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Think now about long-term care
By Leslie Kane, Articles Editor
From
Medical Economics, May
21, 2004
Your dream for the future may include
swinging a nine iron or doing a five-mile hike at age 85. But the less
rosy possibilities include debilitating illness or impaired functioning.
With the average annual nursing home cost now at $55,000 (it's projected
to be $200,000 in 2030), you need to take steps to protect yourself
financially.
As Baby Boomers age, the popularity of
long-term care insurance has grown. "In 1992, about 1.7 million
Americans owned private long-term care insurance; in 2002, that number
was over 5.5 million," says Jesse Slome, editor of Long-Term Care
Insurance Sales Strategies magazine, in Westlake Village, CA. About
45 percent of adults who need long-term care are under 65.
"People realize that a few years in a
nursing home could wipe out their savings," says Brian Gordon, a
principal with MAGA Ltd., an insurance agency in Deerfield, IL. They
also realize that the older you are when you buy a policy, the higher
your premium. For example, a Metropolitan Life Insurance policy offering
a $150 daily benefit, lifetime coverage, and inflation protection costs
$1,877 a year at age 42; $2,488 at age 52, $4,054 at age 62, and $9,218
at age 72.
Health problems also boost premiums.
"If you have high blood pressure, diabetes, or other conditions, you'll
pay more for coverage, and may have to buy from less highly rated
insurance carriers," says Gordon. For example, that $2,488 policy for a
healthy 52-year-old becomes $2,860 if you have certain health problems.
"And if you develop something like multiple sclerosis, you may no longer
be able to get coverage at any price," he adds.
Which is why financial advisers
recommend that doctors purchase long-term care insurance well before
they reach their 60s. The cost of procrastinating can be just too high.
Here's what you need to know when you shop.
How the coverage works
Long-term care insurance provides
assistance so you can perform the "activities of daily living." The ADLs
defined by the insurance industry are the same as those in
healthcare—bathing, continence, dressing, eating,, toileting, and
transferring. A policyholder becomes eligible for benefits when he can't
perform a certain number of the ADLs—usually two or three. Benefits also
kick in if a policyholder is diagnosed with a severe cognitive
impairment and needs supervision as a result.
The typical policy requires that care
be necessary for at least 90 days. The services may be performed at
home, in a nursing home, or in an assisted living/residential care
facility.
Long-term care insurance differs from
disability insurance, which pays you a monthly check based on a
percentage of your salary. Disability insurance and long-term disability
coverage help replace lost income. Generally, coverage ends at age 65 or
retirement. The amount you receive is not likely to be sufficient to
cover both family living expenses and nursing home costs, although you
can use excess proceeds to pay long-term care bills.
How to buy a policy
Shopping for long-term care insurance
is complicated, because you can rarely compare apples to apples.
"Policies from different companies rarely offer identical options," says
Peter S. Gelbwaks, with Gelbwaks Insurance Services, Plantation, FL.
"You have to weigh combinations of features from different companies and
decide which are most valuable to you, and at what price."
So choosing a policy requires several
key decisions, each of which will affect your cost and coverage:
Actual cost vs cash benefit. "There
are three basic policy designs—daily or monthly reimbursement, and cash
benefit reimbursement," says Gelbwaks. "With the first two, you submit
bills to the insurer, which pays the nursing home or health facility."
These policies reimburse your actual expenses (up to your maximum). So
if your daily expenses are $120, but your policy limit is $150, you'll
receive only $120. "With the cash benefit reimbursement option, usually
the most expensive, you get a fixed benefit, regardless of actual
expenses," says Gelbwaks. "The insurer sends you a check directly each
month. You don't have to submit bills."
Benefit size. No surprise: The higher the payment, the higher
your premium. Most companies offer daily benefits ranging from $50 to
$300, in $10 increments.
To help determine the benefit you'd
need, find out what a local nursing home stay costs. "Many people pick a
ballpark figure of $150 per day, or $220 in Eastern metropolitan areas,"
says Gordon. "Better facilities cost more." You can also check the
average daily cost in your area at
www.maturemarketinstitute.com . (Click on Business to Business;
select Mature Market Institute; scroll to MetLife Market Survey of
Nursing Home and Home Care Costs 2003.)
Length of benefit. Fear of a chronic disease, like
Alzheimer's or multiple sclerosis, which could require indefinite
assisted care, is probably a major motivation for purchasing a long-term
care policy. Most insurers offer unlimited lifetime coverage. They also
offer limited coverage of two, three, four, or five years.
Of course, unlimited coverage is the
most expensive. A policy that offers five-year coverage for a
52-year-old might cost $1,816 annually; a comparable unlimited policy
from the same company would cost $2,488.
