Welcome back to The Deep Dive, the show that
extracts the crucial nuggets of knowledge from
stacks of sources so you can get well -informed
fast. Today we're wading into a subject that
sits right at the intersection of longevity,
personal finance, and unexpected risk. We were
talking about long -term care insurance or LTCI.
And this is so much more than just an insurance
product. It's a critical piece of asset protection.
Right. The core assumptions so many people make
that Medicare or your standard health insurance
will cover chronic ongoing custodial care is
completely false. They just won't. They won't.
This deep dive is absolutely necessary because,
look, the potential cost of care can easily wipe
out decades of careful retirement saving. It
can fundamentally change your legacy if you get
the planning wrong. That's the perfect framing
for this. Our mission today is to unpack why
this insurance is so critical, how its coverage
differs completely from general medical coverage,
and maybe most importantly, the surprising technical
and tax details that define your eligibility
and, crucially, determine whether your benefits
are taxable or not. And we're looking at this
globally, too. We're covering policies sold across
the U .S., U .K., Canada, and Germany. Because
that global approach really shows you just how
unique and complex the U .S. system has become.
So let's start with the central, often misunderstood
point. When we talk about the need for long term
care, everyone immediately pictures, you know,
nursing homes and people over 80. Right. And
while it is true that a huge cohort, something
like 70 percent of U .S. individuals over 65,
will require some type of extended care services.
The need is not purely an age issue. Not at all.
OK, let's unpack this immediately because that
changes the entire risk population. Long term
care isn't just for retirement age. No, it's
fundamentally about functional ability. Right.
The data reveals a truly shocking statistic.
Approximately 40 percent of those currently receiving
long term care are actually. between the ages
of 18 and 64. 40%. 40%. That's nearly half of
all recipients receiving care before traditional
retirement age. So we are discussing physical
and cognitive impairment, whether it's from an
accident, an early onset disease, or a chronic
illness, not just the inevitable decline of advanced
age. This shift in perspective really makes the
product less about elder care and entirely about
mitigating risk at any point in your productive
life. Precisely. So if the need isn't solely
defined by reaching a certain birthday, let's
look at the drivers. Why is the discussion around
long -term care becoming so urgent everywhere?
Well, the primary driver is longevity. It's as
simple as that. People are just living longer.
Exactly. Advances in modern medicine are incredible.
They allow us to survive catastrophic events,
a major heart attack, a severe stroke, even late
stage cancers that would have been fatal just
a few decades ago. But surviving often leaves
us needing help. Yes. Needing assistance with
basic daily functions for an extended period,
maybe for years. And this longevity creates a
major demographic impact, doesn't it? It does.
As the sources point out, specifically from around
2016, women tend to live longer than men. This
longevity means they are disproportionately affected
by the need for long term care. But ironically,
they're also frequently the ones who become the
unpaid caregivers first. To partners, parents,
friends. Right. Before potentially needing care
themselves. This creates a dual burden on women,
both physical and financial. That dual burden
really highlights the human cost, not just the
financial one. It's huge. I mean, when family
members step in as caregivers, the emotional
and professional sacrifices they make can be
enormous. And we also have to acknowledge the
specific medical conditions that, while they
might be rare in their early onset, they definitively
necessitate this type of care down the road.
Things like early onset Alzheimer's and Parkinson's.
Devastating conditions that can strike well before
age 65. Whether the cause is age or trauma or
cognitive decline, the insurance world has a
single clinical standard for determining eligibility.
And it doesn't look for a traditional diagnosis
of sickness. No, it looks at function. This brings
us to the core threshold for traditional LTC
eligibility, the famous acronym that defines
your policy's activation, ADLs. Activities of
daily living. What are they? And how many failures
trigger eligibility? OK, so the standard consensus
for traditional tax qualified policies is that
eligibility is triggered when an individual is
certified by a licensed health care practitioner
as being unable to perform two of the six activities
of daily living. So you could be medically stable,
your vitals could be fine. Exactly. But if you
cannot safely perform two of these basic tasks
or you require significant supervision, you qualify
for benefit payments. We need to detail those
six ADLs, not just list them. We need to understand
their real -world application because these are
the words that define whether your policy pays
out or not. Absolutely. We're talking about the
basic fundamental actions for self -maintenance.
