There are three basic ways to pay for long term care in a nursing home, assisted living facility or at home - Medicare, Medicaid (Medi-Cal in California) or "private pay" (meaning that you pay personally out of pocket or by using long term care insurance).
Medicare is the federal program offered to those who need a skilled level of care after a 3 day hospital stay. Skilled care is best described by the type of care you need due to a hip fracture or stroke - therapy on a daily basis.
Medicare is limited in the number of days it will pay - up to 100. Medicare pays 100% for the first 20 days (after the 3 day hospital stay and if skilled care is needed), beginning on day 21-100 there is a co-payment required with Medicare. Most seniors have a Medicare Supplement policy. Medicare supplements will pay in conjunction with Medicare. Once Medicare stops paying for care, most supplements will not continue to pay.
If you have exhausted Medicare payments the only other options are Medicaid and paying out of pocket (private pay). Medicaid is available for those individuals that are low income or have limited resources. Medicaid is the state welfare program and has limitations as to the amount of assets you can own and the amount of income you may receive each month before you are eligible.
The federal government has instituted restrictions on the transferring of assets out of an estate to qualify for Medicaid. There is a look back period of 36 months or 60 months if a trust has been established. A law was passed in 1996 making it a crime to shift assets to become eligible for Medicaid.
In 1996 the average cost for a year in a nursing home averaged between $36,000 and $50,000. This can be financially devastating, especially if a patient stays the average of 3 years or even longer. Some patients have spent more than $100,000 or even $500,000+ on long term care expenses.
Besides paying out of your own pocket you can purchase long-term care insurance. This insurance must be purchased prior to needing long-term care. The eligibility for the insurance is based on your current health. Therefore if you are already ill, you probably will not be insurable.
Most financial planners recommend that Long Term Care Insurance be purchased in your late 50's or early 60's. In this range the cost is quite affordable and your health is probably still pretty good. The premiums are based on your age, health, and the type of plan that you purchase.
When purchasing long term care insurance, you make three main decisions:
Daily Benefit - the amount of money you will receive from the insurance company on a daily basis for your care. You usually can select between $100 and $250 per day. Find out what the current cost of care is in your area and it will help you make the decision as to what daily benefit you want (also see inflation protection below).
Benefit Period - the length of time you will receive payments from the insurance company once you need care. You usually can select a specific number of years (2, 3, 4, 5,) or lifetime plans are also available. The average length of stay in a nursing home is 2 1/2 to 3 years. Note: A three year plan will be less expensive than a lifetime plan.
Elimination Period (deductible) - the number of days that you will be responsible for paying for your care before the insurance begins to pay. This works like most insurance deductibles except it is stated in a number of days instead of dollars. Most plans have a variety of options like 0 days, 60 days, 90 days, or 180 days. Be sure to check if this deductible is once in a lifetime or if it can repeat.
Also, there are three
optional decisions that can be added to your plan:
Inflation Protection - this ties back to your daily benefit and allows it to grow on an annual basis to help keep your plan in step with inflation. It is built into your original premium and therefore will increase your annual premium. You may have choices of 5% simple or 5% compounded. You do not have to add this to your plan - but it is certainly recommended if you are younger when you buy your policy.
Home Health Care Coverage - some policies will also give you the option of receiving insurance benefits in your own home. This option will allow you greater choice as to where your care can be paid for by the insurance. It may cover community care like Adult Day Care Centers and Assisted Living Facilities as well as care in the home. This option will increase your premium.
Nonforfeiture - this option provides some form of paid-up benefit if the policy should lapse. This option increases your base premium.
We hope this will give you some direction when comparing long term care insurance policies. Always look for a strong and reputable company and also make sure your agent is knowledgeable about long term care insurance issues as well. Shop around, educate yourself and use your best judgment when selecting a plan. Look for plans that are Tax Qualified.
Will an investment side-fund beat
long term care insurance in the long run?
Not exactly. First off, insurance is never an "investment". Long term care insurance is PROTECTION for your investment. Insurance provides PROTECTED GROWTH for your investment portfolio.
