Long-term care insurance
by J. Christopher BoydIf you read many consumer finance articles, you might wonder whether long-term care insurance is a necessary protection or merely profit for insurers.
But among financial and legal professionals, long-term care insurance has taken a far more prominent position in planning priorities, particularly for those age 55 and over.
In fact, prominent National Academy of Elder Law Attorneys founder Harley Gordon suggests that financial advisers who do not help clients plan for long-term care should worry about exposure to lawsuits.
When retirees realize how little Medicare and traditional health insurance coverage is likely to pay for protracted care, serious planning inevitably turns to long-term care insurance.
So, who should have long-term care insurance?
The best candidates are those past 50 years of age who lack sufficient assets to protect their retirement savings if they suddenly require long-term health care.
But truly wealthy people should consider it too – even if they could afford significant health-care bills in the future. It’s the same mentality as insuring your home from damage: Even if you know you have the money to pay for a major repair, why set yourself up for a dramatic one-time expense?
On the other hand, for those who are not wealthy but still young enough to amass financial assets, long-term care insurance may be a premature expense. Better to focus on qualified retirement accounts, Roth IRAs, paying down a mortgage or just good old-fashioned investing.
Granted, you can lock in lower annual premiums if you are young and healthy, but the savings may be less than the money you can earn investing.
As you consider the wisdom of long-term care insurance, note these statistics: One in 20 retirees eventually lives in a nursing facility; and that number jumps to one in five for those 85 and older.
That may sound like reasonable odds if you wish to avoid premiums for long-term care. But compare those to the odds of a house fire – 1 in 88. Yet, how many of you would sleep well without knowing your home is fully insured?
For retirees on fixed incomes, the costs of long-term care may appear too high for your budget. But if you still are in your 60s or 70s, examine that premise carefully.
A nursing home can cost $250 per day (more than $90,000 a year), and the average stay could be 2.5 years, according to the National Center for Health. Consider, too, that 43 percent of all those 65 and over will spend some time in a long-term convalescent facility.
To pay more than $225,000 because you are not insured, particularly late in retirement, could be devastating. And that is the approximate cost now, before considering the impact of inflation over time.
In comparison, most purchasers of long-term care insurance typically spend about 1 percent of their net worth, and most often less than that. And in doing so, they protect their entire estate from a dramatic loss.
As you shop for long-term care insurance, be aware that many policies will cover home care and assisted living in addition to nursing home care. Also, pay attention to the potential for future premium hikes. The best policies have premiums designed to remain relatively constant and protect against inflation.
What to consider when shopping for long-term health insurance
What are the standard benefits?
There are no standard benefits so it is difficult to compare policies. Some limit coverage for services provided in nursing homes and do not provide coverage for services delivered in your home, while others cover both nursing home care and home care. Others pay only for adult day care centers or other community facilities. Carefully read the find print to understand what is offered.
What are the most common exclusions?
Generally, policies do not cover mental disease and nervous disorders (other than Alzheimer’s), injuries and illnesses caused by war, treatment paid by the government or self-inflicted injuries. Be sure that Alzheimer’s disease is covered.
Are there limits to coverage?
Most policies will pay per day for care in a nursing; currently the rates vary from $75 to $250 a day. Keep in mind that prices will increase by the time you will need care. Benefit periods range from one year to life. Most nursing home stays are three months or less, but many people suffer illnesses for years. The longer the benefit period, the higher the insurance cost.
How do I begin to decide how much insurance to purchase?
Assume that you will need up to 19 months in a nursing facility at current rates and compute that cost. Compare that to your available assets and you can begin making some intelligent choices.
What should I know about inflation protection?
Some insurance companies offer customers the right to buy additional coverage in the future at the future price the company will be charging, but that price will be higher, sometimes much higher. Another approach is to purchase coverage with automatic benefit increases. Some companies may offer unlimited increases and others end benefits when a customer reaches age 80 or 85.
How do companies calculate inflation increases?
Some use a simple interest approach and add to the daily benefit each year by a stated percentage of the original coverage. A 5 percent formula, for instance, means that a $100-a-day policy at the start would cover $170 a day in 14 years.
Another method is compound interest. That $100 would be nearly $200 after the same 14 years.
What is a waiver of premium?
This discontinues your legal obligation to pay premiums if you are receiving benefits. Some companies stop billing you as they make the first benefit payment. Others wait 60 to 90 days. Often premiums are not waived while you are in a hospital or if you are receiving care at home.
What are nonforfeiture benefits?
These provide that at least some benefits will be paid even if you fail to keep up premium payments and the policy is cancelled for non-payment. The benefits provided are usually minimal.
Who determines if I am entitled to benefits?
Every policy contains terms usually referred to as “eligibility for benefits,” “qualifying for benefits” or “benefit conditions.” Study policies carefully because there is a big difference between providers when it comes to who decides if they will pay out money. Some policies let you qualify if your doctor orders specific care; other policies will require examination of medical records and ask for a statement about your health from your doctor. Conditions that likely will require long-term care probably will disqualify you.
Can an insurer rescind my policy?
If you do not provide full and complete information, yes. Usually, the carrier must prove its case.
Should I be concerned that I cannot renew my policy in the future?
Almost all policies are guaranteed renewable. Even if your health worsens after you buy the policy, it cannot be cancelled. But expect premiums to be raised.
What should I pay for a policy?
The annual premium for long-term care policies with good inflation protection is in the neighborhood of $2,000 for 65-year-olds. At age 75, the premium will be two and a half times greater; six times higher than if you bought it at age 55.
Inflation protection can add up to 40 percent to the benefits and nonforfeiture rights can add as much as 100 percent.
Consider not only if you can pay the benefits now, but in 10 years. Why spend all the money while you are healthy only to cancel because of cost a decade later, when you are more likely to get sick?
Commissions on long-term care insurance can average about half the first year’s premium. Auto insurance, by contrast, commands about a 10 percent commission.
Originally published in the Sep/Oct 2006 issue of Cape Business.
J. Christopher Boyd J. Christopher Boyd, CFP, is president of Asset Management Resources in Hyannis. 
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