What is Long-Term Care?
Long-Term Care is defined as sub-acute care that is required because an individual has a prolonged illness or injury and needs help from others in order to live. One may need assistance in order to perform two or more activities of daily living (bathing, continence, dressing, eating, toileting or transferring), and/or one may need supervision due to cognitive impairment.
Most financial advisors agree that the high cost of Long-Term Care is the most serious risk to the security of senior Americans. As part of the financial planning process, it’s important to understand the potential impact that needing long term-care may have on your assets, retirement income, family and future.
What are the Misconceptions about Long-Term Care?
Many Americans still believe that the chances are slight that they will need long-term care. They claim that their family history, or their genes, or their lifestyle, minimizes their risk. Unfortunately, if they believe these factors will enable them to live a long life, they are building a case that they have a higher risk than others of needing long-term care. The longer one lives, the greater the risk. Thus, a healthy 65-year-old may have as high a risk of needing long-term care as another 65-year-old with health problems, because the healthy person has a longer life expectancy.
Others feel that they do not need protection because their spouse, child or close friend can take care of them if necessary. But very often, a long-term care scenario can impose more stress on the caregiver than on the patient. Policies can be designed to pay for other caregivers to relieve the primary caregiver or caregivers, enabling loved ones to retain their own quality of life.
Finally, and one of the most costly misconceptions, there are still many individuals that believe health insurance, HMOs, Medicare and Medicare Supplements cover Long-Term Care. Since this type of care is not considered “medical” it is not a covered benefit under any of these policies.
Denial can lead to lack of planning. Better for many to pay for insurance and not need it than to deny their human frailties and have their life’s savings depleted.
What types of insurance policies pay for Long-Term Care?
Long-Term Care Insurance was created to help people get the care they need, without draining their assets or burdening their family. Actual services covered vary but most policies include skilled and non skilled nursing care, home health aides, physical therapy adult daycare and assisted living. Comprehensive policies cover care received in a multitude of settings, including, home care, assisted living, board and care, adult day care, skilled nursing facilities and Alzheimer’s facilities
- Traditional Long Term Care Insurance
These are policies with a predetermined pool of money and a daily or monthly benefit amount to pay for services. Similar to other types of insurance, the policyholder will pay an annual or monthly premium for the peace of mind that they will not drain their assets or burden their loved ones should the need for care occur. From a financial perspective, Long-Term Care insurance leverages your assets in a very cost effective manner to create a sum of capital that pays for qualifying care.
Insurance companies are growing increasingly adept at designing products which can satisfy two needs at the same time. These products are called linked products, and normally provide a Long-Term Care benefit inside either an annuity or a life insurance policy. Thus far, the following designs are available from leading insurance companies:
- Annuities with Long-Term Care Insurance Rider
These are basic annuities which offer all of the advantages annuities possess. But in addition, a rider at nominal cost can create a pool of money that can cover some Long-Term Care costs, usually for a limited period. They are usually funded by repositioning a current asset, either an existing annuity or a bank CD. One can often improve on ones current return and at the same time cover Long-Term Care costs. These products are ideal for a person who cannot qualify medically for Long-Term Care insurance and yet has a great need to be protected.
- Life insurance with Long-Term Care Riders
Why is planning for Long-Term Care important?
The problem is how to manage an event that is increasingly likely to occur as we age. Because we are likely to live a long life, we are likely to get old. If we get old, we are likely to become sick or injured. If this happens, we are likely to need care. Who will pay for that care? Who will provide it? How can the potentially severe consequences of needing care be minimized for one’s family and one’s financial plan? An extensive study on aging was published in the New England Journal of Medicine in 1991. This study concluded that 43 percent of people age 65 will enter a nursing home before they die, and, in addition, many more will need home health care. Half of those who will enter will stay for at least one year and their average stay will approach three years.
The average cost of a nursing home in California is now roughly $84,000 per year and is rising yearly at a pace above the rate of inflation. Medicare only covers long-term care for a matter of weeks, if at all, and is now under severe financial pressure. Medicare supplements and other private insurance policies also give minimal benefits. Medi-Cal only covers cost as a welfare supplement for the poor.
Needing long-term care places an enormous emotional, physical and financial strain on loved ones and family members. That is why having a plan is so important. A well designed Long-Term Care policy will reduce the burden of care that would otherwise fall on family members and enable you to receive care in the setting you most prefer, including home care.
What’s the best age to start planning?
Every day thousands of Americans over age 40 experience a significant change in health status. Even changes that are no longer life threatening can still be life altering. Individual or employer-provided health insurance does not cover long-term care costs.
Since younger people can also need care because of accident or because of a longer-term medical condition, it’s never too early to start planning. Here are some of the life altering changes that can unexpectedly happen and cause the need for long-term care.
Accidents..Stroke..Heart Disease..Breast or Prostate Cancer..Diabetes..Parkinson’s Disease..Multiple Sclerosis (MS).. Lou Gehrig’s (ALS)
Why do people purchase Long-Term Care Insurance?