Do you really need such a costly
policy? While impairment from a stroke could last a decade or more,
actual nursing home stays tend to last under five years. "In 2002, of
nearly 4,000 approved claims, only 1.2 percent lasted more than five
years," says Slome. "A majority of people are in a nursing home for less
than a year."
On the other hand, the benefit period
includes home health care, not just time spent in a nursing home. If,
say, you bought three-year coverage, and had home health care for two
years prior to going into a nursing home, the policy would generally
cover only one year of the nursing home. Because long-term care usually
starts out in the home, you can't base your planning on nursing home
statistics alone; you may need care for a longer period.
"With a three- or five-year plan, you
risk outliving your benefits," says Gelbwaks. "The only reason to
purchase the five-year plan rather than a lifetime plan is because you
can't afford the higher premium." Adds Slome, "Get the best coverage you
can afford, but if you can't afford the best, you don't need a Cadillac
policy. You're still better off to get some coverage, and play the law
of averages."
Tax-qualified or not. The Health Insurance Portability and
Accountability Act of 1996 defined tax-qualified long-term care policies
where any benefits received are tax-free. What's more, the premiums may
be tax deductible, depending on your tax status. If you have an
S-corporation or are self-employed, you can deduct 50 percent of the
premium. C-corporations can deduct 100 percent. Individuals can deduct
premium costs as medical expenses (if total medical expenses exceed 7.5
percent of their income). All tax-qualified policies use the same
criteria to determine when benefits for physical impairment are
triggered: It's when you can't perform two of the ADLs, or have a
similar level of disability, or require substantial supervision due to
severe cognitive impairment.
In nontax-qualified policies, which are
cheaper, the benefit triggers may vary. So it could be easier to start
getting reimbursement for long-term care. On the other hand, it could be
tougher. So if you're considering a nontax-qualified policy, study the
section on benefit triggers very carefully. If you receive benefits,
they may be taxable as income, and premium costs are not tax deductible.
Inflation protection. A policy's daily benefit amount is stated in
today's dollars; in 20 years, $150 a day might get you four movie
tickets and a box of popcorn. That's why most policies offer inflation
protection options (using a 5 percent inflation figure). With such an
option, the daily benefit amount will automatically increase. You choose
whether the increase is calculated as simple interest or compound
interest.
While compound inflation protection
costs more, it may be well worth it if you're young. Here's the
difference: $150 at 5 percent compound inflation equals $648 in 30
years; at simple inflation, it's $375. The annual premium for the
compound inflation policy for a 50-year-old is $1,936; for a simple
inflation policy, it's $1,383.
"If you're in your late 60s or your
70s, you may be adequately protected without an inflation feature, or by
using simple inflation," says Slome.
Elimination period. This is comparable to a deductible, and refers
to how many days of expenses you'll pay yourself before coverage kicks
in. Most companies offer a 0-, 30-, 90-, 180-, or 365-day elimination
period. A 90-day elimination period is common, says Gordon. "Although
you can lower your premium by choosing a 365-day period, that year's
expenses can easily erase any potential savings," he says.
Insurance company. You might not receive benefits for 30
years, so you want to be sure that your carrier will be around to pay.
That means choosing a financially sound company. Several firms rate
insurance companies' financial stability, including A.M. Best, Moody's
Investors Service, Standard & Poor's, and Weiss Ratings. "Stay with
companies rated A minus or above," says Gordon. "The only reason to go
with a lesser-rated company is if you have a health condition that
prevents you from using a higher rated company."
Other options.
Many are similar to those available in
life insurance policies, like payment options. For example, you could
choose a plan where you complete your premium payments in 10 years or at
age 65, but you receive lifetime coverage.
Some policies offer options that cover
assistive devices, home modifications, and durable medical equipment
that allow you to stay home as long as possible. There's even an option
for respite care: If an unpaid caregiver is providing services for you
and wants time off, the policy will pay to temporarily replace her
services by a trained caregiver.
The best way to decide on a policy is
to sit down with an agent, and price different scenarios with various
options and types of coverage. Evaluate which ones seem most important
to you. You can get free policy comparisons and quotes from Long-Term
Care Quote at
www.longtermcarequote.com .
Look for an agent or firm that
specializes in long-term care. Policies are changing so rapidly, it's
hard for a generalist to stay on top of every new feature. There are
about 5,000 long-term care specialists in the US. Get recommendations
from a colleague or your accountant, or ask agents you're considering
about their background in long-term care insurance. Also, stick with an
independent agent who represents many different insurers, rather than
someone who can sell only one company's policies.
