A View of Long-Term Care Insurance

July 14, 2004

Is Long-Term Care Insurance (LTCI) right for you? This is an intensely personal question and after carefully taking into account the vast amount of variables, the answer is still a toss up. Do you think you will die suddenly (heart attack, stroke, etc.)? If so, don't buy it. Do you think you will become disabled and linger for years? Buy it. However, if you're like most of us and don't know, read and consider the following.

Medical advances have a lot to do our life expectancy .Simply put, afflictions that used to bring about death can now bring disabilities. Our life expectancy relates to the question of who may need long term care. Life expectancy after age 65 has increased 17.9 years. In 1940 - 64 years ago - it was only 13 years extra after age 65.(1)(see Source Notes) We now live longer and the chances are greater that we will need assistance in some form due to chronic conditions. About 44% of people reaching the age of 65 are expected to enter a nursing home at least once in their lifetime and about 53% of those who do enter a nursing home will stay for one year or more.(2) The average stay in a nursing home is about 2 years.(3)

As of 2001, only 8 million Americans had purchased LTCI (leaving 82 million people over age 45 without financial protection against long term care).(4) If you plan to shop around, check four key areas:

This latter aspect enables you to deduct premiums up to a maximum limit provided you itemize deductions and your medical expenses exceed 7.5% of your adjusted gross income.

We receive medical care because of sickness or injury. Medical care is usually designed to cure the person of their illness or problem. We buy medical (health) insurance to take care of potential medical problems making this insurance a definable expense and a means of limiting our out-of-pocket expenses.

Long-term care is about chronic care. Most people usually need this type of care for a long time - the rest of their lives - because they need help with the activities of every day life. To begin receiving LTCI benefits most insurance companies require the insured to need help with two or more "Activities of Daily Living" (ADL's) which includes bathing, eating, toileting, getting dressed, maintaining continence and the ability to transfer oneself from place to place.(5) Determine whether it's your doctor or the insurer who makes the call about the inability to perform ADL's since this defines "Eligibility for Benefits".

Long-term care takes place in various locations: at a nursing home; at an assisted living facility; at a skilled nursing facility; or at some form of community facility where the spectrum of services can vary. Make sure that your LTCI policy includes these types of choices. Long-term care usually begins in the home where people prefer to get the type of help they need.(6) Therefore, the LTCI should have provisions spelled out for what would be defined as a Stay at Home Benefit.

The average cost of nursing home care in the U.S. is $ 56,000 a year, but costs vary dramatically by state.(7) In Oklahoma you may get by for $ 25,000 per year, but in Alaska you can pay as much as $ 250,000 per year. Here is a sample Average Nursing Facility Daily Cost, private room, by city for year 2003.(8) San Francisco -$312: Phoenix - $174: Dallas - $147: Orlando - $153: Arlington, Va. -$220. One year (365 days) in a nursing facility located in Bergen Co. NJ will average $6,000 per month; or $73,000 per year. Here is a sample of the At-Home Care Cost, hourly by city. This is for an aide supplied by a home care agency.(9) Colorado Springs, Co. - $25: Boston - $21: Atlanta - $18: Los Angeles - $16. The annual cost here is dependent on the number of factors: visiting days by a caregiver, the type of care required (Skilled nursing care vs. care provided by a home health aide), and the length of each visit.

Many people may think or believe that they are covered for long-term care. Medicare is a retiree medical insurance program which most people are familiar with. Medicare offers no custodial care coverage at all. Medicare does pay for one type of nursing home stay: skilled nursing care at a Medicare approved facility. To be eligible you must have been hospitalized for at least three days and receive a doctor's certification for admittance. Medicare pays the covered costs at a rate of 100% for the first 20 days, after that Medicare requires a co-pay of up to $ 105 for the 21st through the 100th days of stay. On the 101st day, all further costs must be borne by the individual.(10)

There are three (3) paths to cover long-term care expenses.

  1. Use your personal income or liquidate your assets. Note: Once you start paying for nursing help or for facility care out of personal savings or assets one spouse could use up all the assets and leave the second spouse in a situation where he/she is house "rich" but cash "poor".

