Should You Invest In Long Term Care Insurance? The Pros, Cons
Almost everyone over the age of 55 has thought about the need for long term care insurance, and most of us have questions. Are there underwriting requirements? Is it a good investment? How much does it cost? Can my premiums go up? Does it pay all long term care expenses? What happens to me if I can’t afford it? In this article, we will explore all those issues as well as possible alternatives to long term care insurance.
What is long term care insurance and what does it cover?
Seventy percent of people turning 65 can expect to need some type of long term care in the future. This statistic comes from the U.S. Department of Health and Human Services. Long term care can range from a few days or weeks in a nursing home following a hospitalization or surgery to permanent placement in a long term care facility. How is eligibility for long term insurance benefits defined? Insurance companies generally allow payment of benefits if the policyholder needs assistance with two or more activities of daily living. Those include bathing, dressing, feeding and toileting.
Contrary to public expectations, long term care insurance does not provide blanket coverage for all long term care (LTC) expenses. Long term care insurance (LTCI) policies have a maximum benefit. This is the most the company will pay on a claim. Once the policyholder reaches the maximum benefit, the policy stops paying. You, as the consumer, control the payout based on the maximum benefit you purchase. You also have the option to purchase an inflation rider for an additional premium. The inflation rider is generally calculated at a compounded, fixed percent. Three percent is often used, or it may be tied to some government measure. This inflation rider increases the benefit based on the agreed upon inflation rate.
Underwriting and Premiums
There is significant underwriting with LTCI. For instance, a couple I know who are in their early 60’s applied for LTCI. The wife, who is in excellent health, had no problems buying a policy. However, the husband’s application was denied based on his history of back and neck surgery. In other words, if the insurer thinks there is a good likelihood of future disability, it will deny coverage. The younger the applicant, the more likely he or she will be accepted for coverage. Older applicants are frequently denied.
Premiums for LTCI are relatively high. The average premium is $3,000 to $6,000 per year, depending on age, sex, health, the maximum daily benefit, the length of the benefit period and the length of the elimination period. Most policies have an elimination period of anywhere from 60 to 120 days. The elimination period is akin to the waiting period we have all experienced before a health insurance policy kicks in to pay benefits. During this elimination period, the policyholder must qualify for LTC, but the benefits are not paid out until the elimination period expires.
The big issue with LTCI premiums is that they are not fixed. They will increase over time. Stories abound of people paying on a policy for 10 years and then finding themselves unable to pay a premium that has jumped by 30% or more. The insurance industry states that this will not happen with newer policies. Insurers say when LTCI was first sold, the insurance industry did not know how to price it. The industry quickly learned that claims far exceeded its expectations, and it was forced to dramatically increase premiums on those early policies. Those explanations are not guarantees that premiums on newer policies will have small increases, but, hopefully, those increases will be less dramatic than in the past. Currently, insurers are predicting annual rate hikes of 3-5% per year.
The Pros that Favor the Purchase of LTCI
There are good reasons to purchase LTCI. The biggest one is that it provides peace of mind. Having long term care insurance can protect your assets for your family. Perhaps, your spouse is a bit younger, and you want to protect him or her from becoming destitute if you need prolonged care. Perhaps, you have a child or other family member needing security and protection after you are gone. Long term care insurance can help ensure that your assets remain intact to protect that person. Perhaps, there is a family history of Alzheimer’s disease, making the need for long term care more likely. Whatever the reason, if you believe you need the coverage for peace of mind or to protect your family, buy the insurance, but purchase wisely.
Another positive aspect to LTCI is the ability to tailor the policy to your needs and budget. You decide how much coverage to buy and for what benefit term. If the premium goes up higher than you can afford, most companies will give you the option of reducing your premium by decreasing the amount of coverage.
Since the need for long term care may not arise for 20 or 30 years, make sure you buy from a good quality company that will still be in existence when you need the care. Consider only those companies with assets in the billions and check the internet to find out the company’s rating with AM Best. AM Best rates insurance companies for stability and quality. Select only those companies rating “A” or higher with AM Best.
