Nothing can completely sabotage a retirement lifestyle like unexpected elder-care expenses.
My father’s dementia developed rapidly. Within a year, he no longer knew me, much less how to perform most activities of daily living (ADLs). The need for a care facility was immediate and the cost was mind-boggling.
We were “lucky,” I was told. My parents had invested in long-term care insurance (LTCI), and yes, I cannot imagine how they would afford the care Dad needs without it. But accessing the insurance benefits came with several unexpected twists and turns. Forethought and careful planning are essential, because if LTCI is not filed precisely, there are certain expenses the insurance will not cover.
During my reluctant education in long-term care, I realized how ill-prepared most people are for this particular financial risk. Only 10% of the elderly currently have a private LTCI plan in place. How should the remaining 90% fund this expense? Is LTCI their best option? As an adviser, what would you suggest to your clients?
Consider the following pros and cons, including a few alternative suggestions, before you make any recommendations.
The Pluses
As Mark Meiners, a professor of health administration and policy at George Mason University, pointed out:
“70% of those who reach 65 will need long-term care. With long-term care costing as much as $250 a day, it doesn't take long to completely deplete a lifetime of savings — even if you're 'lucky' enough to only need it for a relatively short period of time.”
LTCI thus provides the peace of mind of knowing that a good portion of your client’s future needs will be met.
Another benefit is the simple fact that it is insurance, effectively pooling the costs and spreading out the risks. While far from inexpensive, LTCI is much cheaper than saving and paying for a long-term care emergency out of pocket. As Meiners put it:
“In theory, it's true, if a person invested $3,500 a year instead of using it to pay insurance premiums, the investment might grow enough to cover any eventual long-term care bill. But as nice as it sounds, most people simply won't set aside additional savings for long-term care needs.”
Once a client qualifies, most LTCI policies are “guaranteed renewable.” This means they cannot be canceled because of the policy holder's age, physical condition, or mental health. In effect, the policy won’t expire unless your client uses up the benefits or stops making premium payments.
Also, the benefits paid through a LTCI policy are generally not taxed as income. If federal standards deem a client’s LTCI policy "tax-qualified" and their itemized medical costs are in excess of 7.5% of adjusted gross income, they can deduct the value of the premiums from their federal income taxes. The amount of the deduction depends on their age.
Finally, no one wants to be a burden to their family. Unanticipated long-term care expenses can wipe out a client's savings. LTCI can help prevent that, reducing any financial burdens on clients or any of their family members who step in to help.
The Minuses
The two most obvious stumbling blocks with LTCI are qualifying and cost. The American Association for Long-Term Care Insurance (AALTCI) estimates that people should expect to pay an average of $2,170 per year to cover a healthy 60-year-old couple on a plan that provides a $150 daily benefit for up to three years. But this is only an average, and prices vary dramatically depending on the purchaser's age, the level of inflation-adjustment protection, and the size of the daily benefit.
Using a cost-risk-benefit analysis, Prescott Cole, a senior staff attorney with California Advocates for Nursing Home Reform (CANHR), stated that:
“Long-term-care insurance does not compare favorably with other insurance products. With long-term-care insurance the costs are high, the risks are low, and the benefits are low, but with, for instance, fire insurance, the costs are low, the risks are low and the benefits are high.”
Assuming cost is not a deterrent, your clients must qualify for coverage. Ideally, policies should be purchased when your clients are young and healthy. This is rarely the case, however. If they are older or have serious pre-existing health conditions, clients may not be able to get coverage. Most plans require an individual to pass a physical before offering coverage.
LTCI providers will often decline to insure people with the following pre-existing conditions: Alzheimer's disease, dementia, multiple sclerosis (MS), Parkinson's disease, and stroke. “Somewhere in the 15–20 percent range of people who try to buy this insurance are actually denied because they 'fail' this part of the process," Anne Tumlinson wrote. "In other words, the insurance companies think many of us are too big of a risk.”
Should a client have to file for LTCI benefits, the insurance company will not provide them until it makes an independent determination that a severe need for long-term care exists. According to the American Association of Retired Persons (AARP), "benefit triggers" must be met before a policy holder starts to receive benefits: “Most companies look to your inability to perform certain 'activities of daily living' (ADL) to figure out when you can start to receive benefits. Generally, benefits begin when you need help with at least two or three ADLs.”