  2. Rely on Medicaid to bridge the expense gap - once the individual has spent most of his own money. Medicaid is the companion program to Medicare run by state welfare or human service agencies and funded partially by the federal government. Rules vary from state to state. Here is a brief look at some of the Medicaid rules that are applicable in New Jersey.(11)
    1. You must be a US citizen and a resident of that state;
    2. Be 65 or older, blind, or disabled;
    3. Have a certain monthly income under the posted limit;
    4. And you also must prove that you haven't transferred funds out of your estate within the last 36 months. Note: You may experience a long wait to get one of the limited number of Medicaid beds available at each health care facility once you qualify for this program.

  3. Make this a definable expense (Like medical insurance) and purchase Long-Term Care Insurance. This type on insurance is designed to defray the cost of long-term care should you ever need to receive it.

The individual must be in reasonable health to be eligible for a LTCI program. People who have ongoing health problems will probably not qualify because insurance companies have medical underwriting standards to keep long-term care insurance cost affordable. It's generally considered that when your age is in the 50's that this is the best time to buy LTC, when the rates are low and you haven't yet developed any serious health problems. For those people that do qualify, the policy cost (premiums, deductibles, etc.) should be affordable over your lifetime and worth its cost due to the various benefits that it offers. The premiums usually remain fixed at the contracted price during the LTCI life cycle but this is not guaranteed.

The actual cost of the LTCI policy to an individual is dependent on the policy building blocks and their various options. Here are some of the major building blocks.

  1. LTC Daily Benefit Amount (DBA) which can range from $50 -$500.
  2. The Benefit Period is the time period over which the DBA will be paid: 2yrs to lifetime.
  3. The Elimination Period is the number of days that you select before DBA begins: 30 to 365 days.
  4. Inflation Protection: This allows the policy keeps up with rising costs.
  5. The aforementioned Stay at Home Benefit.

A tip: Ask how your daily benefits will be calculated. Will they be based on the charges per day as incurred or will they be aggregated over a month's time? The latter method can be particularly advantageous if you're having home visits from multiple caregivers one day but none the next.

There is an accurate "rule of thumb" when it comes to purchasing a quality LTCI policy for a particular age and circumstances which is still true today. The rule says: You will prepay, over your lifetime, for one year of care in today's dollars. If you ever need care, you will have a significantly larger financial pool on which to draw and all the premiums paid will come back to you in benefits in one year or less.(12)

In summary, the best and worse case scenarios are for those who don't elect to purchase LTCI. The worst case scenario is that you end up in a nursing home, penniless and with no estate to leave your heirs. The best case scenario is you never have to go to a nursing home and all of your assets go to your heirs. Just like other types of insurance - auto, homeowners, personal liability - you pay premiums and get "Protection" and some form of "Peace of Mind". Pursuing this same line of reasoning; By purchasing LTCI you will incur the significant expense of the premium but you will have the Peace of Mind coming from knowing the funds to care for you will be there. This choice, of course, is up to you.

James Himich, Jr.

Source Notes:

  1. A Shopper's Guide to Long-Term Care Insurance, NAIC Publication, 2003, p. 7.
  2. Ibid
  3. National Center for Health Statistics - US Dept. of HHS; 6/02.
  4. Fidelity Outlook, Feb. 2004
  5. A Shopper's Guide to Long-Term Care Insurance, NAIC Publication, 2003, p. 18.
  6. AAHSA, Who Will Care For Us, The LTC Workforce Crisis, 10/2001
  7. A Shopper's Guide to Long-Term Care Insurance, NAIC Publication, 2003, p. 4.
  8. IBD Special Report: The New Retiree, Investors Business Daily, 2/26/04, p. A12.
  9. Ibid.
  10. Medicare & You - 2004, US Dept. of HHS; CMMS, pp. 31-34.
  11. Elder Law, M.A Manna & Assoc., P.C., 2003.
  12. F/M Advisory, Franklin/Morris Assoc., S.H.Leimbach , CLU, 1999.

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