Insurance is always an "expense" which you assume in order to protect financially against a possible negative situation. It cannot "beat" an investment, but without long term care insurance, your investment strategy may be for naught. Understand, pure insurance is not intended to appreciate or provide a "return on investment".
Again, insurance is properly viewed as an expense. Like an airbag, first-aid kit or safety belt, it is there in the event you are unfortunate enough to need it. At that point it kicks in to save the day. In the case of long term care insurance, what you protect is you’re other investments and family assets, as well as the safety, security and peace of mind of the entire family unit.
Long Term Care Insurance & Your "Chances"
Long term care insurance is a "planning tool" - You fund it, and you hope that you will never need it! As I once heard, "I HOPE that it's money down the drain, because I never want to use this insurance!" In any case, you don't get your money back - just like with your homeowner's insurance or auto insurance, except for one difference: The chance of a catastrophic homeowner's claim is 1 in 1200, catastrophic auto claim is only 1 in 240 - But the chances of utilizing your long term care insurance is about 50/50 - like a coin toss! That's why you pay for it, because the chances of your using it are so high.
Here is something to consider in your investment strategy. You dedicate funds to investment vehicles targeting growth and income, all the time weighing the risk of a catastrophic market correction or total meltdown. But consider this: With long term care risk near 50%, your market risk is really quite slight compared with your risk of a long term care need. In order to protect your nest egg of investments, you are wise to look into long term care insurance early on as your expense is locked in at a lower rate.
Example:
An age 65 person with a $300K portfolio could pay a hypothetical $2K - $4K in annual long term care insurance thereby protecting the overall portfolio from the ravages of future long term care costs. In 15 years, when that care is more likely to occur, individual long term care costs are expected to top $100K per year, so for the average 2.8 years of care (a $280K hit), the portfolio could be severely damaged without long term care insurance in place.
That's why so many are buying long term care insurance - not as an "investment", but as investment PROTECTION.
A large portfolio (say $1 Million) can benefit as well, as the same amount of money is still at risk, yet the premium expense is much less relatively. Professional financial planners know this, and the resounding consensus is, "Why WOULDN'T you own long term care insurance to protect your investment portfolio?" It makes financial sense.
People like you build their portfolios by prudent planning, and they KEEP those portfolios by prudent planning. Long term care insurance is the embodiment of prudent planning.
Consider These Unbelievable Statistics
Nobody want to go to the nursing home. Census figures show that only 1.34% of the US population resides in institutions. Smart people want affordable alternatives.
Most people prefer to receive care at-home as long as it's affordable and appropriate - And after that, most people prefer to reside in an assisted living arrangement rather than in a nursing home (It helps to have insurance pay for this non-institutional care, to support at-home care as long as possible).
Even so, there is nearly a 50% chance that, due to medical conditions, a person will eventually end up requiring 24-hour skilled nursing care in a facility. Here are the statistics:
COST ANALYSIS
Leading Causes & Average Lengths of Nursing Home Stays
(Financial Planning News, March 1994) |
Leading Causes: |
Length of Care: |
Total Cost if in a Private Room @ $158 / day: |
Semi- Private Room @ $112 / day: |
Alzheimer's |
96 months |
$455,040 |
$322,560 |
Cancer |
36 months |
$170,640 |
$120,960 |
Cardiac |
16 months |
$ 75,840 |
$ 53,760 |
Diabetes |
48 months |
$227,520 |
$161,280 |
Pulmonary |
36 months |
$170,640 |
$120,960 |
Stroke |
21 months |
$ 99,540 |
$ 70,560 |
These figures inflate at least 5% annually. So,
10 years from now, the average Alzheimer's private room stay will cost the family: $910,080.00
Do you want your family to pay THAT out of your savings -
or your family's?
Doubtful! And after all this, there is still a lingering temptation to compare the numbers of a side-fund investment against a long term care insurance policy, isn't there? No matter what your age, investing never works as good as insurance.
Long Term Care Insurance - What Intelligent Buyers Need to know about tax-qualified-long-term-care Policies (Today’s Most Crucial, Technical Issues)
Is it smart to plan ahead and be prepared? We think so... In this day and age, few can deny the wisdom of owning long term care insurance protection to assure a carefree retirement. It only makes sense to hedge your bets. Few want to spend down assets prematurely for unexpected, prolonged care. Few want to be a burden on their family. People do not want to lose control of their money, and they don’t want to cut corners and jeopardize their future well-being. Period.