It is not uncommon for there to be a waiting period in a LTCI policy that works like a deductible. Once the benefit triggers have been met, your clients must then wait three to four months before their medical costs are covered. As Cole put it, “Most long-term-care policies don't pay anything until the person has been in a nursing home for more than 90 days. If more than two-thirds of those going into nursing homes leave before 90 days are up, it is unlikely that most consumers will receive any benefits at all.”
Statistically, the AALTCI reports that “for someone with a 90-day elimination period, the lifetime chance of someone buying coverage at age 60 and using policy benefits was 35%. So, 35% will use their coverage and 65% will not. As you might assume, the decline is because during those first 90 days, some people will recover and some will die.”
Keep in mind that LTCI policies only pay a fixed amount per day for a limited period of time — that daily amount is a critical factor when calculating the initial premiums. The time period is “typically capped at three years, because open-ended plans have proven too risky for insurers,” according to National Public Radio (NPR).
Also, coverage can be limited to that provided by specific certified home-care agencies or state-licensed professionals.
Finally, LTCI premiums can increase: A company cannot single your client out for a rate hike, but it can raise premiums on a class of similar policies in their state, and most premiums do end up increasing during the length of the policy.
As an example, LTCI policy holders in Pennsylvania were shocked when their 2016 renewal notices indicated that premiums would rise by as much as 130%, with annual rates on pace to reach in excess of $8,000 for some policies. And the problem is not unique to Pennsylvania. Many industry observers expect rates to increase dramatically across the country in the years ahead.
"There are a number of factors contributing to the explosive growth in long-term care insurance premiums," Maryalene LaPonsie explained. "Carriers assumed people would drop policies as they got older. However, that didn't happen in many cases. What's more, people are living longer and aren't necessarily living healthier. As a result . . . many insurance companies have fled the market and those that remain have increased premiums significantly to keep up with costs.”
Meanwhile, premiums for almost all of the federal government's existing LTCI policies for federal employees and retirees will rise by 83% on average.
So, what are the alternatives to LTCI?
Newly developed hybrid or linked-benefit products are options. One product that's growing increasingly popular is a form of life insurance that includes tax-qualified long-term care riders. Jamie Hopkins observed:
"These hybrid life insurance and long-term care policies give the policy owner access to the majority of the death benefit if long-term care services are needed. If long-term care services are not needed or all of the death benefit is not used up to pay for long-term care expenditures, the remaining death benefit is paid out to the beneficiaries upon the death of the policy owner.”
These can be sold to older people who have health difficulties and can't afford long-term care policies, and their waiting periods tend to be shorter. Also, they usually feature fixed premiums and have different coverage rules.
Another option is annuities with long-term care riders. Your client purchases an annuity but rather than taking withdrawals, earmarks the money for long-term care. If the client never requires care, they can elect to receive the money after the annuity matures or bequeath it to their heirs. According to Teresa Mears:
“These annuities require a hefty upfront payment, but if you need long-term care, your overall cost may be lower than what you'd spend on insurance premiums. However, don't expect much in the way of interest.”
High-deductible health insurance plans featuring health savings accounts (HSAs) are another way to put money aside tax-free for qualified long-term care medical costs. Also, your clients may be able to use their HSA to pay for part of their LTCI, if the insurance is tax-qualified.
A final alternative is using home equity through a line of credit, a reverse mortgage, or selling property outright in order to fund long-term care. This option assumes, of course, sufficient equity exists to cover the long-term care expenses.
Funding long-term care requires a kind of clairvoyance — an ability to anticipate future needs, future costs, and future health conditions. It is an incomplete science at best. But with full knowledge of your clients' health, assets, and expenses, as well as the pros and cons of all potential options, you will be able to recommend the long-term care plan that best meets their needs.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.
Image credit: ©iStockphoto.com/Ocskaymark
46 Comments
Thank you Susan for sharing this enlightening piece of information. This is timely and very relevant.
