Long-Term Care Insurance: How To Get The Best Deal

By 2020, 12 million older Americans will need long-term care. Most will be cared for at home; family and friends are the sole caregivers for 70 percent of the elderly. A study by the U.S. Department of Health and Human Services says that people who reach age 65 will likely have a 40 percent chance of entering a nursing home. About 10 percent of the people who enter a nursing home will stay there five years or more.

Medicare only pays for medically necessary skilled nursing facility or home health care and you must meet certain conditions in order for it to do so. For the majority of Americans, Medicare does not pay for custodial or long-term care, which is defined as assisting with daily living skills such as dressing, bathing, and using the bathroom. Therefore, you may want to think about how you would cover the cost of nursing home care for yourself, your spouse or family members.

Note: Slightly less than half of all nursing home expenses are paid for by Medicaid. And only about two percent of stays in nursing facilities are paid for by Medicare or by private health insurance. Even less assistance is available to meet the cost of care at home or in the community.

Planning Aid: For further information on Medicaid care services, see Medicaid Long-Term Services and Supports.

One way of covering these often burdensome nursing home costs is long-term care insurance (LTCI). Long-Term Care Insurance is private insurance that you can buy to cover long-term care. Benefits and costs of these plans vary widely.

This Financial Guide covers the factors you will need to think about if you are considering purchasing LTCI and offers help in selecting a policy if you decide to buy LTCI coverage.

Planning Aid: For more information on these plans, contact the National Association of Insurance Commissioners (NAIC). It represents state health insurance regulators and has a free publication called A Shopper’s Guide to Long-Term Care Insurance.

How LTCI Works

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy. Most long-term care policies are indemnity-type policies, meaning they will pay you for actual charges by the care provider (up to the policy’s limits). Other long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insurers greater flexibility (e.g., allowing them to pay for home care) and less paperwork.

You also need to keep in mind that it’s necessary to plan ahead and sign up for long-term care insurance before you need it because the older the individual covered, the higher the premium is.

When are Benefits Paid?

To receive benefits, you must usually suffer serious cognitive impairment or be unable to perform several “activities of daily living” independently. Long-term care insurance covers activities of daily living (ADLs) without assistance, such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed). Individual policies define “unable to perform” for each ADL.

Period of Payment

The benefit period you choose can range from one year to life; the longer the period, the higher the premium will be.

Tip: About 10 percent of the people who enter a nursing home will stay there five years or more. Purchase at least three to five years of coverage, the average length of a nursing home stay.

Types of Care Covered

Most policies cover skilled care, intermediate care, and custodial care at a nursing facility. Home care may also be covered or offered as an extra. You may also be able to purchase coverage for adult day care, assisted living facilities or hospices.

Most, but not all, long-term care policies can help cover costs incurred during a nursing home stay, assisted living residency, in-home care, informal care, custodial care, Alzheimer’s facilities, and respite and hospice care.

Elimination Period

This period constitutes the number of days the insured must wait after becoming eligible for benefits before coverage actually begins. The elimination period generally ranges from zero to 90 days, but can go up to one year; the longer the elimination period, the lower the premium is. During the waiting period, you must pay all of the expenses related to your care.

Renewability

Most policies are guaranteed to be renewable. However, rates are generally not guaranteed, and can be raised for a class of policyholders with the approval of the state insurance commission.

Rising Health Care Costs

A fixed-benefit policy will lose much of its protective ability over the course of 10-20 years. Thus, if you purchase a policy at age 60 and expect to rely on it for 20 years, you need inflation protection. This is available with most policies in the form of “benefit increase options” of various types. Benefit Increase Options are also known as automatic benefit increase option, automatic increase benefit, and cost of living adjustment benefit. They provide for annual increases in the benefit amount to offset the effects of inflation and are paid for at the time the policy is issued.

Why Purchase LTCI

Here are the reasons most often given by insured for purchasing LTCI:

• To avoid being a burden to their families
• To conserve assets for heirs
• To be able to get into the nursing home of their choice
• To be cared for at home as long as possible
• To preserve quality of life
• To have peace of mind

LTCI may not be the best way to achieve these goals. There are alternatives to obtaining LTCI that are more suitable for certain people.

