Long-Term Care Insurance: Costs & Benefits

Retired teacher Anne Schuessler decided to purchase Long Term Care Insurance (LTCI) based on the uncertainty of the future. “I just wasn’t sure of what’s ahead for me and I felt this was kind of a safety net,” says 66-year-old Schuessler, who lives in Cedar Rapids, Iowa. “My children live far away. If I needed some extra help, I could get it without having to bother my children.”

Schuessler can’t know if she’ll ever need long-term care, but she does know her LTCI plan will help pay for long-term care costs, lessening the impact a health care crisis would have on her children. When a person can no longer care for herself, long-term care helps with the tasks of daily living, such as bathing or eating. This assistance can be necessary for many reasons: after an injury or debilitating illness; due to chronic illness or disability; because of a severe cognitive impairment, such as Alzheimer’s disease; or due to deteriorating physical or mental health.

LTCI is a relatively new product, as this arm of the industry began just 33 years ago. Only about 8% of Americans have purchased LTCI, but as the average life expectancy rate continues to climb, more people are realizing the need to plan for a long life. Whether you are researching LTCI for yourself or a loved one, it is important to know the benefits and potential drawbacks of purchasing a plan, policy and premium terms, and the nature of LTCI plans.

The Financial Impact of Long-Term Care Costs

Long term care costs can easily drain one’s finances. According to the Harvard University Study in Compensation & Benefits Review, 72% of Americans become impoverished after just one year of nursing home care. Long term care isn’t typically covered by private medical insurance and major medical insurance plans. Medicare only pays for skilled and rehabilitative care after a three-day hospital stay; this excludes custodial care, the assistance someone needs for daily living. Medicaid only covers nursing home bills after a loved one is bereft of assets.

Statistics from the Genworth Financial 2012 Cost of Care Survey exemplifies why so many elderly Americans lose all of their savings and assets due to healthcare costs. The national average annual cost for a private room in a nursing home is $83,950, based on the 2012 figures. If someone needs 40 hours of in-home care for one year, the national average cost is $56,717. And these average costs are rising every year by about 5 to 8%. Often a person only needs long-term care for a limited period of time before returning to good health, but even this can be a catastrophic financial event. An LTCI policy protects against the risk of large out-of pocket costs associated with this type of care.

The Benefits of Long-Term Care Insurance

“When a person needs long-term care, an LTCI plan can minimize the financial and emotional impact of the situation,” says Wendy Boglioli, a senior sales specialist for Genworth Financial, the leading provider of LTCI in the United States. LTCI plans are both about preserving one’s lifestyle and deciding how long-term health care needs will be met as they arise.

Purchasing an LTCI policy can:

• Preserve savings and assets for family and friends;
• Help maintain one’s financial independence from family and friends, often eliminating the need to borrow money for long-term care costs.
• Relieve family and friends of caregiving tasks, as paying for professional care becomes an affordable option.
• Allow a loved one to choose where he receives care. If Medicaid pays for care, a nursing home is the only option. People can design their LTCI policy depending on where they want to receive care: in a nursing home, in the community, at home, or in an assisted living facility.
• Expand the range of services a loved one receives, including: care from visiting nurses, home health aides and friendly visitors programs; home-delivered meals and chore services; and time in adult daycare centers and respite services for caregivers.

The benefits a loved one receives from a LTCI policy also depends on the type of plan she purchases. “It’s not a cookie-cutter policy,” says Boglioli. “Educate yourself so you can make a good informed decision. Know what you want, get what you pay for, and make sure it covers everything you want or you do not buy [it].”