First is dressing. The ability to put on and
take off clothes, braces, artificial limbs. It's
not just pulling a shirt over your head. It's
the fine motor skills for zippers and buttons.
Second, bathing. Getting in and out of the bath
or shower, washing your body. This is a common
early indicator of need. It requires stability,
balance. I can see that. Number three. Eating.
So getting food from the plate into your mouth.
Now, this usually doesn't include preparing the
meal, just the act of feeding yourself. All right.
Fourth is toileting. The ability to use the toilet,
manage clothing, clean up. Fifth is continence.
Maintaining control over bladder and bowel functions.
Or managing a capita or colostomy bag. And finally,
number six is transferring. That's a big one.
It is. The ability to move in and out of a bed,
a chair, or a wheelchair. It's one of the most
mechanically demanding ADLs. So to ground this
for the listener, if I have a severe stroke and
I can technically feed myself and maintain continence,
but I need physical help to transfer to get out
of bed, and I also need help with dressing. Because
of paralysis, I failed two ADLs. That's my trigger.
That's exactly right. And if you fail two of
those six, the policy benefit clock typically
begins, subject to the elimination period, of
course. So that's one major trigger, the functional
inability. What about the second one for cognitive
decline? The second equally important trigger
is the requirement for supervision due to severe
cognitive impairment. This would be for conditions
like Alzheimer's. Or severe dementia, advanced
traumatic brain injury. In these cases, the person
might be perfectly capable of performing all
six ADLs physically. But they're a danger to
themselves if left alone. Precisely. They might
wander, forget to turn off the stove, misuse
medication. The inability to safely reason or
navigate their environment also qualifies for
benefits under most plans. Okay, so here's the
crucial point that ties back to our initial discussion
of that 40 % under 64 statistic. Right. Once
a major health change occurs. a stroke, a big
diagnosis, even a series of falls LTC insurance
may become completely unavailable in the U .S.
Regardless of how much money you have, this is
the absolute truth that underlies the whole market.
It's not like regular health insurance. Not at
all. Unlike standard health insurance, which
has to accept you regardless of pre -existing
conditions, long -term care insurance is underwritten
based on your current health status when you
apply. So if you wait until you are sick or even
just showing signs of decline, you will likely
be denied coverage entirely or you'll be offered
an incredibly expensive policy with severe exclusions.
This is why timing the purchase is paramount.
So what is the ideal window, according to the
experts? Because 61, that average purchase age,
still feels like you're cutting it close. It
is. Experts are very clear. You should be shopping
between ages 45 and 55. That's the sweet spot.
It's the sweet spot where you're most likely
to qualify for the best health rating, often
preferred, and you can lock in your eligibility
at a far lower stable premium. So if you wait
until your 60s... You risk encountering that
one small health issue. Borderline high blood
pressure, a minor mobility issue. Anything that
could significantly increase your premium or,
worse, render you uninsurable. So the single
biggest financial mistake someone makes by waiting
isn't just paying a higher premium. It's risking
the possibility of being completely shut out
of the market right when the risk is actually
highest. It's about protecting your eligibility,
not just your wallet. That's the key takeaway.
So let's turn to what these policies actually
cover, because the range of benefits is far broader
and, frankly, more appealing than just to stay
in a clinical nursing home. Right. What are the
specific services that LTC insurance can cover
which standard health plans just refuse to touch?
The list is intentionally flexible. It includes
the big ticket items like nursing homes and specialized
Alzheimer's facilities, but also the services
that let people maintain their dignity and independence.
So we're talking about assisted living facilities,
adult daycare programs, respite care. Which is
so essential for giving the primary family caregiver
a break. And critically. Home care. And that
home care flexibility is really what sells this
product for so many people. Awesome. Well, if
you purchase home care coverage, the policy provides
an extraordinary range of support. It can pay
for a visiting or living caregiver, companions,
certified home health aides. Therapists too,
right. Physical, occupational, speech therapists,
even private duty nurses. The goal is medically
necessary services delivered in the comfort of
your own home. Potentially 24 -7. Up to your
policy maximum, yes. 24 hours a day, seven days
a week. And what about that interesting benefit?
Home modification. What does that practically
mean? Home modification is key to aging in place.
