Long Term Care insurance (LTCi) is an extremely important part of a financial plan.
LTC insurance came into existence approximately 35 years ago. As a result, we are experiencing constant change in the types of policies available in addition to makeup of the “typical buyer” of LTCi.
This type of insurance includes a wide range of medical and support services for people with a degenerative condition (e.g. Parkinson’s, stroke, etc.), a prolonged illness (cancer) or cognitive disorder (Alzheimer’s).
Long Term Care is not necessarily medical care but rather “custodial care.” Custodial care involves providing an individual assistance with activities of daily living or supervision of someone who is cognitively impaired.
To better understand Long Term Care, think of the activities that you performed when you woke up this morning. You probably:
While we are healthy it is easy for us to take for granted the above Activities of Daily Living (ADL’s). However, when you or a loved one is stricken with a degenerative condition such as a stroke or Alzheimer’s, performing these ADL’s becomes impossible without the assistance of another person.
This type of care is Long Term Care. It is the same type of care that a parent must provide for their new baby. This type of care is chronic (full-time) and thus becomes very expensive. Long Term Care can be provided in many settings including nursing homes, your own home, assisted living facilities and adult day care.
There are over 100 companies in the United States that have sold LTC Insurance (LTCi), but only a dozen or so of those actually have a substantial amount of business on the books. The top three companies make up over 65% of all the new business sold in the country today. This is largely due to a combination of reasons. These reasons would be the financial strength and overall stability of the carrier, the longevity and penetration in the marketplace, history of rate increases, the product design, rates and underwriting to name a few. When I talk about LTCi,
I am referring to an insurance policy that covers you in a nursing home, assisted living facility, in your own home, adult day care or in many types of community care centers. This insurance is primarily used to fund the care needed if and when you become disabled and are in need of long term custodial care.
With most policies, a claim can be triggered in one of two ways. Either you have a severe cognitive impairment, or you have a loss of two or more of your activities of daily living ADL’s). The ADL’s are bathing, dressing, toileting, transferring, continence and eating. Bathing and dressing are the first to go. You actually lose them in the reverse order you learn them as a child.
In a Tax Qualified policy, your ADL loss must be certified by a licensed health care practitioner to be expected to last at least 90 days. This language is very common throughout the industry because 99% of the policies being sold are now Tax Qualified. In Non Tax Qualified policies, you will see some of the language differ. However, there is also no clarity in the law in reference to the tax consequences of Non TQ benefits.
I would not recommend the purchase of non-tax qualified LTC insurance policies.
When looking at an LTCi policy, the first and most important decision to make is the daily benefit amount. In other words, how much you would like your policy to pay out to you in benefits at the time of claim. The choices range from about $50 a day to $500 a day. Some policies even offer unlimited amounts. It is imperative to know what the average cost for care is in the area you plan on living at the time of claim. In Florida, for example, the latest statistics show the average cost for care in the $190 a day range. But if you plan on moving to New York City when you need the care, because that is where your kids are (and I am sure they do not want you to move in with them)…plan on buying a $380 a day benefit. In comparison Alaska rates are as high as $850 a day, while in Missouri it is only about $130 a day. Also, some policies in the marketplace today offer a monthly pay benefit as opposed to a daily.
The difference here is that instead of being capped for example at $200 a day, you have access to $6000 a month if you need it. Since home care is so sporadic, you may need $300 worth of services on one day and only $50 the next. In this scenario, you would have much more flexibility with a “monthly pay” plan.
The next important choice to make is the benefit period. This is the amount of time your policy will pay out from the point of claim. These benefit periods range from 2 years up to unlimited or lifetime policies. The bulk of policies offered today are what they call “pool of money” or “bucket of money” concepts. This means that they take the daily benefit amount purchased (for example $200 a day) and multiply it by the amount of days in the benefit period (for example in a 5 year policy, it would be 1825 days). What you are left with is basically a bank account of $365,500 in this example. If you use your full $200 every single day for the full five year period, your benefit ends. But, if you only end up using $100 a day or $200 a day but only three times a week, your benefit could last you 10 years! The money just sits in the account, waiting for you to use it. Therefore, the benefit period you purchase is actually the minimum amount of time your policy would pay in the “pool of money” type contract.
