If it can happen to Superman, it can happen to you. More than 12 million Americans need long-term care, and almost 5 million of those are working-age adults. Here’s how to prepare for the worst.
By Terry Savage
I’ll bet you’re not considering the prospect that you might need nursing home or skilled home health care. But the unthinkable can happen. Just ask Superman — actor Christopher Reeve. Reeve was paralyzed in a 1995 horse-riding accident, joined millions of Americans who require nursing care at home or who now reside in nursing facilities.
You insure your home against fire and your car against an accident — and never complain if that money is wasted. Why not insure against one of the most expensive realities of life — long-term care? As our lives lengthen and new treatments are developed, you — or your parents — are more likely to require some type of senior care.
With a little planning, you can buy long-term care insurance — either for yourself, or as an annual gift for your now-healthy parents. And you can encourage your company to provide this coverage as an employee benefit. Otherwise you may become one of the 7 million Americans who, according to the National Council on the Aging, now provide or manage care for a friend or relative aged 55 or older and not living with them.
Long-term care insurance is a product that catches the attention of seniors, but the ideal time to buy it is actually when you’re in your early 50s and in good health. At that point, premium costs are lower, and you’re less likely to have a pre-existing condition that disqualifies you. But a society that values a youthful appearance seems unwilling to recognize these expensive facts of life.
The costs of long-term care are staggering today and should soar higher in the coming years when baby boomers retire. Even the GenXers won’t escape the impact. Your parents will either spend your inheritance on nursing home care, or you may find yourself taking care of your elderly parents out of your own retirement funds.
In fact, the U. S. General Accounting Office says that nearly 40% of people age 65 now will spend some time in a nursing home. The federal Health Care Financing Administration projects that spending on nursing home care will rise from about $94.1 billion now to $125 billion a year by the end of 2005 and $330 billion by 2030.
The average annual cost of a private nursing home is now about $55,000, or $150 per day — with many facilities in large cities costing more than $65,000 a year. Those costs can add up quickly, and Medicare does NOT cover them — except for a few days in a skilled nursing facility after a hospital stay.
And no Medicare supplement policy covers custodial nursing care. Yes, state Medicaid programs cover nursing care for the indigent — but that means almost all assets and income must be spent down before the state will pick up the tab.
Medicaid spend-down planning has received attention as a way to deal with the nursing-care costs. Financial advisers counsel seniors to transfer assets to younger family members — a process that must be completed at least three years before asking Medicaid to pay nursing home costs. But these state nursing home programs for the impoverished do not cover home-health-care costs. And aside from the moral implications of such a strategy, do you really want you or your parents to depend on a government-funded nursing facility?
Long-term care insurance can solve the problem in most cases. The latest generation of policies pays for “home care” at a senior daycare facility, as well as care in a skilled or custodial nursing facility. A portion of premiums may be tax-deductible, depending on your age and income. But not all policies are alike, the business is growing (There were just 4.1 million policy holders in 1998.) and coverage’s are constantly evolving, so study both the product and the pricing.
Nuts and bolts
If you’re thinking about buying long-term care insurance, here’s what you should know before you buy.
The cost of a long-term care policy depends primarily on three basic factors: your current age, your current state of health, and the location of your residence. Unless you move, you can’t control any of these. But you can control such questions as the amount and length of coverage, the elimination period (deductible), and whether you’ve chosen an inflation rider.
Buying early pays. A healthy 50-year-old could purchase more than adequate coverage for $1,365 a year. For a 73-year-old, the same policy might cost $6,300 a year. This four-year coverage would include a 90-day deductible or elimination period, $200 per day in coverage (for home health care or nursing home care), and a simple inflation rider — all on a policy from a top-rated company.
Good health now pays off later. Once you’ve locked in an annual premium, it can’t be raised if your health changes. But insurance companies can ask state regulators to raise premiums for an entire age group, depending on claims experience. Unfortunately, many companies have raised premiums in recent years, once they realized they’d underpriced their policies. (See below, on choosing a reputable insurer.)
While some insurers require a medical examination, most just ask for a medical reference. However, any false claims could result in future denial of coverage.
Where you live affects costs. That’s because nursing costs typically are higher in major metropolitan areas than in smaller communities.
Length of coverage: The average stay in a nursing facility is 2.5 years, so some people opt to limit coverage length to cut costs. But if you’re purchasing a policy in your mid-50s, you’ll find that lifetime coverage is not much more expensive.