This can cover the costs of installing a wheelchair
ramp, modifying a bathroom to be ADA compliant,
installing grab bars, or even specialized medical
equipment like lift systems. Things that can
cost tens of thousands of dollars out of pocket.
Easily. But the LTC policy allows for reimbursement
of these necessary changes that enable a safer
home environment. Okay, let's talk money. The
foundational motive behind buying this product.
We've established it's not about being sick in
the acute setting. No, it's about asset protection.
What exactly are we protecting our savings from?
We are protecting decades of accumulated assets
and savings from the crippling costs of extended
care. That's the number one reason. And without
insurance? Without insurance, the cost of a nursing
home stay, which can easily exceed $10 ,000 to
$15 ,000 a month in some areas, will quickly
deplete most people's net worth. And the cost
variability is staggering. It is. It differs
drastically by region and by the type of care.
For instance, in 2023, the median cost for a
private room in a U .S. nursing home was well
over $100 ,000 a year. Wow. A basic home health
aid might be half that. But if you need round
-the -clock care, those costs compound rapidly.
The U .S. government has these state -by -state
interactive maps. And they're pretty eye -opening.
They are. You can see how a single year of nursing
home care can just eliminate a middle class retirement
fund. That desire to maintain financial independence
is huge. But there's an equally important non
-financial component, right? Avoiding reliance
on family. That's right. The secondary benefit?
Which is often just as important to policyholders
is maintaining personal independence. And avoiding
that strain on your kids or other family members.
Exactly. The emotional and logistical strain
that comes with relying on them for physical
and financial support. It buys autonomy. It buys
dignity. But we have to contrast this private
insurance with the welfare safety net. Medicaid.
If the costs are so high, why doesn't everyone
just rely on Medicaid? The Medicaid comparison
is essential because it shows the severe gap
that private LTC insurance fills. Medicaid is
a welfare program. It's funded by the federal
and state governments, and it provides long -term
care services only for the poor or for those
who spend down all their financial resources.
Tell us what spend down looks like in practice.
It's brutal. To qualify for Medicaid long -term
care benefits, you have to exhaust your non -exempt
assets, often down to a maximum of just $2 ,000.
So you're saving your investments? All of it.
Now, there are rules allowing a living spouse
or partner to keep an additional amount. But
the applicant's lifetime savings accumulated
through hard work must essentially be wiped out
before the government steps in. So for most Americans,
relying on Medicaid means intentionally impoverishing
themselves. That's what it is. It's the option
of last resort after you've effectively sacrificed
your entire financial legacy. And what gaps does
Medicaid leave in terms of the type of care people
actually want? Well. Medicaid generally doesn't
facilitate aging in place. It heavily favors
institutional settings. So nursing homes. Right.
It generally does not cover long -term care provided
in a home setting unless the state has a specific
limited waiver program in place, and those often
have long waiting lists. And what about assisted
living? Medicaid typically does not pay for assisted
living facilities, which are often the preferred
middle ground between home care and a full nursing
home. So if you want to stay in your home or
move into a private room, in an assisted living
facility, you have to have private funds. Or
private LTC insurance. Medicaid forces people
into a very specific and often less desirable
institutional setting. Private insurance bridges
that huge preference gap. It ensures you retain
control. Over where and how you receive care.
Yes. Now, here's where it gets really interesting
for the financially savvy listener. The tax advantages.
This is often the hidden benefit that makes the
economics of securing a qualified policy so compelling.
There are three main buckets of tax benefits
provided by the federal government for qualified
policies. First, the premiums you pay. These
may be eligible for an income tax deduction,
much like itemized medical expenses. Now, this
deduction isn't unlimited. The amount you can
deduct is based entirely on the age of the covered
person. The older you are, the more you can deduct.
Right. The IRS sets these limits annually, creating
a direct financial incentive to purchase while
you're still relatively young and healthy. And
when the policy actually pays out, how is that
benefit taxed? This is critical. The benefits
paid from a tax qualified long term care contract
are generally excluded from your income. They're
tax free. They are tax free. If you're paying
for care out of your own retirement savings,
every dollar of care has to be paid with after
tax money. If the policy pays out, those benefits
are tax free up to a daily limit, which is also
set by the IRS. So the government is essentially
subsidizing a portion of your care costs. by
not taxing the benefit. It's a massive difference
in the math. You could be avoiding a 25 % or
30 % tax burden on those payout dollars. That's
powerful. A powerful incentive, especially for
high net worth individuals. And finally, that
third component, business deductions. This is
a major perk. A way for businesses to attract
and retain key personnel tax efficiently. How
does that work? Premiums paid by a corporation
for an employee are generally 100 % deductible
for the business, similar to health insurance
premiums, as long as the premium is not included
in the employee's taxable income. So it's a highly
tax efficient way for a business owner to provide
a serious, valuable, and deductible benefit to
themselves and their top executives. A win -win.