The average nursing home claim is 2 ½ years and the average home care claim is just over 4 years. It is important to look at your own family history as well as your current age and health status in addition to how much money you are willing to spend when choosing a benefit period. There is no perfect choice. It really depends on the buyer. Typically, though, people under 60 will purchase unlimited benefits – unless it is cost prohibitive or not available, in the 60 to 70 range will buy 5 or 6 years, while someone in their 70’s or 80’s may want to go with a 3 or 4
year plan. The newest statistics show that 91% of all people will have a claim that is 5 years or less in duration, so the bulk of people could satisfy the need with a five year benefit plan.
Elimination periods (EP) are one of the most misunderstood policy provisions in Long Term Care. Basically, the elimination period is a deductible/waiting period from the point of trigger of the claim to when the policy actually pays out benefits. The choices range from first day coverage (0 day elimination) all the way to 365 day elimination (max of 180 in Florida) or even more with some types of specialty niche products. One of the choices in the market today is when a company offers a split elimination period where you have, for example, a 90 day in a facility and a zero day for home care. Many of the policies will credit the days you are at home receiving care towards the facility elimination period. Since most people at least try to receive care at home before ever going into a facility, this is an attractive choice.
If a split EP is not available, than there are really three different definitions to be aware of when it comes to elimination periods. The first is the least attractive, which says that in order for a day to count towards your elimination period, you must pay for qualified care from a qualified caregiver. In other words, with this definition it could take you six months to satisfy a 90 day EP if your spouse, friend or family member were choosing to take care of you on any of these days. The second, much better definition says that you would only have to pay for one day
each week of qualified care for the whole seven to count towards the EP. Seven days would still have to go by, but this is a more realistic scenario…and more flexible as well. The best definition of all is called calendar day. This means, that from the day you are assessed by the licensed health care practitioner as being chronically ill, the days just start counting off. Therefore, in this scenario, you would not be required to pay for ANY care for a day to count. In addition, look for a policy that has a once in a lifetime elimination period. This has become common in most of the newer contracts so don’t buy one without it.
There are three distinct types of LTCi policies to discuss. The first and most common type would be the reimbursement model. In this contract, you are reimbursed for actual charges. For example, you buy $200 a day and your bill is $150, you are reimbursed $150 and the balance of the money stays in the pool.
The second type would be an indemnity model, where you buy $200, your bill is $150, and you get $200. This is typically a bit more expensive than the first, however the cost differs widely between carriers (insurance companies).
The third type is called a disability model indemnity plan, or CASH. In this example, you buy $200 a day and you get a $200 day…whether or not you even have a bill.
In this type of plan, you can use the money however you see fit. It doesn’t require that you receive care from licensed caregivers or home health care agencies, after the initial care plan. It just requires that you have a two ADL loss or a cognitive impairment.
This is the least common, but very attractive in the young professional market. The example would be the 55 year old doctor who is maxed out on his/her disability benefits and wants complete flexibility. There are only a few carriers who offer this plan, but it would be the easiest to negotiate and the easiest to process claims through.
