Few individuals or families actually plan for disability and dependence in later life. Sadly, the lack of planning and self-education often results in lost opportunities to prepare for potential disability. Without the planning and discussion of these issues, we are often forced to learn quickly about available options after a traumatic accident, diagnosis of dementia, or loss of ability to care for oneself. While many of us are emotionally resilient, we usually are not financially resilient.
It’s surprising that so few families plan for long-term care given the high probability that our aging loved ones will ultimately need it. Perhaps it has been out of mind because it has been out of sight. With the wave of aging parents of Baby Boomers, it will finally come into focus. Consider that two in ten people over age 50 will require long-term care, four in ten people over age 65, and seven in ten people over age 75.
Long-term care is generally defined as (but not limited to) in-home health assistance or skilled nursing care in a facility. Services may include assistance with activities of daily living, home healthcare, respite care, care in a nursing home, or care in an assisted living facility. Some definitions include the assistance of care management professionals who help to coordinate and monitor care. Activities of daily living include eating, bathing, toileting, continence, and transferring.
The financial costs of long-term care have spiraled in recent years. The average cost of nursing home care is $38,000 per year, with some regions and homes topping $80,000 per year. Homecare can range from $50 to $150 per day (depending on the complexity of care required and the availability of skilled staff). When you consider that the average nursing home stay is 2 ½ years, the out-of-pocket costs can be disastrous to most families. The Centers for Medicare and Medicaid Services (a federal agency formerly called the Health Care Financing Administration) provides average cost information on a state-by-state basis.
And now for the bad news...
About a third of long-term care costs are paid directly out of pocket by families from their personal savings and the sale of assets like stocks and their homes. Individuals who qualify for Medicaid (after becoming impoverished) may receive coverage for some homecare or nursing home costs. Contrary to popular belief, Medicare and supplemental Medicare insurance do not pay for long-term care. Medicare only pays for a small amount of short-term nursing home care, not the years of care required by many aging adults. Increasingly, individuals are using private long-term care insurance to pay for anticipated expenses that are not covered by Medicare.
Long-Term Care Insurance Alternative
Individuals planning for future long-term care needs (either because they have seen a loved one require expensive care, or because they have a comprehensive financial plan in place) have four options:
(1) Hope that the federal government will change course and design a long-term care program that fills the gaps in Medicare and Medicaid;
(2) Put aside additional personal savings to pay for care when required;
(3) Prepare an estate plan that allows them to creatively shift assets in order to qualify for Medicaid;
(4) Purchase a long-term care insurance policy through an employer or private company.
When deciding on which alternative is best for you, most experts point to one’s age and personal assets as the keys. According to Long Term Care Quote, an insurance broker in Arizona, if you're aged 50 or older, relatively healthy, and have a net worth of between $100,000 and $1.5 million, you should seriously consider private long-term care insurance. When an individual gets older, the insurance premiums rise accordingly, so it may make sense begin paying into a policy earlier rather than later.
Long-term care insurance is sold by private insurance companies and usually covers medical care and non-medical care to help individuals with their personal care needs, such as bathing, dressing, using the bathroom, and eating. While private long-term care insurance policies are not new, they have received added attention because of growing concern about future healthcare needs, as well as recent laws that impact the tax status of the benefits offered under these plans.
In 1996, the U.S. Congress passed a law that allows the premiums charged for a long-term care policy to be deducted as itemized medical expenses on federal tax returns. According to the Internal Revenue Service, if an individual pays more than 7.5% of their adjusted gross income on medical expenses (including long-term care insurance premiums), they can claim those expenses as deductions. Some special long-term care insurance policies are designated as “tax-qualified,” which makes the benefits themselves tax-free. All other “non-qualified” policies require you to pay additional taxes based on the value of the benefits that you receive.
Long-term care insurance should be considered within the context of a comprehensive plan. That means individuals should consult with their financial and/or elderlaw advisors to see how the inclusion of an insurance policy would impact their overall estate plan. Paying a few hundred dollars for a lawyer to read and explain the policy to you is well worth it if you are at all confused or skeptical. Getting a “second opinion” is common sense.
Types of Long-Term Care Insurance Policies
Most long-term care insurance policies are based on a concept that gives an individual access to a “pool of money” in exchange for the payment of monthly premiums over the years. Insurers use complex actuarial formulas to “predict” how many people will need to use the money and how much interest they will earn on the premiums. In the future, insurers may develop novel types of policies based on their experiences with this type of product or the government may change tax laws again.
Policies generally have four key areas that the individual should consider and compare, according to Long Term Care Quote:
(1) The benefit period: The length of time after a claim is filed that the insurer will pay for the care provided (from one year up to lifetime coverage);
(2) A daily benefit: The maximum dollar or percentage amount the insurer will pay for care each day (from about $30 to $300 per day);
(3) The elimination period or deductible: The length of time and the amount of money that must be paid out-of-pocket before the insurer starts to pay (from “first day coverage” to a one-year wait);
(4) The level of inflation protection: The amount your benefits will increase over time to keep up with inflation (for example, $100 per day sounds adequate today, but may be too little in 10 or 15 years).
The individual buying the policy can choose virtually any combination of benefits, deductibles, or inflation protection options. Choosing the maximum amount under any of these areas will raise the cost of your policy. Consult with your advisor(s) about which areas are most critical to you, and what cost you are willing/able to afford. There is no “standard” long-term care insurance policy, so be sure to read the fine print!
Insurance Shopping Tips
The best way to find a long-term care insurance policy is to shop around. Either you can do the legwork yourself by individually contacting reputable private insurance companies, or you can work with a broker who markets various policies and collects a commission on sales. You may also speak with a legal, financial, or care management professional who specializes in eldercare matters. Use these consultations as opportunities to educate yourself before making a purchase.
How to shop
- shop carefully before you buy
- research at least five policies/companies before deciding
- take your time
- check for pre-existing condition exclusions (or exclusions for Alzheimer’s Disease or Parkinson’s Disease)
- research prospective insurers, agents, and advisors
- keep all contact names, correspondence, and phone numbers handy
- review the contract policy for 30 days and insist on full explanations
What to look for in an insurer
- large company that is rated highly by the leading insurance rating agencies
- established company with substantial assets and over five years of experience underwriting long-term care policies.
Rating Agencies
- Standard & Poor's http://www.standardandpoors.com/RatingsActions/index.html
- Moody's http://www.moodys.com
- Duff & Phelps http://www.duffllc.com
- Weiss http://www.weissratings.com
- A.M. Best Company http://www.ambest.com
What to look for in a policy
- favorable benefit triggers which must be met before the insurer starts paying for care
- few exclusions, especially for dementia and Alzheimer’s Disease
- expenses that are paid regardless of where you receive care
- deductibles that are satisfied only once and various deductible periods
- fair premiums that you can afford over the coming years
- comprehensive care in your home, assisted living, or skilled nursing environments
- benefit levels that are adequate for your region and state
- choice of the doctor who will certify your need for care (rather than someone hired by the insurance company)
- benefits for homemaker services, in-home medical equipment, and safety devices
- weekly or monthly maximums (rather than daily maximums) for in-home care
- waiver of premiums in the event that you need care