Now we need to discuss the policy types, because
the structure of the insurance market has changed
fundamentally over the last decade or so. It
really has. We know that premium volatility has
scared some people away, forcing the market to
innovate. Traditional policies became expensive,
and even existing policyholders saw these dramatic
premium increases. Sometimes over 50%. Yes. It
led to a lot of consumer anxiety. So let's start
with the classic design. The traditional policies.
Traditional policies are purely indemnity products.
You pay premiums continuously, much like car
insurance. And if you never need the care? No
premiums are returned. The contract simply lapses
upon death. You paid purely for that risk mitigation.
But there was an option to mitigate that use
it or lose it risk. Yes, the return of premium
or ROP, Ryder. If you purchase this, a death
benefit would be paid to your beneficiary. And
that would be equal to the premiums you paid
in. Typically, the excess of the total premiums
you paid over any benefits you might have already
received. It's a risk mitigation feature for
those worried about wasting money, but it adds
substantially to the annual premium. Okay, so
the market responds to that premium volatility
and the... use it or lose it anxiety has been
this massive shift toward the combination or
hybrid policy. This is what's driving the market
now. What are they exactly? Combination or hybrid
policies link the LTC benefit to a pre -existing
financial instrument, usually life insurance
or an annuity. So that provides certainty. It
does. If you need long -term care. the policy
accelerates the death benefit or annuity value
to pay for care. If you die without needing care,
the full death benefit or annuity value goes
tax -free to your beneficiary. So it addresses
that core consumer fear. They know the money
will go somewhere valuable, either to care or
to their heirs. Exactly. And the market data
reflects this preference. The vast majority,
84 % of new policies sold annually, are now linked
benefit or hybrid policies. It's the dominant
structure in new sales today. So we have policy
types based on structure, traditional versus
hybrid. But there's a second, far more critical
distinction based on regulation that determines
your tax liability and how difficult it is to
actually access the benefits. The distinction
between tax -qualified and non -tax -qualified
policies. This sounds like the taxpayer's ultimate
dilemma. It is. This is the critical juncture
where good counsel is paramount. Consumers instinctively
want that tax deduction available from TQ policies.
But paradoxically, the benefit triggers might
be broader and easier to meet in the older NTQ
policies. Let's start with the tax -qualified
TQ policies. These adhere strictly to federal
high -pay rules, ensuring tax -free benefits.
Correct. So what are the three strict... federal
rules that define TQ eligibility? To be certified
as TQ, the policy has to meet stringent criteria.
First is the duration requirement. The person
must be certified by a physician as needing care
for a period expected to last at least 90 days.
The ADL requirement. They must be unable to perform
two or more ADLs without substantial assistance.
The alternative is needing substantial assistance
for 90 days due to severe cognitive impairment.
And third. A plan of care. A licensed health
care practitioner must provide a written plan
of care certifying that the services being received
are medically necessary. Let's drill into substantial
assistance. This isn't just someone standing
nearby, is it? No. The IRS standard for substantial
assistance is very specific. It means two distinct
things. Which are? Hands -on assistance, where
the physical presence of another person is required
to help you perform the activity. Or standby
assistance. Standby assistance. The presence
of another person within arm's reach is necessary
to prevent injury while you perform the activity.
For example, supervising someone who is unsteady
while bathing. And that need for supervision
must be constant, not occasional. Okay, so if
I can mostly dress myself, but I sometimes lose
my balance and need someone ready to catch me,
I meet the standby assistance definition for
dressing. That's right. But I must fail. Two
of the six ADLs at this level of need or suffer
severe cognitive impairment to activate a TQ
policy. Correct. The threshold is high, but the
reward is guaranteed. The benefits you receive
are non -taxable under current federal law. So
now we move to the non -tax qualified or NTQ
policies. These were common before the IPA guidelines
established the TQ standard. Why would anyone
risk buying a policy whose tax status is ambiguous?