One of the main reasons Americans buy Long-Term Care insurance is to avoid becoming a burden to their loved ones. They preserve their independence. They obtain the peace of mind that if they do become sick or injured, they will feel free to utilize the best quality of care available in the marketplace. They can die with dignity and usually without pain.
Another important reason Americans buy Long-Term Care insurance is to protect their assets, as they didn’t work their entire lives to spend their savings on nursing care. They want to preserve their assets to pass to their loved ones. It is now agreed that any motivated person with sufficient assets to easily cover the cost of the insurance should buy protection.
What is the best way to purchase Long-Term Care Insurance?
Choosing a Long-Term Care Insurance policy can be complicated and should be done with the help of an industry professional. There are many factors that determine coverage and cost, clients should realize that it’s imperative to choose a good insurance company and a good agent. As yet, there are only a handful of insurance companies and agents that have wide experience in this field. The main factors in choosing an insurance company and an agent are:
- Is the insurance company highly rated and stable, so that it will be around many years from now to pay a claim?
- Does the insurance company have a good track record of paying claims?
- Does the insurance company have competitive rates, give good value, and have a strong presence in the Long-Term Care insurance industry?
- Is the agent trustworthy and a specialist in long-term care insurance?
- Is the agent part of a larger organization that is available to assist you in time of need?
- Can the agent offer many plans from top companies and not merely represent one company?
How do you qualify for benefits when you have a Long-Term Care Policy?
In order to receive benefits, first the client’s doctor has to certify that he or she is sick or injured. He must either require assistance in two or more of the previously mentioned activities of daily living, or he must need constant supervision due to cognitive impairment. In a tax-qualified policy, the client’s doctor must certify that the illness or injury is expected to last at least 90 days.
Second, he must receive care from a person or facility that meets a definition in his policy. In general, a facility must be licensed, maintain records and have the ability to care for him 24 hours a day. If he needs the care of professional caregivers in his home, they must also be properly licensed. If he only requires personal care and services at home and aides, no licensing is needed. Nor does he have to utilize a licensed home health care agency. Some policies reimburse even if care is given by a family member.
Home health care policies often require a written plan of care, designed by a doctor, nurse or social worker and agreed to by the patient. Benefits cover a very wide range of services performed within the plan of care. A social worker is also able to monitor this plan, change it if conditions change, and aid the patient in procuring caregivers. The best policies pay the costs of the social worker’s services.
What are the different levels of Nursing Home Care?
There are three levels of nursing care that vary in intensity, and Long-Term Care policies cover all of them in the same manner:
- Skilled care: Rehabilitative, short term, intensive 24 hour care, usually following an illness or injury requiring acute care first. Assuming a three-day hospital stay, Medicare and other health insurance policies cover room and board for skilled care only in a nursing facility. The average stay is less than 20 days.
- Intermediate care: Rehabilitative care for up to six months which requires less than 24-hour supervision by a nurse.
- Custodial care: Care necessary due to a chronic or permanent illness or injury, which is less intensive, but which may continue indefinitely. This care helps a person perform activities of daily living or supervises a person if cognitive impairment exists.
The primary need for long-term care insurance is to cover the costs of custodial care, as custodial care accounts for more than 90 percent of nursing care costs. Other types of insurance policies provide no benefits for custodial care. Over half of custodial costs are for people having cognitive impairment. Many custodial care scenarios begin with a mild degree of illness, but slow deterioration sets in.
What affects the premium of a Long-Term Care Policy?
There are seven main variables in Long-Term Care policies which all influence the premium:
- Age: The younger you are, the lower the premium. The age is the single largest element in determining the premium. This factor creates a substantial additional cost if one waits to purchase long term care protection.
- Daily benefit: The maximum amount a plan will pay for one day of care. This can vary from $50 to $500 per day. The cost of a nursing home in California in 2010 averages $230 per day, according to the California Partnership for Long-Term Care. Clients may want to protect against all of this cost or only most of it.
- Benefit limit: This is the number of days or years that a plan will pay a benefit … not from now, but from the time the client gets sick. Benefit limits can vary from one year to lifetime coverage. The longer the benefit limit, the greater the protection but the higher the cost.
- Inflation protection: Because nursing care costs are rising, clients need a way for their daily benefits also to increase over time. Otherwise, the policy may not adequately protect your client many years from now if he/she gets sick. Policies normally contain riders offering automatic daily benefit increases of 5 percent each year, either at “simple” or “compounded” rates, plus other options.
- Elimination period: This can also be called a deductible, and is a period where clients pay out of their own pockets before a plan begins to pay. This period normally varies from 0 to 100 days, with the 100-day elimination period yielding the smallest premium.
- Tax benefits of policy: Some or all of the premiums may be tax deductible depending on your filing status. Typically, the benefits of a plan are income tax-free. For specific details contact us and your tax advisor.
- Partnership: Four major companies in partnership with the State of California have special, tax-qualified policies where in the State pays lifetime benefits in skilled nursing facilities under Medi-Cal after the insurance company benefits run out. The amount of insurance company benefits paid out is preserved in the estate of the client.
