Time for a Closer Look at Long-Term Care Insurance

October 16, 2008 by  
Filed under Financial Planning, Insurance

Mr. ToughMoneyLove is looking again at long-term care insurance.  So should many of you.  I will tell you why in a minute.  First, let’s deal with a misconception that you may have…..

Long-Term Care Insurance is Not Just for the Elderly

Before you browse away from this page thinking that you are too young to be thinking about long-term care insurance, please consider the following:

58% of claimants under long-term care policies are under age 65.

15% of long term care claimants are under age 45.

The majority (66%) of insured long term care is provided in the home; only 17% is provided in a nursing home.

The number one cause (30% of claims) for needing long term care is cancer, not dementia or other age-related ailment.

(Source:  UnumProvident Study)

The AARP provides this data on the average U.S. cost of long term care:

$5,566 a month for a semi-private room in a nursing home

$6,266 a month for a private room in a nursing home

$2,968 a month for care in an assisted living unit

$19 per hour for a home health aide

I trust that these statistics have persuaded you to keep reading.

The Recent Market Collapse Creates a Need for More Financial Risk Management

Millions of working adults have experienced dramatic declines in their retirement savings.  Many of them do not have pensions and are within 10-15 years of anticipated retirement.  These folks may need to take increased investment risks in an attempt to more quickly recover from their losses.  To consider taking on more risk on the investment side, responsible investors should compensate by reducing risk in other areas.  That’s where long-term care insurance can play a role.  A worst case scenario is to lose everything to a health disaster while trying to regain what has been lost in a market disaster.  You want to insure against such a scenario.   Stated another way, the more that you can insure against a financial risk, the less you need to be concerned about having a retirement nest egg large enough to cover that risk.

Long-Term Care Partnerships Make Insurance More Valuable

One of the biggest problems and dilemmas in considering long term care (LTC) and LTC insurance is the role of Medicaid.  Stated simply, Medicaid regulations require the sick or injured person to effectively exhaust all personal assets before Medicaid can be used to pay for long term care. Healthy adults considering LTC insurance will mentally weigh the premium costs against the value of the assets that would be at risk before Medicaid could be used.

The Deficit Reduction Act (DRA) of 2005 changed the game somewhat.  Under the DRA, a state can adopt insuranceregulations that establish Long Term Care Partnerships applicable to residents of that state.  The “partnerships” are between long term care insurance companies and the state’s Medicaid-qualified long term care program.  The primary benefit of the Partnership is to allow a beneficiary of long term care to retain more assets yet be eligible for LTC reimbursement by Medicaid. This is done by purchasing a long-term care policy that meets Partnership regulations.  If you do, then you can obtain Medicaid LTC benefits without depleting all of your assets.

It works like this.  Assume that you are insured under a LTC policy that pays you $300,000 in benefits, after which the benefits are exhausted.  You can then become eligible for long term care under Medicaid.  However, instead of having to spend down all of your own assets to achieve eligibility, you are allowed to retain an amount equal to the insurance benefits you received.  In this example, you could retain $300,000 in personal assets while receiving Medicaid long term care.  That’s quite a difference.  It puts you in a much better permanent financial position compared to someone who did not have long term care insurance.  Those folks must still render themselves almost penniless before they are eligible.

More states are implementing insurance regulations that create these Long Term Care Partnerships.  Our state did so, effective October 1.  You should check with your state Department of Insurance to determine if your state is on board or if it will soon join the Partnership program.

It’s important to understand that not all long-term care policies are eligible for the Partnership program.  An important requirement of the regulations is that, for those under age 65, the policy must include compound inflation adjustment of the benefit. That adds cost to the policy but it’s a worthwhile feature.  Make sure you inquire about this issue when discussing a new policy with an agent.

Group Long-Term Care Coverage is More Affordable and Accessible

Another reason why Mr. ToughMoneyLove is actively exploring long term care insurance is the discovery that group LTC coverage can save a lot of money and a lot of underwriting. Our firm is in discussions with a major provider of long-term care insurance.  We are being told that with a minimum number of employee participants, we can obtain LTC coverage for employees and employee spouses, at a discount of 25%-35%. These LTC policies are also transportable, meaning that when I retire, I can take the policy with me, as long as I keep paying the premiums.

