December 1, 2016
Life insurance is commonly addressed in a divorce. But there is another kind of insurance that couples need to pay attention to. Did you know that an existing long-term care insurance may be in jeopardy after a divorce?
As a financial planner I consider it a wise move for every individual (except those with very high net worth) to purchase a long-term care insurance policy. The cost of home health care, nursing home care and other services for chronic, long-term medical conditions can potentially bankrupt a person, and certainly has the potential to derail a retirement plan. Recently a study in the Journal of Aging indicated that 50% of those over age 65 will, at some point, need care that qualifies under a long-term care insurance policy, meaning that the individual is unable to perform 2 of 5 “activities of daily living” or has a substantial cognitive impairment. The average length of time of that care is slightly less than 4 years. You can roll the dice and hope you are not one of those people, or you can buy coverage and sleep easier at night.
Insurers used to offer policies with lifetime benefits but all but one have stopped doing so because of the cost to them. Without the ability to buy coverage that will pay out for an indefinite period of time, the optional “Shared Care” rider has become popular. With Shared Care a couple each has a policy with their own pool of money to access and can access their healthy partner’s benefits if they exhaust their own. For instance, Harry and Sally buy long-term care policies that give each of them a pool of $200,000 to use towards long-term medical expenses. The Shared Care rider would allow Harry to use some or all of Sally’s benefit if necessary. This gives them the potential to collect benefits for at least one spouse for a longer period of time, thus preserving the investment assets for the other, healthier, spouse.
Shared Care is only available to couples, so what happens if the couple divorces or splits up?
The couple can always choose to remove the rider, and each continue with their individual long-term care policies. Unfortunately, they each lose access to the other partner’s pool.
If a couple chooses to keep the shared rider, either one can cancel this benefit in the future. So if Sally changes her mind later and decides she doesn’t want Harry to have this benefit, or maybe she doesn’t want to pay for this rider any longer, she can choose to drop it for both of them - and she doesn’t need Harry’s permission to do so.
If the couple chooses to drop the policy, or drop one person from it, that person will need to obtain a new policy. Premiums are always more expensive the older we get, so it’s a given that the new policy will cost more – also because the new policy is for a single person and not married (married couples enjoy a 20-30% premium discount, as they are considered a better risk.) This should be a consideration when looking at the couple’s budgets.
Just as health care and life insurance are taken into consideration during a divorce, so too should long-term care insurance.