Elimination period: This is like a deductible and works like one. You agree to pay for the first 60 days or 90 days of needed care; then the policy kicks in. Having a 90-day deductible can cut premium costs substantially.
Inflation rider: Even a 3% inflation rate can cut the value of your dollar in half in 25 years. Plus, assume health-care costs will rise more than the general inflation rate as boomers age. So it may pay to buy an inflation rider. All tax-qualified policies today (see below) must offer this coverage as an option.
Benefit payments and triggers: A qualified physician must certify to the insurance company that you need the benefits — and those benefits will be paid only to qualified caregivers. A daughter who simply does your shopping and prepares meals wouldn’t qualify as a caregiver, but she might if she’s a trained professional.
Most policies require the inability to perform at least two activities of daily living to trigger the benefits. The activities include being able to dress yourself, bathe yourself, move from a bed to a chair, use toilet facilities or eat unassisted. Policies will also pay out if you can’t pass certain mental function tests. (Look for a policy that specifically includes coverage for mental or cognitive impairment.) Most policies no longer require a hospitalization before benefits start, but check the wording anyway.
Insurance companies may pay benefits using one of two methods:
Expense-incurred benefits: These are paid either to you or to your provider up to the limits in your policy.
A daily benefit or indemnity: This will be paid directly to you. But be sure your policy offers a pool of benefits on a daily or weekly basis allowing you to pay for covered services as needed, as well as nursing home care.
Tax-deductibility: You may be able to deduct part of your annual premium as part of a medical deduction. But remember, you can only deduct medical expenses that exceed 7.5% of adjusted gross income. The size of a deduction depends on age. People over age 61 can deduct $2,510 (assuming they meet the 7.5% threshold). Almost all policies sold before Jan. 1, 1997 were grandfathered and are considered qualified. Benefits paid by a qualified policy aren’t generally considered taxable income — even if your employer paid the premiums.
Waiver of Premium: This provision lets you stop paying the annual premiums once you’ve moved into a nursing home and the insurance company has started to pay benefits. It may not apply if you are receiving home health care.
Premium Refund: Some policies will repay your estate any premiums you paid, minus benefits used. Usually, there’s an age limit, typically 65 or 70.
Non-forfeiture benefits: If you drop your coverage, perhaps because you can’t afford the premiums, you can receive some benefits for the money you’ve already paid in. But this feature can boost the policy cost substantially.
Where to look for more information
Many of the big life insurance companies are now training agents to sell these new products, but that limits you to one company’s policies. You can get better comparisons by reaching out to a growing number of insurance agencies licensed to sell policies from different companies.
In fact, there are several Web sites for these agencies that provide quotes’, price comparisons and advice on choosing a policy (see the links at left).
Find a strong company
Make sure you’ve purchased from a company with a strong financial base, and a 10-year history with this insurance, so it will price policies properly and be there when you need it. A number of companies jumped into long-term care insurance without adequate data on which to base prices.
Companies such as Fortis and Travelers have either sold their long-term care businesses to others or reduced sales. But John Hancock, UnumProvident, and GE Financial have become big players in this business. Companies that raised prices substantially for existing policyholders include Conseco and Penn Treaty.
Independent insurance expert Martin Weiss has created a ratings service for long-term care companies at his Web site, Weiss Ratings. Weiss suggests that experienced companies have more claims-paying data on which to accurately price policies. He also warns that if you ask an agent whether a recommended company has ever raised premiums, the agent will probably say no. That’s because companies change the identification number of a policy, in effect creating a new policy, when they ask for a rate increase! Ask whether an increase in premiums has taken place on this type of policy instead of on this specific policy.
An alternative coverage
A number of companies are marketing a combination of life insurance and long-term care coverage that lets you withdraw some of the death benefits (not the cash value) to give guaranteed long-term care coverage. Golden Rule Insurances Asset-Care plan requires a single premium, one-time deposit of cash into a policy. The company will either guarantee a minimum rate of interest or offer a variable choice of investments inside the life policy. It provides at least 50 months of long-term care benefits. You can buy extended coverage. The downsides of the policy: it’s expensive, and some people don’t have the cash to make the upfront deposit.
The need for long-term care can occur at any time of life. Of the 12 million Americans who need long-term care, nearly 5 million are working age adults. If something happened to you — or your parents — how would you cover the cost? Don’t say you’d just leave it to the government. Instead, take a minute to stop by a nearby nursing home. You would certainly bring some cheer to the patients there. And you’ll gain new respect for those who provide care. And, I hope, you’ll be inspired to do some planning now, before the need arises. After all, that’s what insurance is all about.