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Long-Term Care Insurance: To Buy or Not to Buy

By Matt Bell
© Sound Mind Investing | September 2012
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Much has been written about long-term care insurance, and yet much confusion remains. Those who recommend the coverage are quick to rattle off scary statistics and stories of financial ruin among people who chose to go without the insurance. Others who say long-term care insurance isn't necessasry claim the risks are too small to warrant the expense. Whom should you believe? And more importantly, what should you do? We hope this primer will help you understand the issues and make a wise decision.

Of all the enjoyable ways you could spend your time, thinking through the various health-related scenarios you may experience toward the end of your life is probably pretty far down the list. The unpleasantness of the task helps explain why only 35 percent of adults have taken the time to have a will drafted, according to a survey by Lawyers.com. Faithful stewardship, however, requires that you consider all seasons of life, and the last season is one of the most important. It is a time of life when you'll want the peace of mind of knowing your loved ones will be provided for if you die or experience a debilitating illness. It's also a time when some of your most sizeable Kingdom investments could be made.

One of the greatest financial threats you will face toward the end of life is that of medical costs devouring much of your life savings. To manage that risk, a small but growing number of people are protecting themselves with long-term care insurance (LTCI). Should you join them? If so, with premiums rising quickly, can you afford it? Those are questions we hope to help you answer with this article.

WHAT'S AT STAKE

Among people entering a nursing home in 2010, about 14 percent were covered by long-term care insurance, according to research from the Employee Benefit Research Institute (EBRI). That's up from six percent in 2000.

At first glance, it's easy to understand why carrying long-term care insurance is becoming more common. A study by the U.S. Department of Health and Human Services concluded that people who reach age 65 have a 40 percent chance of entering a nursing home. While no one thinks of nursing homes as luxurious, they still aren't cheap. According to the Genworth Financial 2012 Cost of Care Survey, the median cost for a private room in a nursing home is $222 per day, or more than $81,000 per year.

EBRI research shows just how quickly those costs can devastate household wealth. It found that median household wealth (including home equity) for those who spend a short amount of time in a nursing home (between one and 30 days) is about $108,000, but those who stay for six months tend to get wiped out financially, with median wealth dropping all the way to about $5,500.

To help add a real-world perspective to this issue, several SMI members agreed to share their perspectives on how they came to their decisions about long-term care insurance. Take 26-year old Robert, for example. Despite the potential financial risk, and the ready availability of LTCI through his employer, he's nevertheless decided to take a pass. He said he just doesn't believe in nursing homes. "I would never put a family member in one; I will never go into one. Obviously, I am young enough that most will feel I just am not in tune with the risks. Only time will tell."

None of us knows for sure whether we will need long-term care. The best we can do is use available information to assess our risk, staying mindful of the biblical mandate to provide for our families ("He who does not provide for his relatives, and especially for his immediate family, has denied the faith and is worse than an unbeliever"—1 Timothy 5:8). The two main risk factors to weigh are health and finances.

ASSESSING YOUR HEALTH RISK

A natural starting point in assessing your probability of needing nursing home care is a review of national statistics. Sure, statistics are less than perfect. After all, if each of us reflected the averages, such as the average household size (2.59 people, according to the U.S. Census Bureau), someone in our family would be less than whole! And, as Gregg Easterbrook, author of The Progress Paradox, pointed out, those who pay for and analyze statistical studies often crunch their numbers with considerable bias: "Torture statistics long enough," he wrote, "and they will confess to anything."

Still, several credible organizations have devoted themselves to the task of calculating the odds that you will need long-term care one day, each with its own way of framing the discussion. Let's look at some of the most widely used numbers.

According to the National Clearinghouse for Long-Term Care Information, a site developed by the U.S. Department of Health and Human Services, about 70 percent of people now age 65 and older will need "some type of long-term care services during their lifetime." As we peel back the statistics onion, it's important to understand what is meant by "long-term care," how such care is typically provided, and how long it is usually needed.

According to the Clearinghouse site, "long-term care" is a catchall term that encompasses "a range of services and supports you may need to meet your health or personal needs over a long period of time. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called 'Activities of Daily Living,' such as: bathing, dressing, using the toilet, transferring (to or from bed or chair), caring for incontinence, and eating."

It's important to keep in mind that long-term care is not necessarily synonymous with nursing home care. In fact, Medicare reports that the majority (70 percent) of people needing long-term care are cared for in their own homes by family or friends.

In terms of length of care, the Clearinghouse site reports that, on average, someone who is 65 years old today will need some type of long-term care services and supports for three years. The site also notes that while about one-third of today's 65-year-olds may never need long-term care, 20 percent will need care for longer than five years.

As for how many of those people will require nursing home care, that's where the statistics get murkier. The previously mentioned figure—that people who live to age 65 have a 40 percent chance of entering a nursing home—does not mean that's how many will actually need nursing home care. Nor does the need for nursing home care mean such care will necessarily need to be provided for the rest of one's life.