What are the main features of a good Long-Term Care Policy?
Any Long-Term Care Insurance policy should include the following features among others:
- Guaranteed renewable: The company cannot cancel the policy unless the policyholder fails to pay the premium.
- Covers mental conditions: The policy should cover mental and nervous conditions due to any organic brain disease, including Alzheimer’s disease.
- Exclusions: Exclusions should be minimal and should not affect the client’s intent to be protected.
- Premiums shouldn’t change: Premiums should not be influenced by any change in the client’s age or health, and the client should expect them not to change during the life of the policy. However, companies reserve the right to change rates on a statewide basis. Clients should be urged to buy from a company that does not have a track record of raising rates, but should be prepared to pay a higher premium, years later if a rate increase occurs.
- No Pre-Existing Conditions: Once the company offers coverage and the client accepts it, any previous medical history (assuming it is admitted on the application) is of no consequence.
- Waiver of Premium: The company allows policyholders to stop paying premiums once they are receiving benefits. There can be waiting periods of up to 90 days before this waiver takes effect, and it may not be available when home health care is obtained.
Who can qualify to purchase a Long-Term Care Policy?
When clients apply for coverage, the company investigates their health history to decide whether to offer them coverage. Clients release medical records, and some companies will call them on the phone and ask questions about their health. If they are older, the company will have a social worker see them, at their convenience, to do a face-to-face interview with no disrobing.
For those with health problems, the big question is, can they get coverage? If they cannot, no financial decision is required. The only way to answer the question, however, is to have them apply.
The underwriting process normally takes about five to six weeks. This gives the applicant plenty of time to read materials explaining the policy applied for. The agent physically delivers the policy after it is issued. This presents an opportunity to finalize the structure of the policy and to become comfortable with the buying decision.
What is the cost of a mid- range Long-Term Care Policy?
Annual premiums should probably not exceed 7 percent of gross adjusted income. The premiums can be financed out of income, but many believe it is also sound to utilize assets to pay premiums, thus using assets to protect assets.
A typical comprehensive policy for a 65 year old could cost from $125 to $200 per month. The same policy would only cost half as much at age 55, but would more than double by age 75. This is even before considering that an increased daily benefit may be needed if one waits to buy coverage.
Because of all the previously mentioned variables, the costs are up to the client. He or she should be comfortable both with the premiums and the protection the policy offers. There is no magic formula as to how much protection to buy, as everyone’s needs are different. A good Long-Term Care insurance agent is like a good doctor or carpenter. Clients need a trained professional in Long-Term Care insurance whose judgment they can trust.
What are the important facts and figures about Long-Term Care?
- In 2010 nursing home care cost averaged about $230 a day or about $83,950 a year in California. Source: California Partnership for Long Term Care, 2010.
- At least 3 in 4 Americans are either uninsured or underinsured for Long-Term Care.
Source: The LTC Guild, 2010.
- Among people age 65 and older, 30% have three or more chronic diseases.
Source: Connie Limon, Aging and Longevity – Can Our Economy and Health Care System Survive Aging Baby Boomers? July 9, 2007.
- Nearly 79% of people who need Long-Term Care live at home or in community settings rather than in institutions. (Source: The State of Aging and Health in America, 2004. Merck Institute of Aging and Health.)
- The main causes of Long-Term Care are Alzheimer’s, stroke, circulatory disease, injury and cancer. Source: The 2010 (Source: book for LTCI Information. American Association for Long-Term Care Insurance, 2010.)
- Of those who enter a nursing home, 44% will stay at least one year and 12% will remain longer than five years. (Source: California Partnership for Long-Term Care, 2010.)
- Long-Term Care insurance reduces a person’s chances by 66% of having to spend down his or her savings to the point of impoverishment to qualify for Medicaid assistance. Helping You Take Care. (Source: America’s Health Insurance Plans, 2009.)
- The average cost for a home health aide or homemaker in San Francisco, Los Angeles, and San Diego is at least $23 per hour. (Source: The 2010 Sourcebook for LTCI Information. American Association for Long-Term Care Insurance, 2010.)
- The Long-Term Care insurance industry is proud of its record of paying nearly 97% of all claims submitted. Helping You Take Care. (Source: America’s Health Insurance Plans, 2009)
- 66% of Long-Term Care insurance claims are paid to women. The 2010 Sourcebook for LTCI Information. (Source: American Association for Long Term Care Insurance, 2010.)
- 62% of Long-Term Care insurance applicants between ages 40 and 49 qualified in 2009 for good health discounts, but only 46% of applicants between ages 50 and 59 qualified.(Source: The Sourcebook for LTCI Information. American Association for Long-Term Care Insurance, 2010.)
- If you meet Medicare requirements, Medicare will only pay the full cost of skilled nursing home care up to the first twenty days of a covered stay and then only a small part of the bill for the next eighty days. (Source: Taking Care of Tomorrow. California Department of Aging.)
In general, the annual premium for Long-Term Care insurance more than doubles from age 50 to age 60 in a California Partnership policy and more than triples from age 55 to age 65.