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PRESERVING YOUR ESTATE WITH
LONG TERM CARE (L.T.C.) INSURANCE
PART II
by Mike Palermo
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Shopping around can be
difficult, because it is almost impossible to compare "apples to apples."
Despite the Model Act for states to follow, there still is no "standardization"
for comparison shopping. Virtually no two L.T.C. policies now on the market are identical.
As of October, 1995, 34 states put out a "Shopper's Guide to Long Term Care
Insurance," probably available through your state's department of insurance.
With or without the Shopper's Guide, one should consider:
1. The financial strength of the insurance company is always an important factor.
This is particularly so with L.T.C. insurance, because of the long time before coverage
might be needed. It is a new product in a rapidly changing health care environment.
Insurers have relatively little historical data or claims paying experience to guide
them in setting rates. We must hope they will make enough money at this to be around
for the long haul, but it may be years before the companies> themselves know for
sure.
Meanwhile, seeing the elder population grow, many insurers got into L.T.C. to make
a quick buck. But a quarter of the companies selling L.T.C. insurance in 1988 were
out of that market by 1991. So go with a well established and highly rated company
that could take some financial lumps, if necessary.
2. Cost - long term care insurance is not cheap. Any ethical sales agent should assess
whether a client can afford it over the long haul. Don't be a sucker. Just as you
would with any other product, be skeptical of "low-ball" quotes that are
way out of line. The key to low rates is buying the insurance when one is in his/her
40's or 50's, or at least no older than 65. Even if one is older, however, for many
people it would still be "better late than never."
The increase in premium as one moves from 45 to 55, and then to age 65 and beyond,
is dramatic. In fact, at whatever age one starts shopping for a policy, if that prospective
purchaser decides to wait five years before actually buying, the total premium dollars
paid till age 85 will probably be far greater than if he/she had not waited. Of course,
during the five year delay, the buyer can invest the money that might have been spent
on premiums. Simple arithmetic, however, will demonstrate that this investment return
is unlikely to make up for the increased policy cost.
There are so many variables involved in the cost of a policy that it is difficult
to generalize. Moreover, both premiums and policies are in a state of change. That
should translate into good news for consumers. Meanwhile, here are some typical situations,
with strictly "ball park" estimates:
A 65 year old can expect to pay around $1,500 a year at most companies for two or
three years of $100 per day coverage, including both nursing home and home care,
with inflation protection and a 90 day waiting period. A 75 year old might pay over
$2,000 for the same coverage. For top-notch, lifetime coverage, those premiums might
double. The 45 to 55 year old purchaser, however, can probably buy the same policy
for well under $1,000 per year. The key to affordability is buying L.T.C. insurance
while you are relatively young.
Prices vary widely among insurers. Premiums for L.T.C. policies overall decreased
an average of 8 %, as reported by the top insurance sellers in 1993, compared to
1992, according to the HIAA. The market is exploding, so this trend might go on for
a while. But short term price wars or "low balling" will threaten the long
term financial health of the smaller competitors.
TIP: The younger the L.T.C. policyholder, the easier it is to use this simple
plan to pay for it: Just set aside a portion of your savings in a safe investment
to produce interest income each year to offset premiums payments. E.g., $50,000 earning
4% yields $2,000 per year. That would cover much of a couple's annual premium, while
the principal would be preserved.
F.Y.I. Health insurance legislation
enacted in 1996 provides that buyers of <most L.T.C. contracts sold in 1997 and
beyond (as well as the large majority of those already in force) will enjoy some
new tax breaks. These will apply only to "<tax qualified" policies,
which must contain certain provisions that are, quite arguably, less "consumer
friendly," - i.e., more restrictive - than good L.T.C. policies already on the
market. Insurance companies are hurrying to make sure their new policies comply with
these requirements, so they can tout the "tax qualified" status to consumers.
Note, however, that for certain people, the best policy for their overall needs might
be a somewhat different variety that does not qualify for all the tax breaks.
For qualified policies - subject to mostly reasonable limitations - neither employer-paid
premiums, nor amounts received as policy benefits will be considered taxable income
to employees. (For some reason, L.T.C. coverage chosen under a "cafeteria style"
employee benefit plan is taxable.) Premium payments by individuals buying their own
L.T.C. coverage will be considered "medical expenses," which are tax deductible
- but only to the extent they exceed 7.5% of adjusted gross income. (There are also
dollar limits on the L.T.C. premium deduction, which depend on the taxpayer's age.
A 50 year old would be limited to $750; a 70 year old will be entitled to $2,500.)
Note, however, that self-employed people can take a much more generous deduction,
by treating a portion (increasing to 80% in 2007) of the premium as a business expense.
Public health policy-makers hope this tax favored treatment of L.T.C. insurance will
expand the pool of covered persons, thereby spreading the risk more widely and decreasing
premium cost.
3. Home and community based health care is an essential policy feature. It encompasses
a wide range of services, from assisted living communities to adult day care centers,
from skilled Registered Nurses to homemaker aides who cook meals. This might be the
most confusing part of the L.T.C. insurance maze.
