Long Term Care- Buyer Beware

February 16, 2022

All of us are getting older.  Someday, perhaps 4 out of 10 of us will need Long Term Care (“LTC”).  LTC are services intended to provide support to those who are unable to perform basic activities of daily living such as eating, dressing or bathing or need assistance due to severe cognitive impairment.  LTC can be provided at home, in the community, in assisted living or in nursing homes. We think everyone should have their plan in place to fund their potential LTC needs by their early 60s. We caution you to be careful as you go through that process. Here’s why:

The two basic options are to obtain insurance or self-insure.  We’ll first look at insurance, and particularly at a “hybrid” policy that offers both LTC benefits and a death benefit.  We recently reviewed this information for a couple, both of whom are 60, and other clients have received similar solicitations.   Of course, not every hybrid LTC and whole life policy would look like the one we will describe today.  But, this summary demonstrates what some insurance companies are pushing and what some people are buying. Caveat emptor.

The proposal we reviewed would provide LTC benefits if needed and, if the LTC benefits are not needed or only a small amount is paid out for LTC, then a death benefit is provided.  In this example, the LTC benefits would be $4,000 per month per each member of the couple for 33 months, after a 90 day elimination period has passed.  There is no inflation protection on these amounts.  In addition, after the 33 months of payments have passed, this policy would provide “unlimited” lifetime benefits.

Here’s a small chart of the summary given to them by the insurance company:

The one-time premium is $120,000.  Just to put this amount in perspective over time, if $120,000 was invested now and earned 6% per year for 30 years it would be worth $690,000.  The death benefit on this policy is $133,000, so if this couple paid their $120,000 premium and died in 30 years without getting any LTC money from the policy, they would receive $133,000, about $400 return per year.

Let’s now take a look at the LTC benefit.  The current daily cost of LTC varies by state and is roughly $240 per day on average.  That’s $7,200 per month and the cost is inflating 3% per year.  So, the $4,000 monthly benefit in the policy would provide roughly 55% of the current cost and in 30 years, when the daily rate might be $582 (and the monthly fee $17,400), the $4,000 benefit would provide about 23% of the monthly cost.  Not a super benefit.

The “unlimited” benefit is likely not a huge benefit either. The payments made for LTC reduce the death benefit.  If one person in the couple needed LTC for 36 months and, therefore, received 33 monthly payments of $4,000, that is a total of $132,000 of LTC benefits paid, then almost all of the death benefit of $133,000 has been paid. After $1,000 was paid for this person or their spouse, the death benefit will be fully paid out and the continuation of benefits would start. However, for those 40% of Americans that do need LTC, the average time that LTC is needed is normally less than two years.

Insurance companies, like other companies, are in business to make a profit. Profit is a respectable goal, but hybrid LTC policies similar to the one described here are simply rip offs. The figure on the above attached chart that really stands out is the cash surrender value.  Cash surrender value is the amount left over after fees when you cancel a permanent life insurance policy or annuity.  So, if our couple wanted to cancel this policy after one year, the one they paid $120,000 for, they would receive $46,000.  That’s $74,000 of commissions, other upfront fees and company profit that were paid in year one.  What’s interesting is if you take the $46,000 left and grow it at 6% for 24 years (average mortality of 60 year olds), you get a value of $186,000, which is more than the death benefit of $133,000 provided by this insurance company.

From our perspective, no one should buy this insurance policy.  Instead they should either self-insure LTC costs or find a LTC policy with better value.  As we showed, assuming the 60 year couple had the $120,000 to self-insure, that hopefully could grow to $690,000 in 30 years.  Assuming they have a 40% chance of needing LTC, each with a 2 year LTC need and assuming a $17,400 monthly expense in 30 years, their likely need is $334,000 ($17,400 x 24 x 2 people x 40%).  If they don’t need any LTC, then their heirs get the full $690,000 or more, depending on how long they live.

If someone doesn’t have the money to self-insure or simply is convinced that LTC needs will hit their family very hard and they need/want to be well insured, then they should find a good policy that meets their specific needs including appropriate daily benefit, inflation factor and pooling of benefits for spouses.  Not every policy is bad, we have seen very good policies out there that can accomplish this.

As you know, DWM is a fee-only fiduciary. We don’t sell any products, including insurance, but we know insurance.  As you have seen above, we are able to take a very important topic, like funding for LTC costs, and focus on the numbers, understanding that buyers must beware with reviewing these kinds of policies.  We’re here to help you put a plan in place for your LTC funding and suggest you get it done by your early 60s. Give us call.




Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page