Are Long-Term Care and Longevity Insurance Right for You?

• By Christine Benz
• On 7:00 am EDT, Thursday October 8, 2009

Retirement planning is complicated largely because you're making decisions based on unknown factors--namely, how long you'll live and how healthy you'll be. To help discuss products geared toward mitigating longevity and long-term care risk, I recently sat down for a conversation with Jason Stewart, vice president at Cohen Financial Services in Leawood, Kansas. A transcript of our conversation appeared in my newsletter, Morningstar PracticalFinance.

Christine Benz: Let's talk about longevity insurance. There's a lot about this concept that's very intriguing for someone who is trying to determine whether their money will last throughout retirement, because it really tackles the unknowable--you don't know whether you'll live to be 95. So in general, what is this product, and what does it seek to achieve?

Jason Stewart: Longevity insurance has been around longer than people realize. It's coming to the forefront due to the Great Recession. In its essence, this is a single-premium deferred annuity. You're putting a certain amount of money down, at a certain age, knowing that when you turn 80 or 85, you're going to get a guaranteed monthly income for the rest of your life. Typically this is for someone who's getting ready to retire--people in their mid-50s out to age 65. That is the target market for longevity insurance.

Benz: Can you provide a sense of what the payouts are like once you reach the target age?

Stewart: Putting $50,000 to purchase this at the age of 55, beginning at age 85--and this is for a male--you're going to generate roughly about $75,000 a year at age 85. If this same male purchased it at age 60, you're looking at about $56,000 at age 85. If you waited to purchase the insurance at retirement age, at 65, you're looking at about $41,000 a year. Females tend to receive a little less.

Benz: So how much of one's portfolio would go into such a product? And what are the drawbacks?

Stewart: If you're looking at some sort of longevity insurance, you usually want to put anywhere from 10% to 15% of your portfolio into a product like this. The big concern that people run into is, "I'm going to put X amount of dollars in here and not be able to get a hold of it for 20 to 30 years down the road." You can set it up so that beneficiaries receive some of the money in case you don't make it to 80 or 85. But the numbers that I just gave you reflect pure longevity insurance—if you don't make it to 85, the insurance company gets the money. I would never condone that with any of our clients. If they're going to put their money into something like this and it's going to extend out for 20 to 30 years, there's no question that if they pass before they're age 85, we want to make sure that their heirs receive a benefit.

Benz: So what type of profile would someone fit for you to recommend longevity insurance to them?

Stewart: I would primarily look for someone who is nearing retirement or in retirement. If they are taking out around 4% and they've got a great asset-allocation structure, I wouldn't worry about it. But if someone is 65 years old and they're looking to take out a certain amount that is well above their optimal withdrawal rate, it's something that we're definitely going to discuss with them.

But it's also age-dependent. If I have an 89-year-old client who's taking out 6% or 7% and they have plenty of money, I'm not going to worry about it as much. Plus, trying to buy longevity insurance at that age is going to be astronomical.

Benz: And would you ask about personal health history, family health history?

Stewart: I would ask about the personal health history, I would ask about the family history. That is usually a good indicator in some instances of what their life expectancy is going to be. We do that anyway with regular life insurance; we would do it with longevity insurance as well.

Benz: I was wondering whether it's possible for someone to implement this same concept of longevity insurance themselves--and do it on an individualized basis--essentially say, well, I'm going to put the money away, invest it in something super-safe, perhaps zero-coupon bonds plus some measure of inflation protection. What do you think about that idea?

Stewart: If they're doing it themselves, I would think that would be a good approach. The pros of that are this: you're doing it yourself, and you have control of the money. The other way, you don't have control of the money. However, by going with longevity insurance, you know that you're going to get X down the road and you don't have as much of the market fluctuation that you possibly could have with zeros and with TIPS. You have interest-rate risk involved with those bonds, of course. Earlier in 2008, Treasuries were the way to go. Now you look at the first two quarters of this year and that's not the case. The question is, what's your risk tolerance if you want to do it yourself? If you feel comfortable with that, by all means go that avenue. If you do not feel comfortable with that, and you think this might be an avenue you want to take, then certainly seek somebody out and go with the longevity insurance.

