What insurance companies don’t tell you about “Long Term Scare Insurance”
by David Disraeli
What occurrence can take 100% of your savings, dignity, and independence?
Marriage? Divorce? Death? Shopping? NO!
Long Term Care? YES!
and agents can be VERY misleading.
The Risks If you are a senior or approaching retirement, chances are pretty good you’ve been approached about Long Term Care Insurance. Perhaps you have bought a policy already. Insurance companies and agents stand on pretty solid ground because it is obvious that you are going to age and lose either mobility, functionality or both. This article is designed to provide you with the straight story about the risks of growing older, the need for long term care insurance and he economic realities of the burgeoning senior population.Insurance companies and their sales forces use statistics and fear in their marketing efforts. Every family has been touched by the nursing home dilemma in some way. The horror and financial devastation of a nursing home confinement is enough to scare most anyone. The risks as portrayed by insurance companies
You may have heard about the risks of long term care.Â By way of review they are as follows:
- Every individual aged 65 has a 48% of experiencing a nursing home stay,
- Every couple aged 65 has a 78% that one of the two will need long term care
- The average stay is 2 ½ years
- The average cost nationwide is $50,000 per year
Here’s what the LTC industry doesn’t tell you:
- 2/3 of seniors either will not need long term care, or will be confined for 90 days or less.
- only 10% of seniors will experience a stay of 5 years or more.
- the odds of both spouses needing long term care are only 2%
If 48% of all 65 year-olds will need LTC, how is it that the odds of both spouses needing it are only 2%? No one knows for sure, but many think that the caregiver is emboldened by care giving and typically won’t live much longer after the death of the first spouse.
In my opinion the only people that need long term care insurance are the ones who will stay five years or longer! Unfortunately, we don’t know who that 10% are. Now that you understand the risks, you may decide to self-insure. The concept of self-insurance is that a person either places what they would have paid in premiums aside to be used in the event of a loss. Some losses however are too great to self-insure like a home, or an auto.
The two primary reasons seniors purchase long term care insurance are they are afraid of running out of money and they don’t want to be a burden to their families. They are reasons people should not purchase long term care and there are people who simply don’t qualify. Persons should not consider coverage if the premiums would cause undue strain or are otherwise unaffordable. For these people there are other planning tools, such as Medicaid planning to consider.
Long Term Care Explained
There are many great resources on Long Term Care Insurance and our purpose is not to provide a buyer’s guide or treatise on the subject. There are a few key nuances I’d like to illuminate however. In general, Long Term Care is similar to disability insurance which protect one’s income during his/her peak earning years. The key difference is the LTC insures ones ability to live independently as opposed to insuring one’s ability to work. The two types of benefits available today are what’s known as indemnity and reimbursement.Indemnity pays a flat cash payment when certain conditions are met which can then be used to pay for any expenses the policyholder desires. Reimbursement however only pays for a covered charges. This means that the policyholder must be receiving care by a member of the healthcare profession in order to receive benefits. In other words, if a caregiver is a family member, there is nothing to reimburse so no payment is made. Indemnity would pay for a family member to provide care. Some LTC policies also pay for home reconfiguration, adult day care, and caregiver training (for family members), equipment.
It is estimated that over 50% of all caregivers are UNPAID. Most policies today pay for care that is provided at home OR in a nursing home. Typically a policyholder need only demonstrate that he/she can no longer perform two out of six activities of daily living in order to qualify for benefits. In other words, if you can no longer perform two of:
preparing meals, toileting, bathing, transferring, dressing, and continence and you have a doctor’s certification as such, you are eligible for benefits.
Just as with any insurance, the premiums for LTC are determined by the risk that is transferred to the insurance company. Therefore, I always recommend that you assume as much of the risk as you are comfortable and transfer the rest. Some people can self insure 100% of the risk and save money by not using any LTC insurance. We have already determined that only 10% of people will suffer a financially devastating nursing home stay, unfortunately there is no way to predict whether you will be part of that group.
How To Reduce the Cost of LTC
The key components to the cost of LTC are:
- Amount of daily benefit (usually from $50 to $300) and whether it provides coverage for in-home care
- Waiting period (30 days to 180 days)
- Length of benefit (24 months to lifetime)
- Inflation protection
If you can afford say $100,000 in LTC expenses, you can lower your premiums considerably by using a long waiting period.Â This tells the insurance company that they wonâ€™t be on the hook unless you stay at least a year or more. Since it is impossible to predict how long you might be in a facility, it is generally not advisable to pick a two or three year benefit period.Â In my opinion, choosing a lower amount of coverage per day but payable for a longer period would protect you against a prolonged stay without increasing the cost.Â Inflation protection is critical because healthcare costs have been increasing at a faster rate than inflation.Â $100 in daily benefits will not buy much in ten or twenty years.Â So insurance companies can offer a rider which insurances that your $100 of benefits will always be meaningful (or whatever daily amount your choose).
Other ways to reduce the cost of LTC involves things besides insurance. 7 million seniors are receiving care in their homes at the present time. As Medicare generally doesn’t pay for custodial care in the home, these expenses must be borne out of pocket. A carefully thought out plan can allow you to stay in your home for months or years. Since a skilled care facility can run upwards of $50,000 it doesn’t take higher math to figure that you can buy a lot of care in your home .Â This concept is known as Age in Place. However is does require planning and examining your options. Obviously there are certain impairments which don’t lend themselves to home care, but most do. The process of mapping out a strategy involves getting the senior and his/her caregivers to sit down and think through the mechanics and economics of needing different levels of care. Unfortunately, many seniors do no planning and wind up moving out of their homes due to some unplanned, medically necessitated reason (broken hip, stroke etc.).
New Innovations in Long Term Care
There are new life insurance policies and annuities which offer Long Term Care Benefits and in some cases LTC benefits are included in the main policy. For example, a typical long term care policy may cost $1500 to $3000 per year depending on age and benefits. Assume for a moment that this type of policy pays up to $100 per day, for nursing or in-home care and is for 5 years. Indexed for inflation, this type of policy may wind up paying $200,000 in total benefits.Â On the other hand, if you pay $1500 to $3000 per year for ten years and die without using it, you are out $15,000 to $30,000 in premiums. One such product on the market today pays if you live, die, or need Long Term Care. Similar to an annuity it pays interest, similar to life insurance it pays a tax-free death benefit if the LTC benefits are unused.
LTC and Estate Planning
It would seem that planning your estate and planning for the contingencies of LTC present contradictory goals. On the one hand, you are attempting to leave as much of your estate as possible to your heirs, reduce transfer costs and hassles. On the other hand, you may need considerable assets to pay for your own care and prevent your heirs from supporting you.Â The good news is that through proper planning and careful selection of tools and products, you may be able to accomplish both goals simultaneously. The skills required to perform such planning are highly specialized and require years of experience and training.Â There are tax, legal, economic, and family dynamics issues which may come into play. Lifeplan Associates will provide you with a complimentary 30-minute phone consultation to assess your situation and make suggestions.
Call us at 512.350.4159