Long-Term Care Insurance. A Guide to Helping Preserve Your Wealth and Well-Being

ab Long-Term Care Insurance A Guide to Helping Preserve Your Wealth and Well-Being

You worked hard to prepare for a comfortable retirement. You did everything you are supposed to do to prepare for retirement. You contributed to your 401(k) or other retirement plan each year. You established an IRA and contributed to it regularly. You even accumulated additional assets because you know that you may spend as many years in retirement as you did at your career. And besides, you have plans travel perhaps, or a house in the mountains or maybe just the ability to do what you want when you want without constraint. But what if you or your spouse were to get sick? What if you required long-term care at home or at a professional facility? What would happen to the assets you have worked your entire career to accumulate?

Why should long-term care insurance be part of your financial plan? Long-term care, while not inevitable, is a distinct possibility for millions of Americans. In fact, the American Society on Aging estimates that Americans who are age 65 and older have a 70% chance of requiring long-term care. 1 Long-term care can also be extremely expensive. A recent survey revealed that the average annual national cost for nursing home care is over $74,800. Depending on where you live and what type of facility you choose, the cost may even be higher. Home healthcare, too, can prove to be a significant drain on resources. The national average cost of home healthcare is over $36,300 annually and expected to get close to $100,000 in 2025. 2 Fortunately, you may not have to fund these costs with your lifetime savings or the legacy of your loved ones. Long-term care insurance can provide you with the ability to meet a considerable portion or all of these costs over an extended period of time. How does long-term care insurance work? Typically, a long-term care insurance policy provides benefits if you: Require assistance for an extreme cognitive impairment such as Alzheimer s disease Cannot perform a specified number usually, at least two of what long-term care policies refer to as Activities of Daily Living. These may include: Eating Dressing Bathing Walking Transferring (e.g., moving from bed to chair) Toiletry Continence Being able to take medicine A case for long-term care insurance After dedicating himself to his career, Bob opted for an early retirement package to spend more time with his wife, Mary. The couple planned several trips they couldn t take while Bob was working. Three years into retirement, Mary began forgetting little things, and within months her memory had rapidly deteriorated. She was diagnosed with Alzheimer s disease. At first, Bob was able to care for Mary, but eventually the demands overwhelmed him. Suddenly, he was facing tough decisions for which he was neither mentally nor financially prepared. Should he tap into their nest egg to hire professional care for Mary? What could he do to allow his wife to age with dignity? 1 The American Society on Aging, Americans Fail to Act on Long-Term Care Protection, May 2003. 2 2007 Genworth Financial Cost of Care Survey. Conducted by CareScout, an independent research organization, March 2007. Home healthcare costs based on rates for noncertified but licensed Home Health Aides at $17.46/hour and a 40 hour workweek. Based on an assumed rate of 5% annual inflation. 1

Most policies pay a Maximum Daily (or Monthly) Benefit for a specified number of years, known as the Benefit Period. This Maximum Daily (or Monthly) Benefit is simply the maximum amount the insurance company will pay per day (or month) for nursing home or other long-term care. Long-term care policies also include a Lifetime Benefit, or the maximum total amount the insurance company will pay. The Lifetime Benefit is typically calculated by multiplying the Daily (or Monthly) Benefit by the Benefit Period. If your long-term care costs are less than the Maximum Daily (or Monthly) Benefit, you may receive benefits for a longer period of time than the Benefit Period. But you will never receive more than the Lifetime Benefit. You should also be aware that most policies impose an established waiting period, called the Elimination Period, before any benefits are paid. What does long-term care insurance actually cover? Most people associate long-term care insurance with nursing home coverage. But long-term care can be much more than that. Although some basic policies cover only nursing home protection, long-term care policies generally cover costs for: Skilled nursing care Intermediate care Custodial care You can typically receive this care at an assisted-living facility, adult-care center or even at home. Coverage can vary greatly from insurer to insurer and policy to policy. Each policy has its own eligibility requirements, restrictions, determination of benefits and cost. A case for long-term care insurance Bill is a 70-year-old widower. He lives alone, but his children and grandchildren visit him once a week. Bill has become chronically ill and finds it difficult to care for himself. His daughters, who are both part of two-income households, must decide the next step. Do they use Bill s assets, and quite possibly erode the legacy he wanted to leave to them, or should one of them quit her job to take care of their father? The children must now balance their personal needs against the needs and goals of a parent. 2