The appeal is the benefit trigger mechanism.
It's easier. Much easier. NTQ policies often
include what's called a medical necessity trigger.
This is much broader and more flexible than the
TQ standard. A doctor can simply state that the
patient needs care for any medical reason and
the policy will pay. It's based on professional
medical opinion, not a strict 2 -ADL minimum.
Exactly. And their ADL requirements are typically
much more lenient, too. How so? Well, NTQ policies
often only require the inability to perform one
or more ADL compared to the TQ requirement. of
two or more. And importantly, NTQ policies often
include walking or mobility as an ADL. Which
is specifically excluded from the core six ADLs
used by the TQ standard. Right. This sounds fantastic.
Easier to qualify, broader triggers, greater
flexibility. So what is the massive risk here?
Why is it a dilemma? The risk lies entirely with
the tax man, the Treasury Department. I see.
They have not clarified the tax status of benefits
received under a non -tax qualified plan. This
means the taxability of those benefits is completely
open to interpretation by the IRS. What does
that financial risk look like in hard numbers?
I mean, how bad could it be? It could be devastating.
Let's say you receive a large payout, maybe $500
,000 over five years of care. OK. If the IRS
decides that those benefits are taxable income,
treating them like an annuity payout, for example,
you could suddenly face a massive surprise tax
bill. You could lose 20 % or 30 % of your benefit
just to taxes. Or more. It fundamentally changes
the math of your coverage and could force you
to spend down your assets anyway just to cover
the tax liability. So you think you've protected
your assets only to find the benefit. Money is
itself subject to a substantial tax claim. It
forces the consumer into an agonizing choice.
Choose the TQ policy with its stricter, harder
-to -meet triggers to guarantee tax -free benefits
or... Or choose the NTQ policy with easier, broader
triggers but risk that significant, unquantified
tax exposure. And most people don't even know
which one they have. That's the shocking part.
A survey found that 65 % of purchasers did not
even know whether the policy they bought was
tax qualified or not. If you don't know the regulatory
status, you can't possibly weigh the risks. It
just underscores the need for informed advice.
Let's move past the tax trap and look at the
actual policy mechanics once the contract is
signed. What kind of long -term stability can
a policyholder expect? This is where the product
is very strong in terms of consumer protection.
Once you purchase a policy, the language and
core benefits cannot be changed by the insurance
company. They can't retroactively alter the ADL
definitions or reduce your benefit amount. That's
a huge safeguard. It is. Furthermore, the policy
is usually guaranteed renewable for life. It
can never be canceled by the insurance company
because your health gets worse or you get a new
diagnosis. The only way they can cancel is if
you don't pay. For non -payment of premiums,
that's it. It gives the policyholder immense
peace of mind. So, if the language is stable,
how are the rates determined? What are the six
core factors and why are they so sensitive to
age? The rates are determined by six interacting
factors, first and most important. The person's
age at purchase. The younger you are, the lower
your rate. And it's locked in for life. Second,
the daily or monthly benefit chosen. How much
the policy will pay out. Higher benefit, higher
premium. Right. Third, the benefit duration.
How long the benefits will pay. Two years, five
years, lifetime. Lifetime is obviously the most
expensive. What's number four? The elimination
period. This is your deductible. A shorter elimination
period means a higher premium. Fifth is inflation
protection, which is crucial. And sixth is your
health rating from underwriting preferred, standard,
or substandard. That age factor just reinforces
the 45 to 55 recommendation, doesn't it? It does.
The fact that the average purchasing age dropped
from 68 in 1990 down to 61 in 2005 shows buyers
are responding to these market signals. Trying
to lock in better rates earlier. And beyond individual
rates, many companies offer incentives for couples.
Most will offer couples and multi -life discounts,
often 10 to 30%. And what's fascinating is the
modern interpretation of couples. It's very broad.
Some companies include not only married spouses,
but also two people who meet criteria for living
together in a committed relationship and sharing
basic living expenses. It's the market adapting.
Let's tackle that fourth factor in detail, the
elimination period. We know it's the deductible,
but how does it actually function? The elimination
period is the waiting period, typically 30, 60,
90, or 120 days, during which you have to pay
for care out of your own pocket before the insurance
benefits begin. It's a cost -sharing mechanism.
