As Americans live longer and more of us face the potential of needing to
pay for our own care outside of the hospital, many are exploring the options
available through a Long Term Care insurance policy.
What is Long Term Care Insurance?
Simply put, a Long Term Care (LTC) insurance policy pays for all or part of your care, outside of a hospital, resulting from a serious disability, illness, accident or even frailty that leaves you unable to care for yourself. Exactly when it will pay, how much it will pay, who it will pay and where it will pay are important distinctions which separate one policy from another.
LTC insurance is a relatively new form of insurance. The first policy was written in the 1970’s, but since that time we have seen a literal explosion in terms of the need for the care, the cost of care and the availability of quality insurance policies.
Initially designed to provide nursing home care only, LTC policies now offer the option of nursing home care, home health care and a number of "alternate" forms of care, including assisted living, adult family homes and adult day care. Policies that provide the full range of coverage are referred to as "comprehensive" or "integrated" policies. They typically provide coverage anywhere in the United States while a few extend worldwide.
Cost of Care
In Washington State, relative to most other parts of the Country, long term care is expensive. According to a 2015 Study by Genworth Insurance Company, the median annual cost of a semi-private room in a WA nursing home is $96,933 and in King County it is even higher. Assisted living runs $55,500/year or more. Home care costs depend upon the number or hours per day and the cost per hour, but averages $54,912/year.
What about my Health Insurance, Medicare or
Many people incorrectly assume that their health insurance or Medicare will pay for the cost of long-term care. In fact, typical health insurance policies provide no coverage, while Medicare provides a very limited amount of skilled care (following a three day hospital stay) in a nursing home, and in total, pays for less than 3% of the cost of LTC in this Country.
Medicaid, which is a health insurance program funded by both Washington State and the Federal Government, provides basic coverage for the poor and indigent, but only after they have spent down to almost nothing (in Washington the asset spend down limit is $2,000 for a single person) and their income is at the poverty level.
Why Consider Long Term Care Insurance?
An LTCi policy may be appropriate for you if you:
Have assets to protect that you want to leave to others
Want to maintain your independence in the event you become disabled or suffer a serious illness.
Want to ensure that your family members or loved ones are relieved of the burden of providing your care.
Can afford the cost of the policy
How Much Will it Cost?
Five factors influence the cost of insurance:
1) Your Age. The older you are, the more expensive the insurance. However, once you
purchase a policy, the price is designed to stay level (see "can they
raise my rates?")
2) Your Health. The healthier you are, the less you pay. The poorer
your health, the more you will pay.
3) Coverage. The more coverage you buy, the more expensive the
policy, but the less risk you will assume.
4) Rates. Different companies charge different prices for similar
5) Gender. Women generally pay more than men because they are more likely to file a claim.
What do I Look for in a Policy?
There are six basic components of any Long Term Care insurance policy:
1) Where Will the Policy Pay for My Care? A comprehensive policy will pay for care in your home, an assisted living facility, an adult family home, or a nursing home, anywhere in the United States. Watch out for policies that pay for a reduced benefit for home care or offer none at all.
Also, make sure you know who is permitted to be a paid caregiver.
2) The Maximum Daily Benefit. This is the most per day (or per month) the policy will pay towards you care. Raising or lowering this benefit will have a lineal impact on your price. Limits range from $100/day to over $500/day. You may decide on a limit that will pay all or just part of the cost of care, depending on you willingness and ability to “share in the risk”.
3) The Maximum Lifetime Benefit . This is the maximum amount of money the policy will pay over the course of your lifetime. This limit is a function of the daily limit (#2 above) times the number of years of coverage. Example: A policy with a daily benefit of $200/day and a 5 year benefit period would have a maximum lifetime benefit of $365,000 ($200 x 1,825 days). This total is referred to as your "pool of money". Additionally, some companies offer unlimited benefits at a considerably higher rate.
4) Inflation. There are two types of inflation available and it is critical that you understand the difference. Inflation riders are designed to keep your coverage in line with the increasing cost of care.
A) Automatic Inflation: Both the daily/monthly benefit and the maximum lifetime benefit are automatically increased each year. You pay extra in the beginning for this rider, but no additional premium is charged as the coverage increases over time. The automatic inflation rider is a critical component of a policy and the more so the younger you are. .
There are many options here, the most common are:
a) 3% or 5% compound (you must be offered 5% in WA)
b) 3% or 5% simple
c) a % with a cap on the number of years it will grow
B) Guaranteed Purchase Option. You are guaranteed the right to buy more coverage every couple of years based on the price for your age at that time. This option looks attractive in the beginning, but the cost of additional coverage down the line may eventually make the policy premium prohibitively expensive for many people.
Elimination Period. This is how many days you must pay for care before the policy begins to pay (like a deductible). A typical period is 60, 90, or 100 days. The higher the deductible the less expensive the policy. Look for a policy where the deductible needs only be satisfied once in your lifetime, and is cumulative.
6) How do You Qualify for Benefits. Look for policies that allow you to qualify for benefits if you:
A) Have a severe cognitive impairment, requiring supervision, or
B) Need substantial assistance for at least 90 days with at least 2 of 6 activities of daily living (eating, bathing, toileting, dressing, countenance, or transferring).