How much does long-term care insurance cost? Not as much as you might think. The features and the options of the policy can be customized to fit both your needs and your budget. The actual cost of the premiums you pay depends on several factors, including: Your age when applying for the policy Your state of health when applying for the policy The length of the Benefit Period and the Elimination Period The types of services offered The Maximum Daily or Monthly Benefit Other policy features such as inflation protection (see below), options and discounts For instance, the longer the Benefit Period you choose and the higher the amount of benefits you will receive, the more expensive the policy will be. To reduce the cost, you may select a shorter Benefit Period, which could still provide a substantial benefit at a lower premium rate. You may also decide to increase the Elimination Period. Although you may be able to reduce the costs of long-term care insurance, one thing is apparent the longer you wait to obtain long-term care coverage, the more expensive your premiums will be. What about inflation protection? As you would expect, long-term care costs are rising significantly each year. In fact, experts report that costs are increasing by more than 4% per year. 3 To protect yourself at least partially, you may generally choose from a variety of inflation protection options that offer increased coverage over time: Compound Percentage is typically the most expansive and expensive coverage. Your Daily or Monthly Benefit will increase at a pre-determined rate (typically, 5%) each year on a compound basis. Some policies have an option that allows the Daily or Monthly Benefit to compound at a different percentage than the Lifetime Benefit. This increase will typically increase each year regardless of whether the insured is collecting benefits under the policy. Simple Percentage offers a Daily (or Monthly) Benefit amount that increases at a predetermined percentage (typically, 5%) each year on a simple interest basis. For example, if the Daily Benefit amount is $100 and the percentage is 5%, each year the Daily Benefit will increase by $5. This increase will typically take effect each year, even if you are collecting benefits under the policy. Guaranteed Purchase Option allows you to purchase a predetermined increase in coverage each year. Unlike the two other options, this increase in coverage is (1) optional and (2) requires an increase in premium each time the coverage is increased. (If the option is declined by the policy owner for a certain number of years, the option may be permanently eliminated.) In addition, once you begin collecting benefits, you may no longer purchase increased coverage. This option, although initially less expensive than the other inflation protection options, can result in higher premiums if the additional coverage is purchased. What about Medicare, Medicaid and other medical insurance? Some consumers decide against purchasing long-term care insurance because they mistakenly believe that their medical insurance will cover them. They also think that if it doesn t, Medicare or Medicaid will. Unfortunately, these assumptions are simply not true. Traditional medical insurance typically does not cover long-term care expenses. Medicare covers doctor visits, hospital stays and, in some cases, rehabilitation. It may also cover medically necessary care at home or at a skilled 3 Bureau of Labor Statistics Consumer Price Index. FITCH, IBCA, Duff and Phelps. Long-Term Care An Industry in Transition, January 18, 2002. 3