Recognize that the intended purpose of home and community health care coverage is
merely to assist the person taking care of the infirm patient. An adult day care
center can be used to free a child to work during the day. Help can be obtained for
a few days per week, or for certain periods of the day or night. In some states,
a policy's home health care benefit, by law, cannot exclude personal care services
(eating, dressing, etc.) given by a home health aide. Be sure this exclusion is absent
from the policy you choose.
Do not buy a policy without home health care in some form. (Often, the benefit for
home health care is stated as a percentage - usually 50% to 80% - of the maximum
daily policy benefit.) It can turn an utterly impossible predicament into one that
can at least be managed and tolerated. Home care coverage might add $150 to $600
to the yearly premium of a 65 year old's policy.
4. "Benefit triggers" are preconditions (with accompanying restrictions,
if any) that must exist before an L.T.C. policy will pay for services. They are also
called "gatekeeper" provisions, because their purpose is to keep you away
from benefits. Read closely and look for a policy that has as few of these as possible.
For example, beware of older L.T.C. policies that require a prior hospitalization
before benefits can be paid. This policy provision is now banned in many states,
with respect to new contracts. Many other undesirable policy features have also been
modified by law in various states. But older insurance contracts, otherwise valid,
are not affected by such laws, so these L.T.C. policies should be reviewed and replaced,
if necessary.
A good policy will pay for care if:
You need help to perform 2 of the following activities of daily living (ADL):
- Eating
- Dressing
- Bathing*
- Maintaining continence
- Toileting - the ability
to move to, from and within the bathroom, taking care of all personal needs and hygiene.
- Transferring - the
ability to change body position (e.g., from bed to standing).
Note that bathing is often among the first difficulties faced by the elderly. For
this reason, many policies do not include it in their list of ADLs - or if it is
included, the policy requires that help be needed with 3 of 6 ADLs, instead of 2
out of 5.
These ADLs have no precise, universal definitions, so the definitions given in individual
policies vary and should be examined closely, cautions Deena Katz, CFP, a Florida
financial planner and LTC expert. Look for broadly worded definitions that won't
allow the insurance company to nit-pick and "wiggle out" of coverage.
The policy should also provide coverage if you suffer from "cognitive impairment,"
OR if nursing home care is "medically necessary."
When comparing policies, look closely at the definitions of "cognitive impairment."
This is a common reason for requiring long term care. Therefore, the more broadly
defined that condition is, the better.
BEWARE ! Many older policies still have only the most restrictive requirement
- that care be "medically necessary" for sickness or injury. But many patients,
especially those needing only custodial care, are not sick or injured, and would
therefore not qualify for benefits under a policy with this "gatekeeper."
5. "Upgradability" of the policy; The LTC insurance business is still evolving,
with better policies sure to come in future years. If you buy now, will the company
give you the option of "trading up" to better coverage if and when it is
offered to the public? Present policies are generally silent on the subject, so that
is an important question to ask, suggests advisor Katz.
6. "Underwriting" refers to the health standards the company uses to evaluate
the applicant for insurance. L.T.C. insurance is easier to get than life insurance.
The risk of death is different from the risk of needing long term care.
In most states, all medical questions, examinations and the decision to issue coverage
must now be made "up front." The practice of "post-claim underwriting"
is outlawed there. No more selling policies to anyone who can write a check, then
looking for excuses not to pay after a claim is made!
Unfortunately, as of October, 1995, there were 16 states, including Florida, Texas,
Massachusetts and New Jersey, that had not banned post-claim underwriting. Policies
sold in these states should be carefully scrutinized on this crucial detail.
As a rule, most companies decline to insure people who have had recent strokes, diabetes,
multiple sclerosis, recent cancer surgery, severe high blood pressure, or already
have Alzheimer's disease. But some companies are more selective than others. Every
company has its own peculiar criteria. If a condition, such as high blood pressure,
is under control, or has remitted for a certain time, buying coverage may be no problem.
Several insurers will accept people with present health problems. A substandard risk
class has been developed for L.T.C. insurance policies. Some companies have even
introduced three - tier rate structures: Preferred, standard, and substandard.
The substandard tier is typically reserved for applicants with conditions like arthritis,
diabetes, or certain kinds of heart conditions. Companies use several approaches
in structuring the cost and benefits of these "rated" policies:
Same price, slimmer benefits, or same benefits, moderately higher price, or slimmer
benefits, much higher price.
7. Coverage of pre-existing conditions is a very important consideration for many
people. Insurers differ in how they handle this problem. Some impose a six month
wait before they will provide benefits attributable to a pre-existing condition.
A few policies have no such waiting period.
8. The choice of waiting period before benefits begin, and the length of a covered
nursing home stay are obviously critical decisions. These factors have a lot to do
with a policy's cost
The waiting period is similar to the deductible amount on car and homeowner polices.
You should know that some L.T.C. policies apply this "deductible" period
to each occurrence of need; some only once.
Clearly, a long nursing home stay must at least be contemplated. But there is also
a trend toward getting people out of the hospital as quickly as possible. ("Sicker
and quicker"). This has resulted in sicker patients entering skilled nursing
facilities to
recover.
Remember, however, Medicare pays only for necessary days of skilled care, once there.
