Brace yourself for these statistics. According to an April 14, 2014 Wall Street Journal article, 58% of men 65 years of age or older will need long term care. On average they will require 2.2 years of care. Even more starkly, 79% of women age 65 or older will require long term care. On average women require 3.7 years of such care.
One result of such statistics is the growing popularity of long term care insurance. Individuals and their loved ones occasionally call on us to review the terms of their long term care policies. Unfortunately, it is usually too late to do much good in these circumstances; the terms of the policies are set by that point. However, we also perform the more valuable exercise of reviewing the policies prior to the individual enrolling. Here are some basic guidelines to keep in mind when shopping for these perplexing insurance products.
What does long term care insurance cover? “Long term care”is an umbrella term that describes care and support given to people regarding “activities of daily living”(ADLs) and the slightly less personal but still vital “instrumental activities of daily living”(IADLs). Examples of ADLs would be eating, getting in and out of bed, dressing, and bathing. Examples of IADLs include taking care of a checkbook, caring for pets, housework and taking medication.
Long term care is not medical care; rather it is help, service or support for an individual in the course of his or her daily living. Most of these tasks do not require “skilled assistance” such as would be rendered by a physical therapist or, perhaps, a registered nurse. This distinction between skilled assistance and “non-skilled assistance” is important for coverage reasons as explained later.
Before I buy long term care insurance, are their other financial sources that might help? Maybe, depending on your circumstances. Medicare covers a nursing home stay of up to 100 days provided you also need skilled assistance. Keeping in mind the statistics cited above, this does not go far. Health Insurance (employer sponsored or otherwise), according to the US Department of Health and Human Services, has limitations similar to Medicare and covers care for skilled and medically necessary care, only. Again, statistics suggest that the average person’s care needs will encompass far more services than those covered by the average health insurance policy. Medicaid does cover the bulk of long term care costs. However, Medicaid is means tested and most individuals simply do not qualify. Children often provide voluntary support for parents. However, as we have previously written in the pages of this newsletter, Pennsylvania statutorily imposes a support obligation on adult children of an indigent parent. Thus, in terms of impact to the family, long term care costs may go beyond simply causing a parent to die broke. (Review our Winter of 2011 issue or our Summer/Fall 2012 issue on our website, for two cases where a parent’s care bills became a child’s liability.)
What type of companies should I buy long term care insurance from? Insurance is only good if the carrier is still around when you need it. A 2006 American Bar Association publication suggests using only a company with a financial rating of B+ or better. A source in the above-mentioned Wall Street Journal article opines that the company should have a rating of A- or better and suggests buying from a national insurance company involved in diversified lines of insurance.
What policy terms should I be looking for? There is no substitute for shopping around, but following is an outline of some important terms.
- Types of Care. All other aspects held equal, you would obviously want the policy with the widest care options including coverage for assisted living, nursing home care, home care and hospice care. You do not want coverage that extends to only medically necessary care. The ABA suggests that a typical “good” policy has coverage that is triggered when a person needs help with two or more ADLs or is cognitively impaired.
- Premium. While ideally this would not be of primary concern, it would be unrealistic to not acknowledge its importance. As a general rule, the premium is set at the start of an annual policy (but confirm this when you shop) and often escalates with inflation. Remember when you buy your policy that you will need to keep paying. If you buy a “Cadillac” policy at age 55 (when you are working) and can’t afford it when you are 77 (and retired) the policy is likely to lapse. All those prior premium payments would go for naught. Premiums are, or course, dependent on such factors as age of the insured (see below), size of benefit and duration of benefit.
- Benefit. Usually benefits are calculated and paid on a per diem basis, subject to an initial waiting period and a maximum number of days. It may be unrealistic to believe that you will buy coverage that will result in per diem payments that will defray the full cost. The coverage you can afford depends on your circumstances and the results of shopping around.
- Duration of Benefit. The statistic cited above from the Wall Street Journal, when further broken down, show that only 11% of men and 28% of women require more than five years of care. Thus, five years of coverage for each spouse may be more than you need and/or not worth the increased payment.
- Income Tax. A “tax qualified policy” will provide definite tax benefits over a “non-tax qualified policy” in the form of untaxed benefit payments and potential deductibility as a medical expense.
At what age should I begin considering long term care coverage? Earlier rather than later. For individuals over 50, premiums increase significantly with each passing year. Additionally, medical pre-screening is a pre-requisite of such coverage and a health problem that prevents coverage may emerge over time. Moreover, it is harder (and perhaps impossible) to obtain coverage if you currently use long term care services. Thus, with regard to cost or eligibility, time is not on your side.
We would welcome the opportunity to review any prospective policies with you. This article cannot come close to answering every question about these policies or analyzing every cost/benefit analysis that a person in the market for such a policy would need to undertake. The decisions are very personal, but perhaps we can help frame some of the questions or put you in touch with a reputable agent.
– Rod Fluck