Researching Policy & Premium Terms

There is a vast array of options in LTCI policies. By doing research and comparing plans, individuals can tailor their plans to fit their needs and budget. Finding a financial advisor that is well versed in the field is a must. The advisor can determine what your needs are and how much you can afford in terms of benefits. The monthly premium a person pays for his LTCI depends on the following premium terms:

• Age and Health: Most companies offer policies to people between the ages of 18 and 85 (although Genworth Financial only insures people up to age 79). While it might sound like a good idea to wait until a person reaches retirement age, the older one is, the higher the premium will be. For example, a 55-year-old might pay twice or even three times the amount a 50-year old pays in premium costs. Also, since a carrier can turn an individual down to due to health conditions, it’s easier to buy LTCI before health issues arise. After an individual buys a policy, premiums should remain the same unless the premiums are increased for an entire class of policyholders.
• Daily or Monthly Benefit Amount: This is the amount available to pay for long-term care costs, either stated in terms of a daily or monthly maximum. For example, a benefit of $100 a day will pay for up to $100 of covered care and services.
• Benefit Period: This is the length of time a plan will pay the benefit amount. It is usually stated as a number of years.
• Elimination Period: This is similar to a deductible amount, but is stated as a number of days, usually anywhere between 30 to 180 days. The insured person must pay for her care for this number of days before any benefits are paid for.
• Inflation Protection Option: This is an optional feature that protects your benefit amount from inflation. It increases the benefit amount on a yearly basis so coverage stays abreast of the increase in care costs. Look for an inflation guard that increases the benefit amount by 5% compounded annually. It is much cheaper to forego this option, but since long-term care costs go up by at least 5% (if not more) each year, a $100 daily benefit will not be a sufficient coverage amount in the year 2030, for example. Most insurance brokers recommend inflation protection unless the insured person is 75 or older.

Because of these five variables, there is no average cost for LTCI policies. But there is one fast rule: The younger and healthier a loved one is, the less expensive a plan will be. With hundreds of companies offering LTCI, it’s important to be a knowledgeable consumer. Learning the following terms can help with your policy research:

• Financial Strength Rating: Buying from a reputable company is essential. Check a company’s financial strength rating at AMBest.com or at standardandpoors.com. Consumer Reports recommends eliminating companies with ratings below a B.
• Benefit Triggers: Benefits kick-in with a trigger, which is pre-defined in a policy. Usually the insured cannot perform at least two activities of daily living, such as using the bathroom or dressing; or the insured has a severe cognitive impairment, such as Alzheimer’s disease.
• Reimbursement or Indemnity: Most plans are reimbursement plans, meaning the insured person pays his bills, and the insurance company reimburses him for eligible expenses. Indemnity plans, which are more expensive, pay the full daily or monthly benefit amount regardless of the insured person’s bills.

Things to Consider Before Buying a Plan

LTCI is not a suitable or affordable option for everyone. “I love tuna fish, but I’m not eating that three times a day to buy a policy!” says Boglioli. “Clearly, it’s not appropriate, financially or health-wise, for everyone.” A person should not need to change her lifestyle to afford a policy. A financial advisor should be able to look at an individual’s savings and assets to see if a plan makes sense. Boglioli advises that an LTCI policy shouldn’t cost more than 7% of your annual income.

Qualifying for a plan also depends on health. Often companies require an individual must pass a physical before he is offered coverage. Most companies will not insure people with the following preexisting conditions:

• Alzheimer’s disease
• Dementia
• Multiple Sclerosis
• Parkinson’s disease
• Stroke

Before purchasing a plan, it’s important to read and understand the entire policy. The insurer should present you with an outline of coverage, describing the policy’s benefits, limitations, and exclusions. Use this to compare plans to each other.

According to the Guide to Long-Term Care Insurance by America’s Health Insurance Plans (an industry trade association), the National Association of Insurance Commissioners recommends looking for a policy that includes:

• One year of nursing or home health care coverage, including intermediate and custodial care
• Coverage for Alzheimer’s disease
• A guarantee that a policy cannot by canceled, non-renewed, or otherwise terminated because you get older of suffer deterioration in physical or mental health.
• The right to return a policy within 30 days of purchasing the policy, which is called a free look period
• No requirement that the insured: first be hospitalized to receive nursing or home health care benefits; first receive skilled nursing home care before receiving intermediate or custodial nursing home care; or first receive nursing home care before receiving home health care.

Although it is impossible to anticipate the state of health a person will have years from now, an LTCI policy can help a person plan for the future and buy some peace of mind. “I am more comfortable knowing I have [LTCI]. It makes a huge difference,” says Anne Schuessler. “If people are seriously considering LTCI, they can tailor something to suit their needs and budget.”