Subject: Insurance - Long-Term Care

Last-Revised: 4 Oct 2006
Contributed-By: Jack Bouer

This article explains long-term care insurance and offers opinions on who should buy this insurance.

People's increasing life span has lead to an increase in people's use of long-term care in nursing homes, assisted living facilities, and their own homes. This type of care can be expensive. The Metlife Mature Market Institute says that the average cost of a nursing home is $192/day or $70,800 per year and the average stay is 2.4 years. So the average total expense is $168,192.

Government coverage for long-term care is very limited:

  • Medicare will fully cover only the first 20 days of a nursing home stay and only a small portion of the next 80 days after it which it pays nothing. In addition, Medicare will pay for these services only if you need skilled nursing care - not if you only need custodial or intermediate care.
  • Medicaid will pick up coverage but only for people whose income falls below state-determined poverty levels and who have a small amount of assets other than their house and car. Many people who need long-term care pay for it by using their own funds until their funds drop to a low-enough level that they qualify for Medicaid.

Long-term care insurance will provide coverage for long-term care but unfortunately the insurance itself is expensive - if you are over 65, you can expect to pay well over $1,000 in annual premiums - which means it is not affordable for everyone and may not be appropriate even for all the people who can afford it. To date, most people who purchased long-term care insurance are people at or near retirement age, but increasingly insurance companies are marketing the policies to younger people by using the lure of locking in lower-premium rates.

This article will discuss who should and shouldn't be purchasing these long-term care insurance policies as well as the policy features one should consider.

Since this article is brief it will only be able to discuss these topics in summary form. The National Association of Insurance Commissioners (NAIC, http:///www.naic.org) has a long-term care insurance booklet that includes worksheets to help you compare policies and decide if you should purchase long-term care insurance . In addition, your state insurance commission is likely to have information. You can reach your state insurance commission's web site by clicking on the "Link to Department of Insurance Websites" on the NAIC web site. Also if you don't feel comfortable evaluating your long-term insurance requirements, consider a fee-only financial planner or a broker who specializes in long-term care insurance.

The major features to consider when comparing long-term care policies are as follows:

Services covered
Services can be offered at nursing homes, assisted living facilities, adult day-care centers or your home. Many, but not all, policies cover services at all four types of facilities. Some policies require services at home to be done by licensed professionals while others do not. Also some policies will pay for someone to perform chores such as shopping.
When benefit payments begin and end
The following are some of major features that determine the time when benefits begin and end:
  • Duration of benefits is the length of time for which the policy will pay benefits. Many policies offer you a choice of 1 - 6 years or unlimited coverage. The longer the benefit period the higher the premium. Of course, it is impossible to know for certain how long your long-term care needs will last. But here are some facts. In a 2003 article Consumer Reports stated that "Nearly 90 percent of all people over age 65 who enter a nursing home stay fewer than 5 years." and Kaiser Foundation study said 47% of nursing home residents stay less than a year with the average stay being 2.4 years.
  • Elimination Period - how long you have to be receiving long-term care services before you begin receiving payments. The longer the elimination period, the smaller your premiums. But you shouldn't have an elimination period that is so long, that you won't be able to cover the costs during this period.
  • Max benefit amount - some policies have a maximum amount they will pay out over the life of the policy.
  • Thresholds in terms of disability that must be met before coverage kicks in. Most policies will require that the consumer either isn't able to perform a certain number of activities of daily living (ADLs) or be cognitively impaired before coverage begins.
The ADLS are:
  • Bathing - wash yourself either by sponge bath, or in the tub or shower; get in or out of the shower.
  • Dressing - Put on and take off all items of clothing and any necessary braces, fasteners or artificial limbs.
  • Toileting - Get to and from, on and off the toilet; perform associated personal hygiene.
  • Continence - Maintain bowel and bladder control or perform personal hygiene associated with a catheter or colostomy bag.
  • Transferring - More in or out of chair, bed or wheelchair
  • Eating - Feed yourself by getting food into your body from plate, cup or table or by using feeding tubes or intravenous tubes

Most policies require that cognitive impairment be verified by tests that measure your impairment in areas such as memory, knowing who and where you are, knowing the time and date and deductive or abstract reasoning

Note - If you aren't going to be able to depend on family members for support, you might want less stringent thresholds before coverage is available

