A Candid Look at Long-Term Care (LTC) Insurance

Lawrence M. Croft, JD, CLU

According to the 2002 U.S. Census, more than half of Americans age 65 or older will need some type of long-term health care. Given a choice, most people would prefer to receive their long- term care at home, but this will not always be possible. To accommodate demand, assisted living facilities are experiencing phenomenal growth. Long-term care costs are likewise climbing at an alarming rate. A recent independent insurance company study showed that, nationwide, the average annual cost of a private room in a nursing home is currently $192 a day or $70,080 per year. With an average stay of 2.4 years, the total cost impact is $168,000.

Your health plan and/or Medicare entitlements or supplement plans will only cover a fraction of long-term care expenses. For those meeting certain Federal guidelines, Medicaid is available; however, under the "get what you pay for" axiom, most people would rather not fall back on it.

In the late 1980s, insurance companies began to offer consumers an opportunity to purchase protection against the possibility of ending up in a traditional nursing home. A lesser benefit was accorded home health care. As the marketplace demanded a wider breadth of coverage, carriers responded with benefits for all potential levels of care whether at home, an assisted living facility or traditional nursing home.

The typical current long-term care policy includes the following:

_ Must qualify for policy through underwriting. Rejection is possible or waiting periods for preexisting conditions may be imposed. Alcoholism, drug abuse and self-inflicted injuries are normally not covered.

_ Agreement to pay a fixed amount for each day at home or in a facility is triggered when an insured cannot perform (1) two or more ADLs (Activities of Daily Living) such as eating, bathing, dressing, continence, toileting, transferring or (2) when care is needed due to cognitive impairment.

_ Benefits are available for a specific period of time, i.e. one to ten years or lifetime. Benefits paid out by indemnity or reimbursement contract.

_ Imposing an elimination period prior to benefits being paid reduces the premium. Typical range is 0 to 100 days but can differ depending upon whether utilizing home health, assisted living or nursing home.

_ Premiums are waived when receiving benefits while in a facility. Waiver of premiums for home health care depends on the policy.

_ Premiums are guaranteed renewable meaning rates cannot be raised unless the insurance carrier gets permission from the State to raise the whole class of participating policyholders. Note that in 2003, seven out of the top ten insurance companies offering LTC insurance requested a rate hike. So long as premiums are paid, a policy cannot be cancelled.

_ Cost of living rider allows future benefits to keep up with inflation. Alternative is to over fund the benefit amount at policy inception.

_ Return of premium rider for benefits not used may be available but at considerable expense.

_ Thirty (30) day free look after purchase to decide whether or not to keep policy.

In deciding whether to purchase LTC insurance, consider these points:

_ Is there a desire or need to protect assets? For what it is worth, financial planners generally use $5,000,000 and above in assets as the benchmark for self-funding LTC needs. Below that amount, LTC insurance is a definite alternative especially when there is a disproportionate amount of non-liquid assets in one's portfolio.

_ In addition to protecting assets, LTC insurance provides peace of mind in knowing (1) you will not have to settle for the limited care provided by Medicare or Medicaid, and (2) a prearranged source of LTC funding will put fewer burdens on the family.

_ If you apply to live in a "continuing care retirement community" (CCRC) that offers varying levels of future care for a substantial upfront down payment, will LTC insurance serve any purpose? It depends. In applying to a typical CCRC type facility, you might remain on a waiting list for years. The Catch-22 is that you must be healthy at the point of entry. If you already own LTC insurance and entry is not possible, benefits will be paid out according to the terms of your policy. If you are healthy and entry is approved, most LTC policies view CCRCs as providing a duplication of benefits, and will not pay claims when they are incurred. Only a few "pure" indemnity type policies will pay out benefits in this situation. Bottom line: Acquiring LTC insurance for protection while waiting for entry to a CCRC facility deserves consideration.

_ Pay close attention to the financial stability and staying power of the insurer. Citing lack of profitability, several carriers have dropped out of the LTC market. This is still a relatively new business in which there has been insufficient claimsı experience to determine proper pricing.

_ Look for a policy that covers all levels of LTC support whether administered at home or in a facility.

_ Take advantage of spousal discounts. Make a buying decision while you are healthy.

_ Compare the expense of adding a cost of living rider versus maximizing the initial benefit amount.

_ Some life insurance policies permit encroaching on policy values or death benefits to pay LTC expenses. Advice: Use separate policy for LTC expenses.

In closing, the decision to buy LTC insurance must be an informed one. To educate potential LTC consumers, the National Association of Insurance Commissioners has published A Shopperıs Guide to Long-Term Care Insurance. This is an excellent resource for understanding LTC insurance. If you would like a copy, please call me.

Laurie Croft has been in the financial services industry since 1973. He received his BA degree from the University of Virginia, his JD degree from the Washington & Lee University School of Law and his CLU from The American College. He is a member of the South Carolina Bar and a non-practicing member of the Virginia Bar Association. He founded Insurance Evaluation Services in 1992 to help consumers make important buying decisions regarding life, health, disability and LTC insurance products.