Benz: In contrast to longevity insurance, long-term care insurance is pretty familiar to most people. What kind of asset level would someone have for you to recommend that type of insurance?

Stewart: Primarily people who are in that middle-class level should consider long-term care. People who don't have much money--those with, say, $200,000 or less, are going to drain it out quickly and will be on Medicaid. With $1.5 to $2 million and up, many individuals will be able to self-insure. But individuals with assets between $200,000 and $1.5 million are good candidates.

We also see a lot of individuals with over $1 million who opt for long-term care insurance because they want to make sure that they have something for their heirs.

That's something we haven't touched on but obviously, that's a huge appeal with longevity insurance as well. Many people think, "Well, I do think I can avoid running out of money for my own retirement, but it's very important for me to leave something for my children and grandchildren."

Once you bring in a question about leaving something to your heirs or having some sort of legacy, that changes the whole scope of things. It doesn't matter how much they have; long-term care insurance, or longevity insurance, for that matter, is a vital portion.

Benz: And what's the right age to consider buying long-term care insurance?

Stewart: With long-term care policies, it's primarily the same demographic as with longevity insurance, people who are nearing retirement or people who are 10 years out from retirement, so people in their 50s or 60s. Some clients want to buy it earlier--even in their late 40s--after they've had to help a parent, or the parent has lived with them, or the parent has just moved into some sort of home health care.

Benz: But it seems like late 40s is really young to be purchasing this given that the typical age you would begin tapping it is 80 or 80-plus. So you're paying into the policy for 30-odd years. Of course your premiums would be lower, but still.

Stewart: It does seem young, though I have a client who decided that's what she needed. Our personal opinion is that long-term care insurance is most appropriate from the middle 50s up until you're getting ready to retire at 65 or so. The reason the 40-something popped into my head was that I had an individual who came in at that age and said, "I really need to look into some long-term care insurance."

And for individuals like that, I would possibly look at a different avenue of premium structure, perhaps like a 10-payment situation.

Benz: So what other questions should you ask when considering one of these policies?

Stewart: The typical policy involves paying premiums every single year, but I will preface that by saying you want to find a policy that will maintain that same premium level for the same level of benefit that you're going to get. There are some long-term care companies that will raise the premiums, the older you get, to maintain the same level of benefit.

That's one of the questions that a client should ask the insurance company, or if they're going through an agent, they should ask, "Are my premiums going to increase at any point in time? Which products allow for me to pay a level premium and I don't have to expect any sort of rate increases?"

We had an individual who was 77 years old and has had a long-term care policy for years. She has not had to use it because she's in excellent shape, but she got a notice from her insurance company saying that her premium was going up. We reviewed what she had. She had gotten the policy at a much younger age, so you have to do a premium comparison.

If she were to buy a new long-term care policy now, how much would it cost compared to the rate increase to continue her current policy? She could also keep her premiums the same but settle for a lower benefit in the future. She said she would rather go with the premium increase, which wasn't that substantial, believe it or not, and continue with the same level of monthly benefit that she'd have if she went into a facility.

Benz: Let's talk about what kind of features someone should look for in one of these policies. I know you can buy inflation protection, for example. Would you recommend that?

Stewart: Yes. I will tell you it's going to raise the premium costs up and it does so somewhat significantly, but you need to take into account that we're doing future forward planning on this, and that is something that is definitely necessary. Does it cost more? No question it costs more.

Benz: So say you're part of a married couple looking at long-term care insurance. Do you have to buy the policies individually?

Stewart: There are some policies where you don't have to. There are some that are set up for a husband and wife, to cover both of them for four years, for example. Let's say the husband goes into a nursing facility for a year. When he comes back out, the wife still has the possibility of using that pool for three more years.

Benz: It seems like you'd also want to look for flexibility and the ability to receive care in your home versus some external facility.

Stewart: I just saw a statistic that 20% of claims from long-term care are done in a nursing home; the rest are home health care.

Benz: And I assume we'll just see things move more and more in that direction, where people might want and demand that flexibility.

Stewart: For individuals looking for long-term care, that's a question they need to ask every single time. Because people don't want to move out of their homes. They're comfortable, it's their home, they don't want to have to move into a facility. It's the last thing they want to do. So a key thing to ask is whether you can use the insurance for home health care.

Buzz up!