Another important feature of the group long term care policy is that there is virtually no underwriting.  You answer four simple health questions and that’s it.  That is critical to me because Mrs. ToughMoneyLove has chronic health problems that would likely disqualify her from obtaining a separate LTC policy.  For the group policy, none of the four health questions relate to the problems she has.  This means that I will be able to purchase the LTC insurance for her and at normal rates.

A last point about group long-term care coverage is that you don’t need your employer to pay for all or even very much of it.  If you are in a small business like ours, a group of interested employees can come together and seek out a plan that would work for them, then present it to the business owner as an option to consider.

As perhaps you can see, although we remain invested for the long term, recent economic events have prompted me to explore other money strategies and tactics to help us reach our financial goals.  Using long-term care insurance to cover a significant financial risk is one of those strategies.

Are any of you looking to insure against financial risk?


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Comments

7 Responses to “Time for a Closer Look at Long-Term Care Insurance”
  1. You are correct that group long term care policies have more lenient underwriting. That’s precisely why group long term care policies usually cost more than individual policies. There are exceptions. It does depend upon your marital status, your age, and especially your state of residence. But for 90% of my clients who are married and under the age 65, individual policies usually offer better benefits and charge less premium than group policies.

    Scott A. Olson, CLTC

  2. Scott: Your comment intrigues me. Can you give us examples of major LTC insurers that routinely charge less for individual policies as compared to group? Are we being misled by MetLife (the company that is pitching us right now)?

  3. I don’t know anything about the particular plan that you are being offered right now so I can’t comment on it. I don’t even know what state you live in which has a big impact on when it makes sense to buy a group policy or an individual policy.

    The premiums that are charged for each group are unique to that group. But, when I’ve compared the group policies offered to large employers and associations, like AT&T, IBM, General Motors, the federal gov’t, and even AARP, (all of which are underwritten by the 3 largest long term care insurers), in many cases, usually about 90% of the time, married couples under the age of 65 can get better benefits for less premium if they buy a policy on their own, rather than go with the group policy.

    I had a couple who had purchased a policy from me about 5 years ago and the following year they told me that they weren’t going to renew the policy because the husband had been offered a group policy at work and they assumed that it would give them better benefits and lower rates. Not only was the group policy 15% higher in cost, but the group policy had 35% lower home health benefits and a significantly lower lifetime maximum benefit.

    And, the funny thing is that the group policy was offered by the EXACT same insurer from whom they had purchased their individual policy.

    All I’m saying is that anyone who is considering a group long term care policy should compare it to an individual long term care policy (even an individual policy that is offered by the exact same insurer.) In my experience, 9 times out of 10, a married couple under the age of 65 can get better benefits for less premium by purchasing individual policies.

    I’ve been specializing in LTCi since 1995. It’s always been this way.

    Scott A. Olson, CLTC

  4. Scott, I talked with insurance agent about LTC and he told me to wait until I was about 60 years old to apply for this. Thanks for the post.

  5. Drew Nichols says:

    This is a good primer on LTC for the uninitiated. Some of the stats you publish are a bit different from those published by Genworth (the largest LTC carrier out there). I guess each company will have different experiences.

    I’m with Scott in that the majority of the time, your group plan will be more costly than a group plan. Everyone is always shocked by this but it makes sense. The group plan may have open enrollment, where someone with severe arthritis can apply and will be virtually guaranteed to make claims. The healthy members of the group will pay for that person.

    Contrast with individual plans, which have underwriting requirements, and a healthy couple will almost always be better off.

    As a last aside, a lot of group plans scrimp on home health care. As your stats indicate, the majority of claims are for home health, so you want 100% coverage if you are considering a plan, be it group or individual.

    Drew Nichols

  6. Evan says:

    TML,

    If you’d like to email me with certain stats I can have my LTC guy run a quote and give it to you (Just need your state and # employees). Just so you have something you can compare it to v. just going with one quote from the Met guy.

    Just a thought….

  7. Dear Debt Reduction,

    You stated, “Scott, I talked with insurance agent about LTC and he told me to wait until I was about 60 years old to apply for this. Thanks for the post.”

    Is there a reason why this agent thinks you should wait to get LTCi until age 60? Will you not have enough in net worth until age 60?

    Scott

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