The Pros and Cons

Long-term care insurance is both complex and controversial. Today, experts are suggesting that long-term care insurance may not be right for everyone, for instance, people whose net worth is $250,000 to $300,000 (excluding their home) might want to skip LTCI. The choice is yours, however, so here is a summary of some of the main points for and against purchasing such coverage.

Reasons for Buying LTCI

• LTCI, although expensive, may provide protection against costly care. Thus, if other options are not viable, LTCI may be the way to meet your goals. Although LTCI policies remain a low-value product, they are better than nothing.
• If you have family caregivers, the extra home care coverage in LTCI might make it possible to remain at home longer.
• LTCI premium costs increase with age. Once you develop a serious medical condition, you probably will not qualify for coverage. Thus, it is better to buy LTCI early, if at all.

Reasons against Buying LTCI

• You cannot afford the premiums or don’t have enough assets to protect. The National Association of Insurance Commissioners recommends spending only 5 percent of your income on an LTCI policy.
• LTCI policies lack sufficient home care coverage to keep an individual out of a nursing home unless family members or informal caregivers are available to help in providing care. Thus, if your goal is to avoid nursing homes at all costs, LTCI may not be the best way to go.
• LTCI policies return from 60 percent to 65 percent of total premiums paid in benefits. This return rate is much less than returns from other types of health insurance.
• Those with assets over $2 million are better off going the self-insure route or simply paying costs as they come up.

Tip: Refuse to pay more than one month’s premium when you apply for coverage. In most states, after you buy a policy, you have 30 days to change your mind and get a refund.

Other Alternatives

Here are some options for paying for long-term care, along with their advantages and drawbacks:

Transferring Assets

Giving away assets to qualify for Medicaid may make sense for some people who want to leave their heirs an inheritance. The downside of giving away assets is that there is less flexibility and fewer resources to pay for care.

The Medicaid program provides coverage for long-term care services for individuals who are unable to afford it. In the past, some people gave away their assets to qualify for Medicaid and make sure their heirs received an inheritance; however, the passage of the Deficit Reduction Act of 2005 introduced new rules that discourage the improper transfer of assets to gain Medicaid eligibility and receive long-term care services.

As such, for anyone who transferred assets in order to become eligible for Medicaid, there is a period of ineligibility depending on date of transfer. For individuals transferring assets before February 8, 2006, state Medicaid officials only look at transfers made within the 36 months prior to the Medicaid application (60 months if the transfer was made to or from certain kinds of trusts). For anyone who transferred assets after February 8, 2006, date, the period is 60 months.

In addition, assets transferred, sold, or gifted for less than they are worth by individuals in long-term care facilities or receiving home and community-based waiver services, by their spouses, or by someone else acting on their behalf are prohibited for purposes of establishing Medicaid eligibility. This is referred to as transfers of assets for less than fair market value.

So called “Medicaid trusts” are another option. However, recent changes in federal law make it more difficult to have a trust and still qualify for Medicaid. Recent policy states the following:

Where an individual, his or her spouse, or anyone acting on the individual’s behalf, establishes a trust using, at least, some of the individual’s funds, that trust can be considered available to the individual for purposes of determining eligibility for Medicaid.

Certain trusts are not counted as being available to the individual. They include the following:

• • Trusts established by a parent, grandparent, guardian, or court for the benefit of an individual who is disabled and under the age of 65, using the individual’s own funds.

• • Trusts established by a disabled individual, parent, grandparent, guardian, or court for the disabled individual, using the individual’s own funds, where the trust is made up of pooled funds and managed by a non-profit organization for the sole benefit of each individual included in the trust.

• Trusts composed only of pension, Social Security, and other income of the individual, in states which make individuals eligible for institutional care under a special income level, but do not cover institutional care for the medically needy.

In all of the above instances, the trust must provide that the state receives any funds, up to the amount of Medicaid benefits paid on behalf of the individual, remaining in the trust when the individual dies.

