Emotionally, long term care insurance is a very compelling financial product. No one wants to be dependent upon future generations or to spend their beneficiaries’ inheritance on medical bills.
The reality is, however, that high net worth families, in particular, are better served by purchasing life insurance, rather than LTC insurance, to protect against the erosion of assets from medical costs.
Planning for future medical bills and the cost of personal care for activities of daily living is a high priority for baby boomers entering their retirement years. But LTC insurance may not be the most cost effective vehicle for high net worth families if given the option of electing between LTC and life coverage. (For purposes of this article, high net worth refers to people having liquid, marketable securities or cash assets of $2.5 million or more.)
The rationale for those interested in the purchase of LTC insurance is often that the insurance is necessary to protect the family estate from erosion due to future medical expenses from chronic or extended illness. Yet, the coverage may be needed or, as shown in Table 2 (see page 27), it may be needed for a relatively short period (1-2 years in many cases). So there is a real possibility that there will be little or no payout of benefits from LTC coverage.
If an insurable individual is concerned about future medical care, and has the resources to self-fund these costs, he or she should consider purchasing life insurance instead of LTC insurance. This will protect the individual’s assets for heirs or charitable beneficiaries upon death.
Life insurance, if properly structured, has a high, if not absolute, probability that it will pay benefits to the contract beneficiaries. By comparison, there is no similar guarantee of benefits payable to an individual who purchases LTC insurance but may never require use of the coverage.
Consider the example in Table 1. It assumes that a high net worth man, age 54, in the best health underwriting class, is looking to insure against future “asset erosion.”
If the amount of LTC premium is applied to a life insurance policy, the resulting guaranteed death benefit to the man’s family is $424,450. In order to achieve the same benefit (asset erosion protection) from an LTC policy, this man would need to receive a $300 per day benefit for 3.88 years.
But it is projected that less than 6% of individuals age 65 would surpass a 3-year benefit period (as per Table 2). Therefore, in cases where asset erosion is a wealthy client’s main goal, an overwhelming majority of individuals would not get as much benefit from LTC insurance as they would get by spending the same amount for life insurance coverage.
Sean Maher, CLU, CFP, is president of Valley Forge Financial Group, Inc., an M Group member firm based in King of Prussia, Pa. His e-mail address is firstname.lastname@example.org