Why long-term care insurance is important

(MoneyWatch) Even a well-developed investment plan can fail for reasons that have nothing to do with investments. It could fail because the family breadwinner dies prematurely and doesn't have enough life insurance to cover her loved ones. Or it could fail because of an auto accident that results in a large judgment, and there's insufficient liability insurance in the form of an umbrella policy.

This is why it's critical to integrate an investment plan into an overall estate, tax, and risk management (insurance) plan. One area of concern that is all-too-often overlooked in the need for long-term care insurance (LTCI).

According to a survey by Sun Life Financial (SLF), there's a major disconnect between people's need for LTCI and the preparation for that need. While just 36 percent of those surveyed believed that they would need such insurnance, it's estimated that at least 60 percent of people over age 65 will require some long-term care services at some point in their lives. The survey also found that 84 percent said they don't feel financially prepared for LTCI.

And this is almost surely an understatement for two reasons. First, contrary to what many people believe, Medicare and private health insurance programs don't pay for the majority of long-term care services that most people eventually need, such as help with personal care such as dressing or using the bathroom independently. Second, when asked to estimate how much costs would increase by 2030, the average estimate put the figure at 56 percent. Based on historical data, by contrast, the costs are estimated to rise 123 percent.

So planning is essential for you to be able to get the care you might need. Yet despite the obvious need, LTCI is often overlooked as a crucial planning tool. It's estimated that perhaps only about 10 percent of the over 70 million baby-boomers actually have a policy that will cover the costs of long-term care. Without incorporating the potential need for long-term care into a plan, individuals and families may unfortunately face the need for long-term care without the necessary tools, resources, or knowledge.

Why People Fail to Plan

There are many reasons why people fail to plan ahead for long-term care. For example:

• The natural tendency to avoid thinking about becoming dependent on others for your care
• Misinformation about the risks of needing care
  
• Ignorance regarding the cost of care and of payment options

In addition, most people don't like to think about getting older, developing a disability, becoming less independent, or needing help with personal care. Unfortunately, there is a reason that the following adage is so often cited: "Those that fail to plan, plan to fail."

Understanding the Product

LTCI can provide for personal and custodial care for an extended period of time. The trigger for this is the help with or loss of at least two activities of daily living (ADLs). These include six categories: bathing, dressing, eating, transferring, toileting, and continence.

The "loss of ADLs" could be the need for substantial assistance, whether it's hands-on, standby, or supervisory. Any cognitive impairment, such as Alzheimer's and dementia, are automatically covered whether or not the two-ADL trigger is met.

A common misperception of long-term care is that it's the same thing as nursing home care. While care may be received at a nursing home, it can also be used at an assisted living facility, adult day care, with respite services or for home-based care.

Care can be defined in two ways:

• Care for custodial (personal) needs -- Care provided to assist with ADLs or to meet personal needs, such as assistance with bathing, dressing, eating, or getting out of bed.
• Care for skilled needs -- Care provided by a licensed health care professional such as a registered nurse, physical therapist, or speech therapist. This care must be ordered by a physician.

LTCI is a tool that can help preserve and protect financial assets, provide flexibility to choose the type of care, offer the ability to choose where care is received, help to ensure high-quality care, and provide financial and emotional support for the family. There are six areas to consider regarding the need for a LTCI policy.

How much coverage is right for you?

In this case, you should consider the cost of care in your area and the daily benefit amount you need and want. (These may be two different answers.)

Where would you like to receive care?

There are several options available for care, not just the traditional idea of going to a nursing home. Other examples include home health care, assisted living facilities, and adult day care, to name a few.

How would you like to receive your benefits?

There are two main ways for you to receive LTCI benefits:

• Reimbursement -- Reimbursement for actual expenses accrued on a monthly basis
• Cash -- Most expensive option, up to 20 percent additional cost

How long do you want to receive benefits?

There are several factors to consider regarding receiving your benefits. Benefit periods typically are two, three, five, seven, and 10 years and depend on your carrier. A lifetime option is available but not often used. Also, the benefit period is driven by a pool of money. For example, a $150 daily benefit allowance over a five-year policy yields a total lifetime benefit of $273,750 ($150 x 365 days x 5 years). The benefit will remain even if five years has elapsed until the pool of money is depleted.

Another consideration is the availability of shared care. For example, a husband and wife, each with a three-year benefit period, have six years total between them to use as necessary. So if the husband needs five years of care, he can use both policies, with his wife still having one year available for her own care.

What type of inflation protection would you like?

Inflation can have a significant impact on how far your benefits will go. There are many inflation options available, such as simple or compound 3 percent or 5 percent, or possibly increases by the CPI or additional purchase options.

How long can you wait before benefits are paid?

The "elimination" period is the period of time you're responsible for paying the cost of your care services. A typical elimination period is 100 days.

As is the case with many other financial issues, a so-called Monte Carlo statistical analysis can help you decide on the proper course. For example, that might reveal that a couple's portfolio has sufficient assets to maintain their desired lifestyle if neither ever has a need for long-term care. However, if one or both need long-term care for an extended period, then the portfolio has a significant likelihood of being strained, or even depleted. In addition, this analysis might reveal that the incremental costs of a LTCI policy won't significantly reduce the odds of success.

Photo courtesy of Flickr user simaje