A trust will not be counted as available to the individual where the State determines that counting the trust would work an undue hardship.

Reverse Mortgage or Equity Conversion

Reverse mortgages and other forms of home equity conversion are often viable alternatives for those who wish to remain at home. Seniors can borrow money against the equity in their homes and defer repayment until they die or sell their house. However, for these options to make sense, a home must have a high monetary value and be fully or mostly paid for. Moreover, the individual must intend to stay in the home for the long-term.

Related Guide: Please see the Financial Guide: REVERSE MORTGAGES: How They Can Enhance Your Retirement.

Other Sources of Income

Developing other income sources is an option that many older persons overlook. If you are retired, you might want to get a part-time job. If you are currently working, you might work a few years longer than you had planned. You might consider either renting part of your home or selling your current home in order to invest the proceeds.

Self-Insurance

Even though self-insurance–paying for costs yourself if they arise–is a gamble even though it is the current strategy of choice for most people. Self-insurance makes the most sense for people with major assets ($2 million or more), for those who can afford a long nursing home stay, and for people of modest means (under $300,000) who would quickly qualify for Medicaid anyway.

Can You Afford LTCI?

Premiums for LTCI vary greatly, depending on your age at the time of purchase, the comprehensiveness of the coverage, and the company selling the plan.

According to a 2015 report published by the American Association for Long-Term Care Insurance, a 60-year-old married couple would pay $2,170-per-year combined for a total of $328,000 of long-term care insurance coverage.

A 55-year-old single male purchasing new long-term care insurance protection can expect to pay $1,060-per-year for $164,000 of benefits according to the industry report.

A 55-year-old single woman would pay an average of $1,390-per-year for the same level of benefits available to a single man for $1,060.

Here are some general guidelines that suggest buying LTCI:

• Your net worth is more than $250,000 to $300,000 (not counting the value of the primary residence)
• You can pay premiums without having to “go without”
• You could continue to afford the premiums, even if they increased by 20 or 30 percent in the future.

Tip: Long-term care premiums are tax deductible. For example, if you are between 60 and 70 years of age in 2016, you can deduct up to $3,900 (up to $3,800 in 2015).

Related Guide: Consider the possibility of receiving benefits under a disability policy, please see the Financial Guide: DISABILITY BENEFITS: How To Get All That You’re Entitled To

How to Select an Insurer

If you decide that LTCI is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area while others have not. Do not assume that a company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

Tip: Seek independent advice from your financial advisor before buying. Use a local independent agent or broker who has been recommended by someone reliable. Do not buy from an agent who sells door-to-door.

No matter how good a policy sounds, it is worth little if the company won’t be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company’s rating by A.M. Best or Standard and Poor’s, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor’s. Most public libraries have these references.

What to Look for in a Policy

Read the policy from cover to cover. Do not rely on marketing literature. When you compare LTCI policies, consider the following features:

Flexibility

A policy that covers nursing homes should also cover assisted living, a better alternative for many people who can no longer live on their own. If you want a policy with home care, look for one that offers a full range of community-based services, including adult day care, or that pays you a monthly cash allowance to spend as you please for care.

Tip: If you lack family caregivers you can count on far into the future, avoid buying a policy with home care coverage-it will not be sufficient to enable you to stay at home.

Eligibility

Look for a policy that bases eligibility on the need for help with activities of daily living. Policies that pay only for medically necessary care are not usually a good buy.

Tip: To be sure you are covered for Alzheimer’s disease, choose a policy that covers cognitive as well as physical disability and pays benefits if you meet either criterion.

Inflation

If you purchase a policy before the age of 75, inflation protection is essential to ensure adequate coverage if you need long-term care at some point in the future.

Tip: Buy a policy that has an additional cost but automatically increases benefits at the rate of 5 percent annually.

If you cannot afford inflation protection, either choose a less comprehensive policy or do not buy LTCI at all.

Duration

Keep in mind that the chances of needing long-term care for five years or longer are relatively small. For most people, a policy covering two or three years will be more cost-effective.

Tip: Resist pressure to buy the first policy you see. Compare it with at least two others.