Wednesday, April 02, 2008

Long Term Care Insurance Basics

By Keith Tufte

Healthcare costs and long-term care costs are one of the biggest concerns today for many people. Long-term (LT) care insurance can help protect you against the significant financial risk posed by the potential need for long-term care services either in a nursing home, assisted-living facility, or in your own home. These policies can help you preserve your assets for your spouse and/or heirs. They are purchased for asset protection, to minimize the dependence on other family members, and to have some control of where and how you will receive long-term care services. LT care goes beyond medical and nursing care to include all the assistance you will need if you have a chronic illness or disability that leaves you unable to care for yourself. The US Department of Health indicates that people age 65 face at least a 40% lifetime risk of entering a nursing home sometime during their life, and 10% will stay there five years or longer. The odds of entering a nursing home increase with age, and currently 22% of people age 85 or older are in a nursing home. While older people are more likely to need LT care, your need for it can come at any age. The average cost of a private nursing home room is about $70,000-$75,000 per year. These costs vary significantly based on what part of the country you live in. The typical stay in a nursing home is between 90 days and four years (average is 2-2.5 years). Benefits are typically triggered when you can't perform two "activities of daily living" such as bathing, feeding yourself, dressing, getting from bed to chair, and going to the bathroom (and the condition is expected to last at least 90 days). Benefits can also be triggered if you develop severe cognitive impairment (like Alzheimer's).

Aren't I already covered for this? No.

Generally Medicare and most regular health insurance plans will not cover long-term care costs. Medicare supplemental insurance (Medigap) also typically does not cover LT care costs.

Who should buy LT care insurance? Who shouldn't bother?

Wealthy people (with assets over $3M) that can afford care on their own typically don't need to buy LT care insurance (they can basically "self-insure"). For a very wealthy family if they are forced to live in a nursing home for 3 years at $75,000 per year the total cost of $225,000 will not wipe them out. Some wealth people buy LT care insurance anyway for the peace of mind and for emotional reasons. "It allows loved ones to care about you rather than caring for you" says Jesse Slome, executive director of the American Association for LT Care Insurance. Those with little assets (below $300,000) also are not great candidates because they likely can't afford the coverage anyway, and they have a smaller amount of assets to protect. Medicaid may take over coverage after they have exhausted their assets (depending on the state). People in the middle in terms of wealth are good candidates for LT care insurance. People who have no relatives nearby that could help take care of them often consider LT care insurance. Single people who have relatives nearby and don't really care about leaving an estate may not need/want LT care insurance. If you have a family history of long-term incapacitating diseases like Alzheimer's, you should think about this type of insurance (and longer duration of insurance) because those types of diseases often cause people to need LT care for many years.

When should I buy it? At what age?

The typical range people buy this insurance is between ages 45 and 70. The premiums increase as you get older (and are thus more likely to end up in a nursing home). The premiums start to increase especially as you get over the age of 60 and are very expensive at age 70+. If you don't have a family history of chronic illnesses and you are in good health you can probably wait until you are around 55-60 years old to buy.

What are the variables that determine how much my LT care coverage will cost? What are important things to consider when shopping for a policy?

1. Duration of coverage (this can range from just a couple years coverage up to unlimited or lifetime). Given that the average nursing home stay is typically only a few years, lifetime coverage is likely too much for most people and is very expensive. Usually 2-6 years of coverage is enough.

2. Elimination period. This is similar to the deductible on other insurance policies. Your LT care policy doesn't start paying out for a certain number of days. This elimination period is typically 30-90 days.

3. What exactly is covered? Skilled care and non-skilled care covered? Does it cover help at home? Assisted living? Adult day care? Does the policy require a hospital stay before this (home care) benefit is available? Are pre-existing conditions excluded from coverage? Is Alzheimer's covered? Most policies exclude coverage for some mental and nervous disorders, alcoholism, drug abuse, and care after self-inflicted injury.

4. Amount of coverage per day? The higher your daily benefit, the higher your premiums. Typical amounts covered are $100-$200/day of costs. The average cost of a nursing home is around $200/day.

5. Inflation adjusted or not? This is important and makes a big difference over long time periods. It also greatly increases the cost (and value) of the policy. Is the inflation protection "compound" (increases by a set percentage each year) or "simple" (increases by a set dollar amount each year)? Compound inflation protection is better.

6. Is the policy guaranteed to be renewable? Can you continue getting coverage as long as you pay your premiums?

7. How and when (after 90 days?) are premiums waived once you get sick?

8. Do you want a "shared care" joint policy with your spouse? These cost slightly more than a single policy but allow either of you to use the full benefits. These policies are significantly cheaper than two individual policies bought separately.

9. How financially stable is the insurer? Check out the ratings at A.M. Best's website. Several long-term care insurers have gone out of business. Stick with highly rated companies (rated at least "A").

10. Your age is a big factor that determines how expensive the policy will be.

Other things to consider?

Make sure your policy clearly explains when you will be eligible for coverage and how your eligibility will be determined. Make certain you know exactly what is and is not covered. Are dementia and/or Alzheimers covered? These LT care policies are often very complex and have so many different options that it is tough to get an apples-to-apples comparison across different companies. Only buy as much LT care insurance as you need. Some insurance companies have been able to raise the premiums on existing policies over time, and there isn't much you can do about it. It is very difficult/expensive to change insurers or policies once you have had a policy for several years (because you are older and a worse insurance risk). Buyers essentially commit to an insurer and a policy for life. Claims are often a judgment call. Do you really qualify for benefits now? Will your insurance company pay up when you need it? The insurer decides whether or not they will pay for the care.

You may not be using your policy for 10-20 years. What will happen to your LT care insurance company by then? Will it still be financially strong? What will happen to the US healthcare system over the next 10-20 years? It is sure to change significantly. Will there be universal healthcare by then which will include LT care? How much will nursing homes cost in 10-20 years? How much will medical technology change over that time period? There are lots of uncertainties surrounding LT care insurance over such a long time period.

How much does it cost?

This insurance is expensive, especially for people over age 65. It is hare to give numbers for the insurance because the policies have so many variables. A healthy 59 year old person can buy a policy that pays $130/day for 5 years of coverage with a 5% inflation protection rider for around $1,150 a year. The same policy for a 65 year old might pay closer to $2,000 per year. Some more comprehensive policies with inflation protection can cost a 65 year old as much as $4,000 per year. Rates depend on your age, health, and marital status (cheaper if you are married).

Tax Issues?

Most LT care policies sold today are "qualified", which means for federal tax purposes benefit payments received are generally tax-free. If you are self-employed (sole proprietor, partner, or LLC owner) you can deduct all of the premiums for a qualified LT care policy (subject to age based maximum limits). This deduction is available whether or not you itemize.

Keith Tufte
Longview Wealth Management, LLC.

Labels: , ,