Exactly. It reduces the insurer's initial exposure.
But what's the critical detail most people miss
about satisfying this period? It's not just calendar
time, is it? No, and that's the insider detail.
While some policies use simple calendar days,
many require you to provide proof of 30 to 120
service days of paid care before any benefits
will be paid. So if you only receive care three
days a week. A 90 -day elimination period could
take months to satisfy. You have to be paying
out of pocket for the required number of service
days before the insurance officially kicks in.
That is a major financial distinction. It means
you must have a substantial emergency fund reserved.
specifically to cover those initial payer costs.
Absolutely. However, there is a flexibility option,
which is particularly popular for people who
want to age in place. What's that? The option
may be available to select zero elimination days
for home care services as long as those services
are delivered in accordance with a plan of care.
That zero elimination option for home care must
drastically increase the likelihood of using
the benefits. It does. It removes the barrier
to entry. This is precisely why someone purchasing
coverage at age 65 has a 50 percent likelihood
of using their policy benefits, especially if
they select that option. It makes activation
much easier. Speaking of activation, we need
to connect private insurance back to the welfare
system through something called partnership plans.
Yes. Partnership plans are a direct outcome of
the Deficit Reduction Act of 2005 designed to
solve that spend down problem. They bridge the
gap between private insurance. And Medicaid.
For middle class families, they're essential.
So how does this mechanism work to protect assets
from that Medicaid spend down? It provides dollar
for dollar lifetime asset protection. For every
dollar of private LTC insurance benefits you
use, that same dollar amount is disregarded when
calculating your eligibility for Medicaid later
on. Can you give us an example of how that saves
someone from impoverishment? Sure. Let's say
you bought a partnership policy with a total
benefit pool of $300 ,000. You use that entire
amount for care over several years. Even if you
needed Medicaid later, that $300 ,000 is protected.
It will not need to be spent down before Medicaid
kicks in. So you can keep $300 ,000 in assets
that you would otherwise have had to exhaust.
Exactly. As of 2014, 41 states had active partnership
programs, making this a widely available, powerful
incentive to buy private coverage. That's the
government explicitly rewarding proactive planning.
So to wrap up the U .S. snapshot, let's look
at the sheer scale of the market. It's a vast
market. Currently, about 7 million individuals
have some form of long -term care coverage. And
the claims being paid... Demonstrate that this
is a system in action, not just theory. Definitely.
$11 billion in claims were paid in 2019 to some
310 ,000 policyholders. The benefits are being
used heavily, which validates the necessity of
the product. Moving beyond the U .S., let's look
at how other developed nations approach this
specific universal need. It provides crucial
context. Especially when you compare mandatory
versus voluntary systems and how they approach
consumer risk. economies structure their approach.
The U .S. relies heavily on a complex private
market contrasted with a welfare floor. Right.
Whereas Canada and Germany offer different models.
Starting with Canada, the policies are structurally
similar to U .S. traditional models. But what
are the common riders or consumer protections
available there? Canadian policies frequently
emphasize certain risk mitigation riders. The
first is the ROPD return of premium on death.
Similar to the U .S. ROP rider. It is. If you
pass away without using the policy benefits,
a portion or all of the premiums are returned
to your estate. It provides that certainty that
the money won't be wasted. And the second essential
protection focuses on the rising cost of care.
That's the protection from inflation rider. In
Canada, this is extremely common and highly recommended.
Because long -term care costs rise faster than
general inflation. Much faster. So this rider
ensures that the policy benefit grows at a set
rate, often 3 or 5 percent compounded annually
over time. So a policy you buy at age 50 with
a $200 daily benefit. By the time you need it
at age 80, might be paying $450 a day. It's vital
for keeping up with the true cost of care decades
later. Let's pivot to Germany because the German
system is a completely different approach. They
mandate a baseline of coverage. Germany is a
fascinating case study in integrated social welfare.
They mandate. Basic care insurance for all citizens.
It's one of five pillars of mandatory social
insurance there. Along with health, accident,
unemployment, and pension insurance, this ensures
everyone has a fundamental basic floor of coverage.
