A few weeks ago, we discussed long-term care insurance and how it can be used to safeguard your assets in the event that you need extended care to help with your activities of daily living. The discussion continues today.
As with all insurance, you never hope to actually use your long-term care policy. However, if you do, be mindful that the cost of care will be significantly different years from now than it is today. For that reason, it is imperative that you select a policy where the benefit increases to offset the rising cost of care – also known as cost of living adjustments.
There are multiple options to keep pace with inflation. One method increases the benefit by a set percentage annually, perhaps 3 percent. Another option increases the policy by the consumer price index, the benchmark used to measure inflation in the general economy. While both of these options are useful for maintaining your benefit, keep in mind that healthcare costs often increase at a faster pace than goods like cereal and vegetables. Therefore, do not be surprised if even the best policy does not offset all of your ongoing long-term care expenses.
Regardless of the type of insurance you purchase, insurance companies want you to have a financial interest in what is being protected. Long-term care policies are no different. Instead of having a deductible as you would in a homeowner’s or auto policy, long-term care policies have a waiting period. This is the amount of time that you agree to bear the cost of care before the insurance company pays a benefit.
As a general rule, the longer the waiting period, the lower the premium. The reason for this is because the consumer is taking more responsibility for his or her own costs prior to the insurance company having to step forward. Longer waiting periods also reduce the time that the insurance company must pay benefits. Before selecting a policy, ask your certified financial planner how long you can afford to self-insure before needing to draw a benefit. A difference of 60 or 120 days can decrease your premium significantly and make it more affordable over time.
On the opposite end of the spectrum, you need to consider the benefit period. This determines the length of time to draw a benefit. Some standard options include two years, five years or a lifetime benefit. Just like with the waiting period, the insurance company wants to limit its exposure to risk.
Therefore, shorter benefit periods result in lower premiums. However, if you must choose areas to manage your premium, this is an area where you want to get the best policy for your premium dollars. While the average person needs extended care only for a few years, there are countless people who survive a stroke and live well beyond this and need ongoing care. Therefore, select the best benefit period you can afford since it is impossible to predict the duration or extent of your need.
The goal of LTC is to safeguard your assets from costs that can drain your life savings in a relatively short period of time. Take the time to speak with your Certified Financial Planner about options that are appropriate given your needs and resources.
Life is a journey, plan for it.
Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Contact her at info@AJBrooker.com or (803) 724-1235.