Make sure that the policy allows you to use "any licensed health care practitioner" to qualify you for benefits. Also, favor those that allow "stand by" assistance to qualify you for home care benefits as opposed to “hands on” assistance. Also, favor a contract that will allow you to receive home care from a licensed health aide, but not necessarily one that must be provided by a licensed home health agency.
Can They Raise My Rates?
In Washington State, the rates for LTCi policies can only be raised if they are raised for everyone in your class and the rates are approved by the Insurance Commissioner's Office. The prices are designed to stay level. However, in the past decade we have seen most carriers raise their rates on older versions of their policies. They cite higher than anticipated persistency, higher than anticipated losses and weaker than expected investment income as reasons for the rate increases. However, at the same time, they are charging a higher price for new applicants and thus do not anticipate raising rates on those policies, assuming their new actuarial assumptions are accurate.
Under no circumstance can the rates be raised because of your health, because you file a claim, or because you get older.
When Should I Buy LTC Insurance?
While there is no simple answer to this question, policies are less expensive
for people who are healthy and the younger you are, the less costly the
coverage. Suzie Orman, in her book The 9 Steps to Financial Freedom,
says it is best to consider the insurance while you are in your 50's, but
anyone 40 or older should take a look. We believe the best time to purchase is when:
How Do I Know I am Not Getting Ripped Off?
Take your time. Attend a seminar. Education is critical. These policies are complicated and are not standardized. Evaluate both cost and coverage. Find balance between what is reasonable in terms of coverage with what is affordable in price. Favor experienced agents who specialize in long term care insurance and companies that are financially sound with a proven track record in LTCi.
Role of the Federal Government
During recent years the Federal Government and WA State have taken an increased interest in LTC insurance. They realize that the more Americans who purchase policies the fewer will need government aide. Faced with the challenges of Social Security, Medicare and Medicaid, they are looking for ways to reduce the overall cost of their role in providing care for the disabled elderly.
In 1996, as part of the Health Insurance Portability and Accountability Act (HIPPA), the Federal Government passed a law providing for tax incentives for those who purchase a “Tax-Qualified Policy”. Most LTCi policies sold today are Tax-Qualified, but be sure to ask.
For individuals, all or some of the cost of tax-qualified LTCi policies can be treated as medical expense when filing your federal tax returns and can be used to meet the 10% deductibility threshold. If you are self-employed or own a business you may be eligible to count the cost of your ltci as a deductible business expense. Be sure to consult with your tax advisor.
Washington State Partnership Plan
In 2012, Washington State passed a law providing for a Partnership Plan. Essentially it is a provision that allows people who use the benefits of a tax-qualified LTCi policy in Washington (and a contract that has also been approved for Partnership eligibility by the WA Insurance Commissioner’s Office), to be eligible for special treatment under the Medicaid eligibility rules. To be approved, among other things, the policy must contain at least a 3% compound inflation rider, in most cases.
With a Partnership Plan policy, if a person were to exhaust their LTCi benefits, they then become eligible for a different “spend down limit” or “asset disregard” for Medicaid eligibility. Instead of the $2,000 asset eligibility limit, the limit becomes $2,000 plus whatever was used in the way of insurance coverage. Other Medicaid eligibility provisions may also apply.
During the past 10 years many life insurance companies have introduced “hybrid polices”. These policies combine a universal life insurance or annuity contract with a long term care insurance benefit. These policies may appear attractive to people who are concerned about the possibility that they will pass away without using their long term care insurance and like the idea of assuring themselves that their heirs will receive something when that does happen.
Hybrid policies are a compromise. You wind up paying for both a life insurance policy (or an annuity) and a long term care insurance policy when you very well may only need one. Just about the time (retirement age) when most people no longer need life insurance is precisely the time they are most likely to need long term care insurance. However, you cannot “undo” one of these contracts. You must keep paying for both components in order to keep one.
Often the hybrid policy makes a mockery out of the long term care insurance benefit because that component is sold without an inflation rider or one that is inadequate. Secondly, the policy may contain a large amount of “Maximum lifetime benefit”, but the daily or monthly benefit is so small that the insured will wind up paying for a large percentage of the claim out of pocket.
Here are some things to consider:
1. Hybrids often require a single, up front premium, with the average in excess of $130,000.
2. Hybrids have two layers of fees that stand alone ltci policies do not; an administrative fee and “mortality expenses”
3. Hybrids contain “surrender charges”
4. Hybrids are “not tax-qualified” and thus the premiums cannot be deducted from income.
5. Hybrids are not eligible for “Partnership” programs.
6. The guaranteed interest rates on these policies are extremely low, often 1%.
While “hybrid policies” are a viable solution for some high net worth people, it is important for anyone considering this option to weigh the alternative of investing the “up front” requirement yourself and using the yield to pay for the long-term care insurance, while retaining the initial investment.
In addition to the standard discounts for good health and partner status, we represent a number of insurance companies that offer exclusive discounts for a variety of associations, including AAA Washington.
Whether you ultimately purchase a policy is not the critical issue. What is most important is that you do your homework and make an informed decision.