering their policies and more customers than expected using their benefits.

Clients who retained their policies also had their difficulties: Insurers sought to raise premiums in order to deal with the high cost of providing the benefits.

As of 2014, the NAIC pointed to about a dozen insurers still actively selling long-term care insurance. That number has continued to drop off, and sales have tumbled.

Meanwhile, insurance companies have sought double-digit premium hikes on long-term care insurance clients who are keeping their policies.

As a potential alternative to traditional long-term care insurance policy, insurers launched a type of life insurance policy with the option of adding a rider to help cover care expenses.

This is what's known as hybrid or linked-benefit life insurance.

Multiple methods

Before deciding whether to go with traditional long-term care coverage or a product that combines coverage for care plus life insurance, consider the similarities and differences between the two.

Premium schedules: A 55-year-old couple in the best health, purchasing a pool of benefits that will be worth $333,000 for each in 30 years will pay $3,000 in combined annual premium this year, according to the American Association for Long-Term Care Insurance.

That initial outlay may not sound like much, especially considering that hybrid life insurance products tend to be single-premium — that is, you make one large lump-sum premium payment — or you make a series of payments over five to 10 years.

But don't forget that premium levels for traditional long-term care coverage aren't guaranteed.

"You'll end up in a situation where you need the coverage as you approach the age," said Phil Jackson, senior planner specializing in insurance at ValMark Financial Group.

"You're asking to receive less of a benefit for the same premium or to pay more in order to keep your old benefits," he said.

Benefit payouts: Clients were once able to purchase traditional long-term care insurance that would allow them to claim benefits for an unlimited period.

These days, the benefit offered is typically between three to five years of care, subject to daily or monthly maximums, said Derek Holman, a CFP and managing director of EP Wealth Advisors.

"One question I get all the time is, 'Should I buy long-term care insurance or self-insure?'" -Thomas J. Henske, partner at Lenox Advisors

In comparison, monthly maximums may come into play with hybrid life insurance. However, the cash you receive comes from the acceleration of your policy's death benefit.

This way, money you use when you go on claim will reduce the proceeds your heirs will receive when you die.

Use it or lose it: One of the downsides of traditional long-term care insurance is that unless you go on claim, you've pretty much given your money irrevocably to the insurer.

"They perceive the premiums to be a waste because they think it will never happen to them," Henske said.

Hybrid life insurance addresses that "use it or lose it" worry by giving clients options.

Generally, you can go on claim if you're unable to perform at least two activities of daily living (such as dressing or bathing); your heirs can receive death benefit proceeds if you die; or you'll get some money back if you decide you no longer want the policy and surrender it to the insurer.

Always start with a plan: Regardless of whether you buy insurance, you'll need a plan to address your long-term care needs.

Work with your advisor to hash out how you would like to receive care, get your powers of attorney for health and finances together, and collaborate to find the best way to pay for your long-term care costs.

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