nursing facility on a part-time or intermittent basis. Generally, Medicare covers these expenses only after a required minimum hospital stay of three days; coverage for an extended period is limited. Medicaid provides certain types of coverage only after people have depleted almost all their assets. Only long-term care insurance provides protection against the costs associated with long-term care. What about taxes? Generally speaking, you may be able to take advantage of certain tax benefits for long-term care insurance coverage. However, UBS Financial Services Inc. does not provide tax advice. This section is a brief summary of our understanding of the federal tax issues associated with long-term care insurance. Clients should speak to their own tax advisors for advice about their specific situations. Premiums paid for long-term care insurance are tax-deductible, subject to certain thresholds and limitations, as medical expenses on your personal tax return. Companies can generally deduct the long-term care insurance premiums paid on behalf of a policy insuring an employee. Employees of C-Corporations and non-owners of S-Corporations, partnerships and limited liability companies ( LLCs ) do not have to report the value of the premiums that their employers paid on their behalf as taxable income. However, employee-owners of S-Corporations and LLCs, as well as partners, are taxed on the value of employer-paid long-term care insurance premiums for their coverage. Benefits paid under a long-term care insurance policy generally are income-tax-free to the recipients. In some situations, however, amounts received under certain types of policies may be taxable if the benefit exceeds a specified threshold. Three compelling reasons to consider long-term care insurance 4 2007 Genworth Financial Cost of Care Survey. Conducted by CareScout, an independent research organization, March 2007. 1. The cost of healthcare services in this country continues to escalate at an alarming rate. Depending on where you live, it s likely that you might have to spend over $74,800 a year for nursing home coverage. And the cost of home healthcare can be prohibitive in some parts of the country. In 10 years or less, you could easily drain your bank account by a half-million dollars or more. 4 2. You could be putting your loved ones in an awkward situation. They may be forced to make some difficult choices at a time when they are already under severe stress. For example, they may have to choose whether or not to place you in a nursing home. By purchasing longterm care insurance, you can let your loved ones make this decision without worrying about financial considerations. 3. To whom would you rather pass a significant part of your accumulated wealth a nursing home or your family? No matter how much you have saved for retirement, every penny you pay out in healthcare services is one less penny that can go to your heirs or your favorite charity. 4

What else should you know about long-term care insurance? Long-term care insurance can be an important component of an overall financial plan. As a result, you should work closely with your Financial Advisor to make certain any long-term care policy you consider is coordinated with your investment, retirement and estate planning strategies. Your Financial Advisor can also help you determine how long-term care insurance fits into your overall financial plan before and after retirement. This is especially important, since premiums still must be paid if your annual income declines during your retirement years. Most long-term care insurance policies offer a choice among several premium payment plans, including an option to pay a greater share of the required premiums prior to retirement. Finally, your Financial Advisor can help you determine such policy specifics as: What are the key terms, including the amount of benefits paid, the Benefit Period and the Elimination Period? Does the policy offer adequate inflation protection? Are policyholders allowed to upgrade or reduce coverage? Is the policy guaranteed renewable (i.e., the policy cannot be canceled as long as you continue to pay the premiums)? Is the policy issued by a highly-rated insurance company? The next step You can rely on your UBS Financial Advisor to work with you to decide whether long-term care insurance is appropriate for your individual situation. Your Financial Advisor has the tools and resources available to help you determine whether your financial assets are positioned to pursue your goals and objectives. Long-term care insurance is just one of the many products and services offered by UBS Financial Services Inc. to help you pursue your financial objectives. To discuss your unique financial planning needs, talk to your Financial Advisor today. About UBS UBS AG is a leading global financial services firm, serving a diverse client base that includes affluent individuals, corporations, institutions and governments. By integrating and leveraging the combined resources, expertise and best practices of its business units, UBS offers products and services designed to provide appropriate solutions to its clients, regardless of where they are located. UBS has significant operations in all of the world s major financial centers and strong long-term credit ratings. From investment banking to asset management services, our Financial Advisors have at their command a broad array of financial resources to help clients manage their wealth. Important Considerations: Insurance products are made available by UBS Financial Services Insurance Agency Inc. and by other insurance-licensed subsidiaries of UBS Financial Services Inc. through third-party insurance companies unaffiliated with UBS Financial Services Inc. UBS Financial Services Inc. does not offer tax or legal advice. You must consult your tax advisor and attorney regarding your specific situation. The premiums initially listed on long-term care policies are not guaranteed and may change over the lifetime of the policy.