E.g., Mom falls in the bathtub and breaks her hip. After several days in the hospital,
she enters a skilled nursing facility requiring weeks of recovery, but skilled care
for only one week. Medicare will pay for only one week.
This economic fact, in turn, has encouraged the early discharge of patients from
the skilled nursing facility, as soon as they can receive less than skilled care
safely at home. A "revolving door" situation can occur, in which some patients
go in and out of the skilled nursing facility several times, each for a relatively
short stay. Today, less than 50% of skilled nursing facility patients stay 90 days
or more.
Policies offer waiting period options from 0 to 90 days or more. You face a significant
choice, to which there is no universally correct response. It's a trade-off. a long
elimination period keeps rates lower - maybe much lower - but the policy might leave
you vulnerable to unacceptable out of pocket expense. (E.g., Can you absorb the cost
of a 90 day skilled nursing facility stay at $93/day?)
9. Inflation protection is a policy feature designed to maintain, over the long haul,
the purchasing power of the daily benefit you select. Remember, even a 65 year old
who buys a long term care policy today might not need it for 20 years. At the current
low, general (not medical) inflation rate of about 2.5%, a $90/day facility will
cost $130 in just 15 years! Without protection, the real value of the daily insurance
pay out will have, in effect, shrunk drastically in that time.
The law of most states requires L.T.C. policies to offer,as an extra cost option,
a 5% annual increase in benefits, or to promise to pay a set percentage of charges,
no matter how high, or to let policyholders buy additional coverage every few years
at the then-current price, based on their then-current age, although they do not
have to prove they are still insurable.
The last option is a very undesirable feature. Future price increases for the additional
coverage are unpredictable and might make the policy unaffordable. Also, those who
do not buy each additional benefit increase when offered lose their right to buy
more in the future.
Most policies, fortunately, offer the "5% annual increase" option. Often,
there is a choice between a "simple" 5% annual increase and a "compounded"
5% increase. Compounded inflation protection is calculated like compounded interest
- and like inflation itself. Therefore, "compounding" is more realistic
and better protection, especially for those with long time horizons. But it costs
more. If it makes the policy unaffordable, "simple" 5% yearly benefit increases
will do fine.
Inflation protection is expensive, adding 25% - 40% to the premium, and sometimes
more. To keep premiums low, some agents might recommend against purchasing an inflation
option that automatically increases benefits. Think twice before taking this advice
- unless you use a different strategy to deal with inflation. Some insurance agents
suggest buying more coverage than you need to begin with. You can purchase a daily
benefit amount greater than the current local nursing home cost. If the inflation
protection option has not been chosen, that amount will remain constant. Over time,
inflation will erode the value of the daily benefit dollars. But since an "excess"
daily benefit was purchased initially, it will provide adequate coverage, even after
inflation shrinks it. Often, it can be cheaper to deal with the inflation problem
in this way.
Some approach to protection against inflation is a "must." If it makes
the cost unaffordable, it may be that L.T.C. insurance is just not for you. But there
is no point paying thousands of L.T.C. premium dollars over many years, only to be
left with a benefit inadequate to avoid financial ruin, if the need for care arises.
There are a variety of policy options and variables that be adjusted to result in
a price you can realistically pay. You will just have to sit down with an agent and
do some arithmetic.
10. Non-forfeiture options protect you from the following scenario: The L.T.C. policy
lapses for some reason after a long time, and all premiums paid till then will have
been wasted. Non-forfeiture provisions come in two varieties. One plan provides for
limited, but fully paid up future benefits in case of lapse after a certain number
of years of payment. E.g., two years of coverage might be provided, even if the policy
lapses - after at least 10 years. The alternative arrangement simply offers a rebate
of a portion of the premiums paid until the policy lapsed.
Non-forfeiture is a popular option, but it is very expensive, so I do not recommend
it. If you buy insurance, plan to keep it in force! If the future affordability of
premiums is in serious question, you should question the decision to buy L.T.C. insurance
in the first place. Nobody expects a homeowner or auto policy to return premiums
if the policy lapses, and most people would decline to pay more for a return feature
in these policies.
Mike Palermo
is a member of the Kentucky Bar Association, with a practice in Lexington. After
graduating from law school in 1984, his first job was with the Public Defender's
office there, where he became an experienced trial
attorney.
Mike left that position, seeking broader exposure to people not facing major prison
sentences. Soon, most of his time was spent drafting Wills and counseling on financial
and estate planning. Several years ago, the local community college asked him to
present a three night adult education class on, "Wills and that kind of thing."
This "Crash Course" is the product of the 115 page class outline that has
evolved. It has been enthusiastically received and very favorably reviewed by the
media, legal/financial professionals, and hundreds of thousands of "regular
folks" across the nation.
Among only about 1,000 practicing attorneys nationwide holding the Certified Financial
Planner (CFP) credential, Mike is also a Notary Public. Inwardly, he believes himself
to be a computer geek trapped in the body of a lawyer. That lawyer can be reached
at 300 West Short Street, Lexington, Kentucky 40507.
Telephone: (859) 268-6082 E-mail mike.palermo@gte.net
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