According to Prescott Cole, Senior Staff Attorney at California Advocates for Nursing Home Reform, 67 to 70 percent of seniors who go into a nursing home are discharged within 90 days, and after two years less than six percent of those admitted will still be there. According to the Census Bureau, out of approximately 40 million Americans age 65 or older today, less than four percent currently live in nursing homes.

Of course, these are statistics for the population at large. To better understand your own risk of needing long-term care, take an honest look at your family history. How long did your parents and grandparents live? Is there a family history of serious illnesses? In particular, is there any history of Alzheimer's disease? According to the Alzheimer's Association, the risk of getting the disease goes up significantly if you have a primary family member who has had it.

ASSESSING YOUR FINANCIAL RISK

Even if your risk of needing nursing home care seems low, an inadequate financial base may leave you feeling vulnerable. Carrying a 10 percent health risk while sitting on a multi-million dollar nest egg is one thing; carrying that same health risk without much money in savings is quite another.

Clyde, another SMI member, described his decision to buy an LTCI policy "a slam dunk." He retired in 1999 with pensions from two previous employers—the larger of the two without a survivor benefit—and not much money in personal savings. Making sure his wife would be provided for was his primary motivation. "I was looking at it, and I thought, 'What happens if I have to go into a long-term care facility?' She could end up with nothing."

Jerry also decided to buy a policy, but said, "It was not a clear-cut decision." In part, he was motivated to buy a policy after hearing financial teacher Dave Ramsey weigh in with his typically emphatic advice that everyone age 60 or older should buy a policy. But Jerry and his wife also know a couple where the woman suffers from Alzheimer's disease. The man told Jerry they would have been financially devastated without an LTCI policy.

WON'T THE GOVERNMENT HELP?

This is an area of much confusion, with many people wrongly assuming that Medicare will pay for a nursing home stay. Medicare, the federal government's health insurance program for people age 65 and older, typically does not pay for extended nursing home stays. It covers "medically necessary" bills. That means it would cover nursing home care if you were there for rehabilitation purposes or post-acute care. In those cases, Medicare usually pays for the first 20 days and part of the next 80 days. The same is true for most private insurance. Medicare may also provide short-term home health care if you are recovering from an illness or injury, as well as hospice care if you are in the last stage of a terminal illness.

Medicaid, on the other hand, is a state and federal government program that pays for certain health and nursing home services for people with low incomes and few assets. In most states, it also pays for long-term care services at home. Eligibility and what services are covered vary by state. The quality of care may vary as well, as only certain nursing homes are Medicaid-approved.

Residents of 40 states have access to long-term care "partnership programs," which allow them to utilize Medicaid for long-term care without having to first use up all their assets paying for care. If you live in one of those states, purchase a qualifying LTCI policy, and continue to need care after your policy's benefits are used up, then you can keep assets valued at the Medicaid limit plus the value of the benefits you received and still qualify for Medicaid.

UNDERSTANDING THE COST OF LONG-TERM CARE INSURANCE

Key factors that affect the price of long-term care insurance are your age, health, and the level of benefits you select.

  • Age
    The younger you are, the more likely you are to qualify for an LTCI policy and the less expensive your monthly premiums will be. Of course, younger people are likely to pay for their insurance over a longer period of time, raising the total cost of coverage. (If you're buying a policy at a younger age than you would otherwise simply to lock in a lower rate, don't. Rather than pay the premiums for a policy, you're likely to come out ahead if you invest that money instead.)

    The risk in waiting to buy a policy is that you may develop a medical condition that disqualifies you from coverage. According to the American Association for Long-Term Care Insurance (AALTCI), the percentage of people applying for LTCI who are accepted declines with age. Underwriting standards are also gradually becoming stricter. The AALTCI reports that 11 percent of applicants under age 50 were denied in 2010, up from seven percent in 2007; 17 percent of applicants in their 50s were denied, up from 14 percent; and 24 percent of those in their 60s were denied, up from 23 percent.

  • Health
    Evidence of chronic conditions often prevents applicants from obtaining coverage. People with diagnosed memory loss or arthritis are almost always denied, and insurers are getting tougher on osteoporosis and diabetes, experts say. By the same token, survivors of some conditions have been able to purchase policies if they can show that their condition is under control. These conditions include cancer, bypass surgery, Crohn's disease, congestive heart failure and forms of hepatitis.

Besides your age and health, the level of benefits you choose will impact how much you pay, including:

  • Elimination period (similar to a deductible)
    This is the number of days that you need to be in a nursing home in order for coverage to begin. Options range from zero to 180 days. The longer the elimination period, the more of the initial costs you pay and the less expensive your policy.

  • Daily benefit
    This is how much the policy will pay per day. Options usually range from $50 to $250.

  • Maximum benefit period
    This is how long the coverage will last once you start using it. Options range from one year to the rest of your life, although unlimited lifetime coverage is becoming harder to find, and even if you can find it, the premiums may be cost-prohibitive.

  • Inflation protection
    The least expensive policies are those with little or no inflation protection. However, at the rate that healthcare costs are climbing, choosing a lower level of inflation protection is, in essence, choosing to increasingly shoulder the cost of long-term care out of personal savings.