There are a number of riders available in the LTCi policies of today. One of the most important ones would be the inflation option. When it comes to inflation, there are really four choices. The first choice would be to not buy any and just purchase as much daily benefit as you can possibly afford. This option is almost always for the much older buyer. If you are 80 or older, this is what I would suggest. Second choice is something called the guaranteed purchase option (GPO) or COLI (Cost of Living Index) future purchase rider. This is either built in at no cost up front, or adds a minimal charge (about 2% or so). With this option, offers will be made every two to three years depending on the contract to increase the daily benefit with no additional underwriting. The downside to this option is that the cost of each increase chosen is based on the new age of the insured. Also, many of the policies will stop the offer you if have rejected it two or more times or have been on claim. GPO is a very good choice for people in their 70’s. The third
option is called simple inflation. This usually adds between 40% and 60% to the premium. Simple inflation increases the original daily benefit by 5% every year automatically. This will double the daily benefit in 19 ½ years. It is usually best for people in their 60’s. The last, and most would say best option, is compound inflation. This can double your premium but is well worth it. Compound inflation typically adds 5% to the daily benefit and is compounded annually so the daily benefit doubles in 14 ½ years. Sometimes we see compound inflation options at 3%, 4% or even linked to the Consumer Price Index. Anyone under 60 years old should seriously consider the compound option. The age examples given are exactly that…examples. This is another option where it really depends on health, finances and family history. If a 50 year old is trying to decide whether they should buy simple or compound inflation, they need to consider whether they are more concerned with the first set of 20 years (from 50 to 70), or the second set of 20 years (from 70 to 90). If it is the 1st set, then 5% simple is the way to go…but if it is the 2nd, then 5% compound is the right buy. This is because, in the second set of 20 years there is a dramatic difference in where the daily benefit will be. The typical 50 year old (in that example) would say “the second set” and that is what the guidelines above are based upon. The problem we are facing today is that many of the LTC insurance companies price compound inflation out of range for most people. Because of that, a very good choice would also be to buy 5% simple inflation instead, but increase the starting benefit amount to higher than the average cost for care in your area.
Survivorship, shared care, restoration of benefits, return of premium, joint waiver, extra cash and limited pay options are all additional riders offered in the current LTCi plans. Many of these riders are extremely attractive to the buyer, but not overly necessary. There are many variations of each and they can cost anywhere from 2% to 65% depending on the rider. The important point to note is that the marketplace is full of options and flexibility. There is something for everyone.
However, the utilization of a Long Term Care insurance specialist has become more important than ever. In addition, we need to be aware of the differences in policy exclusions between carriers. An important one to look for is a mental and nervous exclusion. Just about all policies will cover Alzheimer’s or other types of dementia claims, but this exclusion means that the company will not pay a claim for a mental and nervous disorder that is non-organic in nature. An example of this would be manic depression. So if you are simply too depressed to get out of bed or feed yourself, this would not be covered. Most of the better policies offered have removed this exclusion.
Just as there are differences between language definitions, there are also many state variations (Insurance is State Regulated). A benefit that is built in to a policy in North Carolina may be offered as a rider in Florida. In addition, most LTCi contracts have benefits built in for respite care, caregiver training, medical equipment, home modifications, bed reservation, care coordination, alternate plan of care and waiver of premium.
These all differ by contract in the dollar amount available to the insured at the time of claim.
The average buyer of individual LTCi in America is approximately 58 years of age depending on the study you read. This has dramatically decreased from the high 70’s only a decade ago. In the worksite (employer sponsored plans), the average age LTCi buyer is only 41. The Federal Government has also offered LTCi coverage to all federal employees, spouses and dependents – 20 million Americans! However, they have not subsidized the cost and recently a number of government insured’s saw their premiums rise over 80% in just one year. This makes a significant statement to the baby boomers of this country. Go out and buy your own, personal, LTC insurance!
Every year that a person waits to buy LTCi could cost them 10% to 12% in premium. Therefore, the younger you are, the better off you are. In addition,typically, the younger buyer has less health concerns to deal with when it comes to getting underwritten and approved by an insurance company. Long Term Care underwriting may not as tough as you may think it is. Over 75% of all applicants are being approved for coverage.
Many people who apply for LTCi are taking multiple medications, could possibly have had a history of cancer, heart problems or even diabetes. The key is control. Companies want to see that you are stable and that you don’t have conditions that will cause you to become disabled. You will even be eligible for preferred health discounts if you are squeaky clean. Other discounts you may be eligible for include married or worksite/association.
More than ever before in the history of LTC insurance, opportunity is knocking at the door. Kasmann Insurance Agency has excellent, state-of-the-art products with financially stable insurance carriers who are extremely committed to the sale of Long Term Care insurance.
There is a need for this product and the time is now. Please call us today to discuss this important financial asset.