It is definitely packed with helpful information, that can help clients prepare for their future and carve their way out of premium hikes. It is undeniable that long-term care insurance has helped a lot of Americans pay for their long term care needs but there’s no product that is perfect, so it has flaws too.
The premium hikes are causing panic among policyholders and alarm to people who are considering to purchase a plan. Despite the increase in premiums, long-term care insurance proves to be the most economical way toy pay for long term care. Relying on government programs is too risky since Medicare doesn’t cover long term care and Medicaid only provides coverage to low-income seniors.
The bottomline is this, talk to a specialist and shop around if you want to get covered. If you already have a policy, then talk to your long term care insurance provider and strike a deal on how to bring your premiums down. There are actualy variety of options that can help you brave these premium hikes. Lowering your daily benefit amount is one, another is decreasing your benefit period and adjusting your benefit inflation rate is also an option.
I’ve actually written about different ways to face long term care insurance hikes just recently and here’s the link: http://www.altcp.org/facing-long-term-care-insurance-rate-hikes/.
Good info. I wonder if there is a life insurance product that offer long term care benefit, preferably, with some sort of investment management option (index funds selection)?
Thank you for your comments, Samantha. Very true that the high initial cost and then unknown premium increases are significant barriers to long-term care insurance. I will certainly review your article.
There are a lot of facts in this article but also a lot of half-truths. Here are a few I think should be addressed:
1. Most policies don't pay until you've been in a nursing home for 3 months - this is incorrect. While it is true that most policies sold have a 90-Day Elimination Period, many people satisfy this waiting period by using Home Care or care in an Assisted Living Facility. In fact, most policies sold today have a 0-day EP for Home Care and yet any days used at home count towards the 90-day EP. So it is very likely that by the time the client goes to the Nursing Home that there will be no Elimination Period to meet.
2. Policies pay a fixed daily amount - untrue. Older policies (and by older I mean ones sold in the 80's and 90's) were limited to the daily benefit but most carriers today pay monthly benefits. So if you buy a policy with a benefit of $200 per day, what you're really getting is the ability to spend up to $6000 a month, not limited by the daily amount.
3. Waiting periods are shorter with hybrids - not sure where this information came from but it's completely inaccurate. I haven't seen a hybrid yet with less than a 90-Day EP. If it exists, it certainly isn't the norm. In fact, since many LTC policies have a 0-day EP for Home Care, they will pay benefits faster than a hybrid will.
4. Using the example of 130% increase is unfair. That is certainly not the norm and only works to scare people away. There are many blocks of business that have had minimal rate increases (5% - 10%) or none at all. This more likely the norm than the 130% scenario.
5. Care is limited to specific HHC agencies or state-licensed professionals - while all policies will pay benefits if the caregiver is duly licensed as such in t their state, there are policies out there that will pay family members to provide care. There are also policies that will pay a cash benefit, which allows the client to hire anyone they want to.
6. Costs are high, risks are low and benefits are low - this is probably the most misinformed statement in this article. In my agency, our average premium is $2499 annually. That means a couple is paying about $200 a month for both of them or $100 each. Also, there are newer policies out that only pay benefits for a year or less (Genworth says 49% of their claims are for less than 1 year) that are very affordable and can provide meaningful benefits.
7. Comparing LTC to fire insurance isn't a fair analogy. The odds of your house catching on fire and burning to the ground are 1 in 1200. The odds of needing some LTC in your life are 1 in 4. It's estimated that 1 in 2 people over the age of 85 have some sort of dementia. As our population grays with 79 million baby boomers, LTC is going to become our most important issue. We must make plans to prepare for needing care because the government cannot possibly take care of us all.
I really appreciate that you are writing about long term care insurance, but please talk to LTC specialists for your information. Any one of them will be more than happy to get the right information to you. Most of us are passionate about this industry and want to see people take responsibility for their own care expenses. Not only that, but during such a difficult time, having this insurance can make it so much easier on everyone involved.
Thank you for your comments, Barbara. It is always very helpful to have many different opinions. It definitely helps with the information gathering. Please note, the information in the article regarding my parents' policies did come from an insurance specialist, and they are true. Otherwise, sources for the facts are certainly cited in the post.