    If you decide to buy a policy, make sure you receive an "outline of coverage" that clearly states the policy's benefits, terms, and limitations. Look for at least one year of nursing home or home healthcare coverage, the right to cancel the policy for any reason within 30 days of purchase with a full refund of premium, and a guarantee that the policy cannot be cancelled or terminated because of your age or health (physical and mental). Also consider a "shared care" rider that gives you and your spouse access to each other's benefits if you use up your own.

    It is a good idea to make sure your policy also includes an "alternate care benefit," which recognizes that new trends in long-term care are emerging, and coverage could be provided in the future for options not specifically spelled out now.

CHOOSE YOUR INSURER WISELY

Over the past year alone, LTCI premiums have risen between six and 17 percent, according to the AALTCI. Insurers have simply underestimated the costs of providing benefits. Additionally, low interest rates have limited what insurers earn on the premiums they collect. As a result, some of the biggest players, such as Prudential and MetLife, have exited the market. According to LIMRA, an industry group, half of the top 20 individual long-term care insurance providers are no longer writing policies. To protect yourself, look for insurers that are highly rated by Moody's Investors Service, Standard & Poor's, and A.M. Best Company, and who conduct significant business in your state.

Keep in mind, however, that even strong insurers may raise your rates. While they can't single out individual policyholders, they can seek approval from state regulators to raise rates on groups of policyholders, such as those who opted for a certain level of inflation protection or those with lifetime benefits. If you buy a policy and get hit with a hefty rate hike, most insurers will allow you to temper the increase in exchange for a decrease in benefits.

ALTERNATIVES TO LONG-TERM CARE INSURANCE

Of course, there are ways to pay for long-term care without carrying long-term care insurance.

  • Personal savings
    The late Larry Burkett used to say that the cheapest insurance is self-insurance. The key here, of course, is making sure that isn't just a good idea but a strategy you act on through disciplined saving and investing. According to the Society of Actuaries, $2 million is generally the amount of savings needed in order to be adequately self-insured. By the same token, the organization says people with savings of less than $250,000 may be better off without a long-term care insurance policy. The assumption here is that those people will have such modest retirement income they they will not be able to afford LTCI premiums. Plus, if they need long-term nursing home care—at an average annual cost of over $80,000—their savings will be used up quickly, leaving them eligible for Medicaid.

    It's also very helpful to plan for a lower cost of living by making sure your mortgage is paid off by age 65 and choosing to live in a state with relatively low property taxes. Make sure you have a living will and healthcare power of attorney, and tell your family and doctor your wishes as well.

  • Family support
    People often worry about being a "burden" to their kids. However, there was a time when multi-generational families were the norm and people more readily assumed they would help care for their parents or grandparents. Perhaps more families would benefit from some open conversations about taking care of one another across generations.

    The combination of family care and bringing in some outside help costs far less than a nursing home stay, and would likely provide a better quality of life for those needing care in their later years. According to Genworth, it currently costs about $19 per hour for a home healthcare aide, and less for someone to help only with meal prep or housekeeping.

    If you're the one in need of care, it may be difficult to ask an adult child for assistance, but if you're the adult child of a parent or grandparent whose health is in decline, consider what you might do to help. Perhaps you will create a new and very positive example for others in your family to follow.

  • Reverse mortgages
    As you consider ways to pay for long-term care, it may ease your mind to better understand how much money you could receive each month and for how long if you were tap your home equity through a reverse mortgage.

NOT AN EITHER/OR DECISION

So, should you purchase a long-term care insurance policy?" As you can see, there is no one-size-fits-all answer to that question. To a great degree, it depends on how you weigh your health and financial risks and your wherewithal to pay the premiums. According to the AALTCI, the annual premium for a 55-year-old in good health, with a 90-day elimination period, a $150 daily benefit for up to three years, and with five percent inflation protection, would be about $2,300.

For mid-wealth individuals—those with a later life nest egg totaling between $250,000 and $2 million—the answer may be especially unclear. Perhaps the best idea is to recognize that this is not a purely yes or no question. Many articles about LTCI give the impression that there are only two alternatives: buy a policy that provides enough coverage to pay for most of the cost of an extended nursing home stay or self insure through personal savings. But the issue is more nuanced than that. It doesn't have to be an "all or nothing" decision.

After considering the many factors detailed in this article, you may still find yourself undecided. If you lack the confidence to tailor an LTCI strategy geared to your specific financial goals and lifestyle expectations, consider a fallback position: initially purchase an affordable policy that will provide at least a degree of protection.

Mike Cave, an insurance consultant who has written about insurance for SMI in the past (and who does not sell long-term care insurance), suggests taking out a relatively small long-term care policy that would "take the sting out of a costly nursing home stay without requiring an equally stinging monthly premium payment."

Thinking about this issue isn't the most pleasant of tasks, but it's an essential part of whole-life stewardship. Far better to think about it now than to wait until you find yourself needing long-term care (which can happen at any age). A good starting point is to thoughtfully and prayerfully consider this bit of biblical wisdom: "The prudent see danger and take refuge, but the simple keep going and pay the penalty"—Proverbs 22:3. End

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