The latest research statistics reveal an unprotected retired couple stands a nearly 75% chance of a substantial long term care loss - especially healthy individuals, due to their extended longevity. That’s why Americans are planning ahead to protect themselves in advance. The most popular solution is long term care insurance covering visiting nurses, at-home helpers & companions, assisted living homes, and skilled nursing homes. Forgive the slang, but the street-wise tip of the savvy, financial advisor is this: "Regarding long term care insurance - Get it, or sweat it."
Long Term Care Insurance - A Closer Look
For now, however, let’s set aside the statistics and all the scenarios demonstrating how care costs can disrupt your plans. Let’s assume that we’re actively investigating your options that you are actually in the market for coverage.
Long term care insurance policies are complicated at best, and the consumer is often overwhelmed in the insurance decision process. It’s important to have intelligent guidelines to follow. Today’s point is simply this - If you are GOING TO BUY LONG TERM CARE INSURANCE coverage, then BUY SMART! If you agree, please read on
Several features exist by which to distinguish a truly competitive long term care insurance policy:
The long term care insurance carrier should have a rating of no less than A- by A.M. Best, the industry rating service. Nothing less will do. There are a couple of major players in the long term care insurance market that have lesser ratings, but the giant, quality, long term care insurance carriers are rated A- or above.
Long Term Care Insurance & Name Recognition
NOTE: In long term care insurance, "Name Recognition" and "High Visibility" are not necessarily indications of the highest quality policy. The financial ratings and actual legal wording of each carrier’s contract must be analyzed objectively to determine exactly what the carrier is allowing itself to be liable for. A more highly recognized company may actually get away with a less competitive offer by virtue of the "goodwill and professional reputation" associated with its name, so be very careful. Also, one can not make a general assumption on how a carrier will behave based solely on past claims administration. It is no longer enough to base the current purchasing decision on past claims behavior. The new tax-qualified-long-term-care contracts are a different product entirely, and must be scrutinized as carefully as they have been by the carrier’s own legal staff. Each contract clearly states the conditions under which the company will pay. Long term care insurance carriers do not stay in business by giving money away indiscriminately. This is certainly no place for fuzzy, emotional, sloppy or wishful thinking on your part. It may be wise for you to confer with an objective, long term care insurance specialist.
Several financially sound, yet less well-known, companies are willing to offer a more competitive product in order to gain market share. These contracts may offer more substance for less cost - simple market logic. An independent broker/consultant who handles the entire spectrum of companies can help you make informed choices.
Another feature is that the long term care insurance carrier should have five or more years experience in the long term care insurance market. Major long term care insurance carriers all have this experience.
A third feature is that the long term care insurance coverage must bind the carrier to pay out not only for skilled nursing facilities (SNFs), but for assisted living facilities (ALFs). Why? Because an SNF (usually called a "nursing home") is the setting of last resort - no one wants to go prematurely into a SNF environment, so they will make every effort to remain at home or with family as long as possible. When that is not practical or possible, one will typically want to live in an assisted living facility (ALF) for as long as that is humanly possible (ALFs go by several names: Adult Care Home, Residential Care Home, Christian Science Facility, Alzheimer’s Unit, Domiciliary Care Facility, Adult Congregate Living, Community-Based Residential Facilities, Board & Care Home, etc.). Some long term care insurance policies limit benefit payments for ALFs. No good, as this financial situation may encourage the family decision makers to place the client into a SNF prematurely - an emotionally difficult and now unnecessary burden. This is an area where a long term care insurance carrier may assume less risk through clever policy wording. Watch out.
Look for Liberal Long Term Care Insurance Policy Wording
Committed long term care insurance carriers take a higher road. It may seem a small point, but good policy wording will be very clear about paying full benefits for ANY level of facility, whether ALF or SNF. The better long term care insurance contract will contain a clearly broad definition of ALFs which will hold the long term care insurance carrier liable to pay for ANY state-licensed care facility. Otherwise the long term care insurance carrier may only pay benefits if one is in a SNF, which is the very last place the person will want to live, making it less likely that the carrier will have a claim, as long term care insurance policy holder may pass away before ever entering the SNF.
