Long-Term Care Insurance

Investment or Gimmick?

“So, what’s the deal with long-term care insurance? Do I need it? Isn’t it just a waste of my money?” “Is my policy good enough?” “I don’t need long-term care insurance because I’m never going to a nursing home.” “I’ve got plenty of money to pay for my own care.” “Do I have enough coverage?” In our office, we hear these comments and questions on a regular basis. Long-term care insurance is a baffling topic for many. Let’s try to put this puzzle together piece by piece.

What is it? Long-term care insurance is an insurance policy that will pay benefits to the insured upon the occurrence of certain “triggering events.” Usually, benefits under the policy are triggered when (i) the insured begins receiving home care or care in a skilled nursing or assisted living facility and (ii) such care is required due to insured’s need for assistance with at least two activities of daily living or due to cognitive impairment. Activities of daily living are dressing, feeding, toileting, transferring, bathing and continence.

Who needs it? The simple answer is that most of the members of our community age 50 or above should at least consider purchasing long-term care insurance. A semi-private room in a skilled nursing facility in our community may easily cost as much as $5,000 - $6,000 per month, or up to $72,000 in a year. And that amount only pays for room and board. This significant expense quickly depletes most estates.

For the larger estate, long-term care insurance can be the “mote around the castle” that protects all of the careful financial and estate planning that’s been accomplished by insuring that assets will not be depleted on long-term care. For the smaller estate, long-term care insurance can be the difference between the “privilege” of Medicaid eligibility for long-term care and saving the family home. However, long-term care insurance for such estates may not be appropriate unless the premiums can be paid out of disposable income without changing lifestyle. Because long-term care insurance can be cost-prohibitive for the smaller estate, particularly for retirees on a fixed income, adult children frequently pay the premiums for such policies for their parents in order to protect the family assets, particularly if highly appreciated real property is involved.

Is this a good policy? You should consider the following factors when evaluating a long-term care policy:

• Company – ALWAYS check the credit rating of the company offering the policy. Regardless of the “bells and whistles” the policy may offer, the policy is only as good as the company’s ability to pay any potential claims. You can check the credit rating of insurance companies on the web at Medicare Prescription Drug "Personal Plan Finder" at www.standardandpoors.com
• Coverage – We see lots of policies that cover only care in a skilled nursing or assisted living facility. Most people prefer to receive care in their homes. Since none of us has a crystal ball, we recommend that clients purchase a comprehensive policy that covers home care, adult day care, assisted living and skilled nursing care.
• Daily Benefit – Your “daily benefit” is that amount that your policy will pay to you for home care, adult day care, assisted living or nursing home care. You should base your daily benefit amount on the most expensive of these options – nursing home care (although home care may be more expensive, most people do not receive 24-hour home care). If we assume that the daily rate for a semiprivate room in skilled care is $165/day, then your daily benefit amount should be $165 less that amount that you can pay from your income for your care without impacting your lifestyle or that of your spouse.
• Benefit period – The “benefit period” defines how long your policy will pay benefits. Often, this is expressed in terms of a maximum dollar amount that the policy will pay. So, a policy with a daily benefit of $150 and a lifetime maximum of $164,250 would provide three years of nursing home coverage at that level. Because nursing homes care for the frailest and sickest of our seniors, the typical nursing home stay is less than two years. However, for the dementia patients, long-term care may extend for years. We have typically recommended policies with a three year benefit period because the Medicaid “lookback” period has been 36 months. The Deficit Reduction Act of 2005 extended this lookback period to 60 months, which may mean that we will begin to see longer benefit periods for long-term care policies. Lifetime benefit periods are more expensive and are generally not necessary other than as a peace of mind measure.
• Elimination Period – The “elimination period” is the number of days that you must receive care that would otherwise be covered under your policy before your policy begins to pay benefits. We typically see a 90-day elimination period for nursing facility benefits because this period of care may be covered by a Medicare supplement policy. Please note that adult day care and assisted living care will not be eligible for coverage under a Medicare supplement policy and that there is very coverage under Medicare for home care. Therefore, depending on your circumstances, a zero elimination period may be appropriate for home care, while a 90 elimination period may be sufficient for skilled nursing care.
• Inflation Protection – We know that the expense for medical care is growing at a rate that exceeds the general inflation rate. Therefore, purchasing policy that fixes the daily benefit amount leaves your estate vulnerable to the increasing costs of nursing care. Particularly for those purchasers in their sixties, we advise a compound inflation rider that increases the daily benefit amount annually. Depending on the circumstances, the older purchaser may include a simple inflation rider or may purchase a higher daily benefit with no inflation rider.

Even with the outline above, long-term care insurance is a difficult topic. Too often, long-term care insurance is evaluated as an investment product and found lacking by financial planners. Measured against other investment products, long-term care insurance may not provide the estate with a return that competes with life insurance or market investments. But for the surviving spouse with a significant estate, long-term care insurance may provide the peace of mind of knowing that her care will not financially, physically or emotionally burden her children, that her care will not “un-do” her husband’s careful financial planning or eliminate opportunities for her children or grandchildren, that she can exert some control today over things that may happen tomorrow. For the later second marriage, long-term care insurance may maintain the separation of the assets of each spouse. For the more modest estate, long-term care insurance may eliminate the painful task of taking apart mom and dad’s estate in order to fund dad’s care in the nursing home. In each of these circumstances, long-term care insurance defies mathematics to quantify the value provided.

The above discussion is provided as general information only and does not constitute legal or investment advice. Please consult your attorney or financial advisor to evaluate any long-term care insurance product.