Respectfully, just because your sources are cited doesn't make them correct. At the very least, Mr. Cole needs to be better informed. I've been in the insurance business 33 years with the last 29 of then exclusively in LTC and I can tell you without a doubt that this statement is not factual: “Most long-term-care policies don’t pay anything until the person has been in a nursing home for more than 90 days. If more than two-thirds of those going into nursing homes leave before 90 days are up, it is unlikely that most consumers will receive any benefits at all.” In fact, according to Genworth (who pays more LTC claims than anyone - $6.1 million a day) 71% of their claims begin as Home Care. So while it is true that a person would need to pay for the first 90 days on their own if they went straight into a nursing home without first getting any care at home or in an assisted living facility, it is incorrect to insinuate that is the norm.
Lastly, it's important to remember that whatever statistics went before are going to be irrelevant in 25 years. Using old information is what got this industry in trouble in the first place but then again, it is impossible to predict what effect aging baby boomers will have on extended care. So while the AALTCI might say that only 35% of those who purchase LTCi will use it, that information is based on current data. Once 79 million boomers start experiencing dementia, that number is going to climb much higher.
Thank you once again for your comments, and thank you also for reading the blog.
I have been reading articles which are critical of extended caregiving benefits (Long Term Care Insurance) or reasons why owning caregiving benefits has little value.
1. Caregiving is expensive.
2. Long Term Care benefits are expensive
3. If you do not use the plan, the premiums go to money heaven
and not a beneficiary.
4. I will self-insure or be in denial about caregiving and wait for the
crisis to occur and then my family will be in worry and panic with
how to care and pay for caregiving services.
5. Family and friends who have no choice but to be personally
involved with caregiving will be supported where they work or
if self-employed, employees will keep the business productive.
6. No worries if you have assets over $2 million.
Since 2009, long term care plans have been in transition for these reasons:
a. Interest rates have been low affecting short and longer term fixed
investment returns.
b. Actuaries forecast that a percentage of people who own plans would cancel them after a period of time, similar to owning life insurance. This did not occur. People realized that these plans are valuable so the cancellation rate is very low.
3. People believed or were led to believe that the would only use the plans for a short period then die. This has changed. People need care for longer periods before they die.
There is an important factor which is seldom considered which is the first question I ask. Where will your caregiving begin and not where will it end? A person maybe 6 months to a year in a care center may have caregiving services for several years while living at home.
Before owning a plan consider your cash flow, your capital which is producing cash flow, your lifestyle, and your commitments for the future.
People own a caregiving plan because they love their family and they want to make sure that should caregiving be needed, it will not disrupt the life of a family.
The affluent understand this and would rather own LTC plans and transfer some of the caregiving payments to an insurance carrier to pay for care services.
Caregiving is not about you, it is about your family and how they will be affected.
a. Most people begin caregiving at home.
b. I have read studies of how much income, savings, and benefits is forfeited by family and
friends caring for people who need care services. It is in the billions.
c. There is an emotional and physical toll on people who care for family and friends?
d. Why would people accumulate or inherit assets for lifestyle want to spend or to go on Medicaid work with an elder care attorney to transfer property and assets just in case they need care services?
e. Why would people spend a lifestyle of accumulating capital for lifestyle and legacy and transferring to family want to liquidate all or a portion of their estate for caregiving services?
f. Why would anyone want to spend 100 cents on the dollar versus spending cents on the dollar to own a caregiving plan which will pay a good portion of caregiving expenses?
g. Money makes the choice whether people remain at home or transfer to a care center. Why?
It may be that it is better to be in a care center. Another reason is family and friends are
tired, frustrated, and need to get on with their lives and careers. h. Ask an economist whether studies were of value when they or their loved ones needed care. I doubt their impulse is to say, "sell everything and spend it on caregiving and then go on Medicaid."
Thank you so much for your comments, Raymond. All good input.
Hi,
I have LTC insurance since 2012, They recently raised my premium by 50%. In order to keep the same premium, I have to either reduce the daily benefit from $191 to $127, or increase the elimination period from 90 to 180 days.
I'd appreciated your take on this.
Thanks,
Diana