Benefit Payment Features
The most obvious benefit feature is the amount per day that the insurance company will pay. The amount paid may be less for home care than for care in a facility. You should compare this benefit payment to the costs. Costs per day vary greatly by location. Costs are generally lower for longer stays.
Other Benefit Features
  • Inflation protection - Nursing home costs will increase in the future. Most policies offer an inflation protection option usually in the form or an automatic increase in the benefit amount of 5% compounded annually. This inflation protection option usually increases the benefit without increasing the premium so the premium is level. However, this feature will increase the premium amount significantly. Some policies offer another inflation option whereby policy holders are periodically offered the option to increase their premium and benefit amounts.
  • Benefits can be paid in a number of ways including 1) Reimbursement for expenses incurred up to the max daily amount and 2) A fixed payment to the policy holder regardless of expenses incurred
Premium
Another obvious feature is to look at the amount of the premium. Companies will often state that the premium is level in the sense that it will not increase. But be aware, that while companies can't increase the premium just for an individual, companies can and do increase premiums for a class of policy holders if they find their costs are greater than expected.
The company
in addition to looking at the features of the policy you should evaluate the company itself including:
  • The health of the company - since even a person at retirement age may have many years elapse before they use the coverage, you should choose a company that has a strong likelihood of being around. Insurance companies are rated by financial ratings services like Weiss, A.M. Best and Moody's. In its 2003 article, Consumer Reports recommended not choosing companies with a Weiss rating below B+ or a A.M Best or Moody's rating that is B or below
  • Company's history of raising premiums
Tax Qualified Plans
Tax qualified plans must meet certain federal rules. The premiums for these tax-qualified policies are partially tax deductible and the benefit payments are not taxed. But you should be aware that there is a cap on the deduction that varies by age and to take advantage of the deduction 1) you have to itemize deductions on your tax return and 2) the total amount of your medical deductions must exceed the medical deduction threshold which is 7.5% of your adjusted gross income. In contrast premiums for non-qualified plans are not deductible and it is unclear if the benefit payments are subject to tax.

There are a whole host of other features for buyers to consider including ambulance coverage, bed reservation, hospice care as well options to return some or all of the surplus of premiums paid over benefits used to your survivors.

So who should purchase long-term care insurance? The issues concerning about who should buy insurance differ for young and older people.

People in their sixties or above need to evaluate

  • the likelihood that they will need services
  • their financial ability to pay for the insurance
  • their financial ability to live without the insurance
  • what they are trying to accomplish with the insurance.

Evaluating the likelihood you will need a service is only at best an educated guess but nonetheless you can take the basic fact that about 1/3 of men and = of woman who reach the age of 65 will spend some time in a nursing home and then modify it for your individual circumstances taking account of factors such as:

  • Likelihood that family members can provide some of the service
  • Age of your ancestors
  • Mental impairment of older relatives.

The NAIC has offered the guidance that consumers should not purchase the insurance if they have less than $35,000 in assets or will spend more than 7% of their income on the policy. Other organizations have offered guidance of 5-10%.

In contrast if consumers have a large amount of financial assets (estimates of sufficient vary between $1.5 and 3 Million) then they probably will not need the insurance because they can pay for their long-term care using their own money.

If a consumer has sufficient money to pay for the insurance but not enough to bare the risk of paying their own long-term care costs, then they should consider purchasing insurance. But people in this middle-range category are unlikely to have sufficient income to purchase every desirable insurance feature (e.g.. long-benefit period, small elimination period and high-benefits). So they will have to evaluate the scenarios they want to cover. For example, if a person can't purchase insurance to cover a multi-year stay in a nursing home, they may have to concede that this long-term stay will exhaust their assets and push them into Medicaid coverage. Instead of worrying about this long-term scenario they should consider purchasing enough insurance to protect their assets for a short-term stay which would lead them to purchase insurance with a high benefit and a short elimination period.

The Kasier Article focused on the question of whether younger people should purchase long-term care insurance and much of what is said below comes from that article.

First of all younger people should only consider purchasing long-term care insurance if they have already have covered their other financial needs such as having sufficient emergency funds and adequate health, life and disability insurance. Only about 20% of families can meet these requirements.

This 20% should consider long-term care insurance. In doing so they should consider the reasons for buying now as well as the reasons for deferring the purchase.

Why buy long-term care coverage at a younger age?

  • Because you can lock in low premiums if you begin coverage earlier, the premiums paid over your life time will be smaller if you begin coverage earlier. This is despite the fact that you will actually pay premiums for a longer period of time. However you should be aware the guarantee of level premiums is not complete because insurers can still raise premiums as long as they increase them for everyone in the same policy class and in fact many insurers have raised premiums for people who had assumed they had locked in their rates.
  • Risk of not getting covered - 86% of people 45-49 years of age would pass eligibility test for receiving insurance, but only 79% of people 60-64 would pass the eligibility test.
  • Possibility you will need long-term care before age 60. 2-2.5% of people need long-term care coverage before age 60. However the figure is lower for those people who are in the financial position to actually purchase insurance.

Why not buy at a younger age?

  • The world will change - Younger purchases may not actually use the services for 30-40 years and in that period of time, many changes may occur that might not be covered by the old policy or may make the policy obsolete. For example, the earliest policies only covered nursing homes, while new polices cover home-health care. Also the provider could go out of business.
  • The consumer may not be able to pay the premium as they get older in which case they will lose coverage although some companies do offer options that provide limited coverage even if premium payments stop.

In conclusion, long-term care insurance is a complicated product that is not for everyone. People should consider their individual circumstances when choosing whether to purchase a policy as well as the features of the policy.

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