And it avoids that moral hazard of a large population
spending down their assets to reach the welfare
net. Exactly. And how is the cost structured
for that mandatory coverage? It's a shared financial
responsibility model. The costs for the mandatory
care insurance are evenly split between employers
and employees. So it spreads the burden across
the working economy. Right. Rather than placing
it solely on the individual or the state. But
even with that mandatory coverage, there's still
a voluntary private market to supplement. The
basic state -mandated care. That's correct. The
mandatory coverage provides a floor, but it often
does not cover the full cost of high -quality
facilities or private rooms. So the private market
exists to provide supplementary options. And
there are three distinct types of voluntary private
insurance available in Germany. Each addressing
a different risk preference. Let's define those
three. Type 1 is the most expensive, right? Yes.
Type 1 is often called the life insurance hybrid
or fixed pension model. It's the most expensive
because it pays the insured a fixed monthly pension
amount predetermined when the contract is made,
when they need care. And it pays this fixed amount
regardless of what the actual care costs are.
Right, based purely on the chosen care level.
This offers certainty, but if care costs rise
faster than expected, you may still have a gap.
What about the second form, the percentage payer?
The percentage payer is highly sophisticated
for managing inflation risk. This insurance pays
a certain percentage of the actual cost of care,
but only after the mandatory state insurance
has paid its share. That structure seems inherently
protective against the unexpected rise in medical
service costs. It is its core advantage. Because
it's tied to the actual cost of services, the
insurance pays more money when the care costs
more. It effectively lowers the insured person's
risk of being ruined by raised prices in the
care market. It ensures the coverage maintains
its relative value. Exactly. And the third and
most common private policy type. That is the
per diem model. This is the simplest to understand
and most common choice for supplementing the
German mandatory system. How does it work? It
pays a certain fixed amount of money for each
day that the insured is being taken care of.
It's simpler than the percentage model, but requires
the policyholder to adjust the fixed benefit
over time to keep up with inflation. Or risk
having the coverage amount become inadequate.
So even in a country with a socialized floor,
the complexity of private planning still exists,
driven by the desire for quality control and
inflation protection. That's the bottom line.
This has been a critical exploration into what
is. arguably one of the most essential yet poorly
understood financial planning tools available.
Let's synthesize the major themes for our listener.
The key takeaway is that LTC is fundamentally
a financial tool. It's driven by increasing human
longevity, and its sole purpose is asset protection.
And its benefits are defined not by traditional
sickness, but by functional loss. The specific
clinical language of the activities of daily
living. And for any U .S. purchaser, navigating
the complex distinction between tax -qualified
and non -tax -qualified policies is the highest
hurdle you have to clear. To ensure your financial
protection is secure and tax -free. And the central
action point, whether you're in the U .S. or
navigating a supplementary market abroad, is
timing. It's everything. The importance of shopping
early. Ideally, between ages 45 and 55, to secure
the lowest rates and lock in the policy structure
before a major health change occurs is paramount.
Because once your health status shifts, the policy
you need may become financially prohibitive or
completely unavailable. Exactly. Before we wrap
up, I want to leave you with one final provocative
thought that builds on the U .S. market structure
and consumer protection. OK. We spent a lot of
time noting that policies purchased from state
regulated insurance companies are guaranteed
renewable and the language can't be changed.
But there's a loophole for large groups, isn't
there? There is a serious risk for those who
obtain coverage through large retirement systems
or major employers like CalPERS. How so? Because
these organizations often create their own group
-like LTC plans, they are often not regulated
by the state insurance departments. They operate
outside that critical consumer protection safety
net. What's the consequence of that lack of oversight?
The consequence is that these non -regulated
groups can increase rates and in some cases make
changes to the actual policy structure without
the rigorous state scrutiny and approval that
traditional carriers must submit to. So we've
seen massive unexpected rate hikes in these non
-regulated plans. Yes. Your policy might be guaranteed
renewable, but that guarantee does not necessarily
extend to guaranteed rate stability. That raises
a critical question about oversight. If you're
offered coverage. through a large employer or
a retirement organization, you need to verify
precisely which regulatory body is scrutinizing
the policy. And the rate increases before you
commit. Because your guarantee of stability might
not be as solid as you assume. Protection isn't
just about the policy language. It's about the
regulatory framework surrounding it. Food for
thought, indeed. That's all the time we have
for this deep dive. We hope this knowledge empowers
you to plan ahead and secure your future.