Until there is further clarification from the IRS on tax treatment of non-qualified long term care insurance policies, to be safe the wise consumer should only consider purchase of a tax-qualified-long-term-care policy rather than one that is non-qualified. It is not so much the possible deductibility of premiums that is important. It is that the benefits from qualified plans are guaranteed not to be considered as taxable income, and that could be a big deal for your family.
The IRS has not yet ruled on taxability of benefits received under a non-qualified plan. So there is a legislative risk that one would have to pay taxes on everything received under a non-qualified contract.
By law, all tax-qualified-long-term-care policies must conform to federal guidelines: A) There can be no "medical necessity" trigger for benefits B) For benefits to begin, it must be certified that one’s condition will last for at least ninety days C) One must either have a "cognitive impairment" or require "substantial" assistance with activities of daily living.
This is the hottest topic among long term care insurance professionals: A competitive contract must have a specific, liberal policy definition of the phrase "substantial" assistance. Background: In order to receive tax-qualified-long-term-care status, a policy must state that in order to trigger benefits, one policy trigger must be a certification that the insured need "substantial" assistance with 2 of 6 ADLs (Activities of Daily Living - typically defined as eating, bathing, toileting, transferring, continence, dressing, etc. NOTE: It is essential that Bathing be included as an ADL, as bathing is the activity that one will likely need help with first - a policy that excludes Bathing as an ADL is NOT competitive in today’s market).
Long Term Care Insurance -
Don’t Settle for a "Hand’s On" Contract
Where long term care insurance policies differ most widely is in their definitions of the word "substantial". A conservative interpretation would mean personal, one-on-one, "hands-on" help from another human being. This wording may not allow benefits until much later on, when one is "on their last legs." A more desirable interpretation of "substantial" includes "directional" assistance ("Mr. Smith, now it’s time to eat. Pick up your spoon now."). Another desirable phrase is "stand-by’ assistance (which means that a human being is nearby to monitor, observe and help if needed). Each of these desirable phrases should be included in any policy under consideration!! Specific, liberal, policy wording is definitely in the consumer’s interest, as the policy may pay benefits weeks, month or even years before the restrictive, "hands-on" policy - saving one untold thousands of dollars.
Again, beware of restrictive or vague definitions of "assistance". Think about it: A long term care insurance carrier may be sold, or it may get new management. Specific legal wording is crucial, because it is all that is enforceable. Vague wording is always vulnerable to unfavorable "interpretation” by whoever is in charge at claims time. Restrictive or vague definitions could leave a policy holder out in the cold when they can least handle it, costing them untold thousands. That’s NOT why we took out the coverage! A knowledgeable, objective long term care insurance broker can help select a competitively-worded policy.
One other consideration: Most long term care insurance companies offer conversion from their non-qualified plan to their qualified plan during the first policy year. That’s nothing new, but only one company we know of is offering a REVERSE conversion, allowing purchasers to switch from qualified to non-qualified, if it is in their best interest. This may be desirable, depending on how the IRS rules on the taxability of benefits received from a non-qualified plan. If non-qualified benefits are NOT taxable, then one may be better off switching to the more liberal non-qualified plan, thereby eliminating restrictive technical wording inherent in the qualified plans (the 90+ day certification clause, the lack of a "medical necessity" trigger, the "substantial assistance’ clause, etc). If the IRS gives tax breaks to non-qual policies, then you want the option of switching.
Long Term Care Insurance - Do Your Duty & Be Prepared
Every financial professional now has a moral, if not fiduciary, duty to recommend that each client consider long term care insurance protection - no matter what the client’s age or net worth. In addition, no person who is aware of the long term care insurance dilemma wants to allow their own family to continue to be exposed to this serious risk.
Long Term Care Insurance - Now It’s up to You
The message from Washington is clear: With regard to long term care insurance, don’t count on Uncle Sam. With lawmakers virtually subsidizing private long term care insurance through tax breaks and scaling down entitlement programs such as Medicaid/AHCCCS, certainly now is the time to plan.