The Arguments Against Long Term Care Insurance
The uncertainty of future premium increases worries many prospective buyers. Premiums will almost certainly go up every year, but no one really knows how big those future increases will be. As Boomers age, the demand for benefits will escalate, and it is impossible to predict how that will impact premiums.
LTCI is relatively expensive for retired people on a fixed income. Some argue that if you have more than $1 Million Dollars in assets, you don’t need it. If you have less than $500,000 in assets, you can’t afford it. That argument may be true. People with considerable assets can afford to pay for their own care and may find LTCI is not a good use for their money.
Some argue that LTCI is a poor investment, that you are better off self- insuring by investing the money you would otherwise pay in premiums. That argument has some merit. The average stay for someone who must live out his days in a nursing home is 9 months. Nine months is considerably less than the average LTCI benefit period. These people argue that the insurer profits by selling you coverage for longer than you need.
According to a study published in the Wall Street Journal, 44% of men and 58% of women over the age of 65 will spend some time in an assisted living facility. A study done at the Center for Retirement Research at Boston College found those number to be a bit deceiving. Of those people who spend time in LTC, 50% of men and 40% of women stay at the assisted living facility less than 100 days. Medicare covers the full cost of a skilled nursing facility for a period of 20 days and covers partial costs after that for up to 100 days. Thus, while many of us will spend a few days or weeks in a skilled nursing facility following a hospitalization or surgery, the number of people requiring longer stays is far fewer. Like many things in life, LTCI is a gamble. The policyholder bets he or she will spend many months in an assisted living facility before dying, and bets the insurer will pay out the maximum benefit. The insurance company bets that the policyholder will never need long term care or that he will need it for less time than the elimination period.
Alternatives to Traditional Long Term Care Insurance
There are a number of alternatives to traditional long term care insurance. First, you can self-insure by saving sufficient money to pay for your care. You can also choose to partially self-insure by purchasing a policy with lower limits and relying on your savings for the balance.
Second, consider a partnership policy. Partnership policies help you to qualify for Medicaid after your LTCI benefits run out. In 2006, Congress passed the Deficit Reduction Act which included a provision authorizing states to offer special Medicaid Asset disregards for people who purchased qualified LTCI from select private companies. Arizona is one of the participating states offering these “partnership” policies. People who buy these policies earn one dollar of Medicaid asset disregard for every dollar the insurance company pays out in benefits. For example: Jane purchases a partnership plan that pays $150 per day in benefits. She goes into an assisted living facility and has been there for one year. Her LTCI partnership policy pays out $50,000 in benefits after the elimination period. That earns her the right to keep $50,000 in assets over the Medicaid limit. In sum, partnership policies protect assets from Medicaid’s estate recovery rights after the death of the policyholder, and they help participants become eligible for Medicaid when LTCI benefits are gone.
A third option is to purchase an annuity with a delayed payout. An annuity that does not begin making payments for 20 years will be considerably cheaper than one that begins paying you right away. This option provides you with money for future long term care needs, but can also be an asset for you and your family in the event you never need LTC.
If you need assisted living and run out of money, you will not end up on the street. Arizona has provisions for its citizens in need with the Arizona Long Term Care System (ALTCS), which is funded by Medicaid. The majority of nursing homes in Arizona accept ALTCS (commonly pronounced ALTEC) patients. Because it is a Medicaid program, ALTCS has eligibility requirements that include limits on income and assets. These are the types of assets considered in determining eligibility: cash and bank accounts, stocks and bonds, retirement accounts, revocable pre-paid funeral accounts, revocable trusts, and certificates of deposit. ALTCS eligibility will kick in if the individual in assisted living runs out of assets and can no longer afford the monthly charge.
Conclusion
Deciding whether to buy LTCI is not an easy task. If you have a trusted financial advisor, make an appointment to discuss the issue and decide what is the right decision for you. Otherwise, before you purchase LTCI take a careful look at: your finances, your personal and family health history and investigate the insurance company. It is a complex subject with many variables and uncertainties it deserves careful thought and attention before making a decision.
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