The Long-Term Care Insurance Dilemma – Is it worth it?
By Julia C. Rice, J.D., LL.M. (Tax)
According to the U.S. Department of Health & Human Services, 70 percent of Americans 65 or older will need some form of long-term care. Long-term care insurance (“LTCI”) policies reimburse individuals for services that assist with activities of daily living such as bathing, dressing, or eating. These policies provide up to a certain pre-determined limit, based on the plan options selected.
Clients frequently question whether they should purchase LTCI. The question arises for clients of varying socioeconomic statuses, and the answer depends on numerous factors, including the client’s personal comfort level, ability to pay the premiums, and the type of care they want to receive should the need arise. With life expectancies continuing to rise, clients face an increased risk of becoming incapacitated before they pass away. Planning for that contingency is crucial.
Of course, the appropriate plan depends on the client’s current level of functioning and ultimate preferences. Does Alzheimer’s run in the family? How well does the client perform activities of daily living? Would the client prefer in-home care? Is the client hoping that family will provide care if needed? Of course, the latter question raises a host of questions in itself. What is the client’s relationship like with those family members? Does the client have family living nearby? What is the likelihood family members can simply drop everything and take on the responsibility?
Exorbitant Costs of Long-Term Care
High net-worth clients generally have far more options available since they can pay for private care at facilities, such as Mirabella in Portland, and still have money left for their children or favorite charities. Low net-worth clients typically plan to stay in Medicaid-funded facilities and are much less concerned about leaving an inheritance. Thus, the group who tends to be most concerned about LTCI are the individuals in the middle range.
Long-term care costs can quickly deplete a family’s life savings. According to the 2015 Genworth Cost of Care Survey for Oregon, the median cost of staying in an assisted-living facility in Oregon was $46,560 per year. The median annual cost of care for staying in a nursing home was $95,904 for a semi-private room and $102,018 for a private room. Unfortunately, Medicare and other forms of health insurance do not pay long-term care expenses, because long-term care is not considered a medical expense. Further, Medicare generally only covers skilled nursing care and therapy services following a hospital stay. Although spouses may plan to care for each other, they both may reach a point of needing long-term care or the needs of one spouse may become too great for the other spouse to handle without greater assistance.
Selecting a Long-Term Care Insurance Policy
Despite these issues, many families do not purchase LTCI due to the substantial cost of premiums, which can skyrocket without warning. LTCI still may make economic sense, particularly if clients purchase their plans early (mid-50’s), and they properly research their options. Savvy clients quickly realize that companies charge substantially different rates for virtually identical plans. Given the wide discrepancy in cost, clients should obtain at least three different quotes before purchasing LTCI. Also, some companies have a tendency to raise premiums at a higher rate than other companies.
It is also wise to research the financial health of the insurance company and the rate history. Numerous companies underestimated the cost of care and went debunk. The website for Oregon’s Division of Financial Regulation provides a list of authorized insurers in Oregon along with their financial health. Clients can also view a list of companies with strong credit ratings at the website for the American Association for LTCI. Further, clients can access a company’s history with LTCI from Moody’s Investors Service, Standard and Poor’s and A.M. Best.
Other important options for clients to explore are whether their employer offers group LTCI, which is often more affordable, and whether they want to purchase a joint policy with a spouse. The latter option allows spouses to split the benefit depending on who needs it. This eliminates some of the risk should one spouse need long-term care while the other does not. The benefit can also be apportioned between the clients based on their needs at the time. However, there remains the possibility that one spouse uses all of the benefit during his or her lifetime, which leaves no benefit for the other spouse.
Methods to Reduce Long-Term Care Insurance Premiums
Several strategies help reduce the cost of LTCI premiums. The average American typically spends less than three years in a nursing home, so clients are well-advised to purchase terms within that range. Clients who purchase joint policies might consider five-year terms so that they each receive two years along with an extra year to allocate as desired. LTCI policies also allow consumers to add inflation protection. This may add to the cost of premiums, but could prove quite beneficial over time. According to the AARP, experts recommend 5-percent compounded inflation protection.
Clients might also consider pooled benefits, which allow them to use a total-dollar amount of benefits for different services, such as in-home care and nursing home care. With this coverage option, clients can combine services that meet their personal needs. Another method clients may use to reduce premiums is to purchase a plan that may not cover 100% of the daily care needed. This option allows clients to slow down the depletion of their assets while still ensuring they can pay for the long-term care services they may need.
Unfortunately, most LTCI policies are “use it or lose it” policies. This feature deters many individuals from purchasing the policies because they believe they will not need the coverage and, even if they do, that they will have amassed enough wealth to pay for their care. Whether this makes economic sense depends in large part on whether the clients will actually invest funds that would otherwise have been used to pay the premiums. This can be a risky assumption, particularly if care is needed earlier in an individual’s life. On the other hand, family genetics may indicate that the need for long-term care is highly unlikely. These are questions that clients must analyze when deciding the right course of action for their individual circumstances.
Fortunately, the insurance market has developed more flexible LTCI options. Hybrid plans allow clients to combine life insurance with long-term care benefits, typically by adding a long-term care rider to a life insurance policy. This means that their policy will pay a death benefit regardless of whether the long-term benefits are used during the client’s lifetime. Other insurance plans offer an accelerated death benefit, which allows clients to receive an advance on their death benefit while they are still alive. These options may address some of the concerns clients have with the “use it or lose it” feature of traditional LTCI policies.
Qualified Partnership Policies
Clients who have too many assets to qualify for Medicaid, but who cannot afford LTCI premiums, may consider Qualified Partnership Policies (QPP). Section 6021 of the Deficit Reduction Act created the Qualified State Long-Term Care Partnership program. This program offers special long-term care policies that allow consumers to protect their assets and still qualify for Medicaid when their long-term care policy runs out.
Thus, states are authorized to offer special Medicaid asset disregards for individuals who purchase and use qualified private LTCI policies. Most partnership programs offer dollar-for-dollar asset protection. This means that for every dollar of coverage the long-term care policy provides, the consumer can keep a dollar in assets that normally would have been spent down to qualify for Medicaid.
An LTCI policy must meet general requirements to constitute a QPP. The consumer must be a resident of the state sponsoring the partnership program when coverage first becomes effective. Further, Medicaid asset protection only works if consumers receive long-term care in the state where they bought the policy, or in a partnership state with a reciprocal agreement. The policy must be a federally tax-qualified LTCI policy, which means that it must adhere to the HIPAA requirements. QPPs must also contain specific consumer protections, including age-based requirements for inflation protection.
Whether clients should purchase LTCI depends on their personal circumstances and priorities. Attorneys can guide clients in this analysis while ensuring clients understand the pros and cons of obtaining LTCI. With proper planning, clients can implement a workable strategy for affording long-term care later in life.