Long Term Care Insurance – Is it Right for You?

As a sixty-two year old who manages the financial affairs for families and businesses, I find myself in a very interesting position as both an advisor and potential customer when it come to the subject of Long Term Care Insurance.  I am at that point in my life where I must give serious consideration as to whether or not my wife and I should obtain LTC insurance, so I personally understand the difficulty of the decision. In fact, I have been deliberating this decision for the past 12 years!

Since each person’s situation is unique, there is no one correct answer, however, there are some important issues to consider when making this decision.  The first, of course, is to understand the problem this insurance is designed to address.

As a result of modern medicine, most of us will enjoy a much longer life than our predecessors.  Actuarially,   a 65 year old is expected to live nearly 19 more years – that’s 7 years more than in 1900.  That’s the good news.  The bad news is that along with longevity, we are experiencing more of the chronic issues that often plague older folks and make fully independent living difficult or impossible.

Typically the progression starts with a medical issue that, for the most part, is covered by health insurance, Medicare and Medicare Supplements.  If the medical issue progresses, care can be supplemented at home by a spouse or family members. 

As we get older the concern becomes the management of physical ailments or cognitive impairments  that may exceed the ability of our family caregivers and require professional intervention – adult day-care, home health care, assisted living, or full nursing home care. It is at this point that health insurance no longer covers the cost of care, and the financial burden of these modes of care can be extraordinarily expensive. In a study done by Genworth, a leading LTC insurer, the median Massachusetts annual care costs in 2011 were :

While it is possible that some portion of the above mentioned services may be covered for a short period of time by health insurance, the three primary methods of covering the costs are Self-insurance, Medicaid, and Long Term Care Insurance.

In absence of an alternative, self-paying (your checkbook) continues until virtually all assets are spent.  Unless protected in some manner, even the value of your primary residence is an includable asset under self-pay.  When assets are spent down, Medicaid will begin covering the costs at a facility that accepts Medicaid reimbursements.

An often employed strategy to protect against the spend down of assets is to transfer ownership irrevocably in order to qualify for Medicaid’s eligibility standards of poverty.  The catch is that it requires adequate preplanning to qualify under a 60 month “look back” provision since any transfer within 60 months is still includable.   The more difficult concept for many is, however, accepting the notion of giving up control of the assets that are transferred away.  The advice of a qualified attorney who specializes in this area is critical to fully understand the process and its implications.

Finally, there is the option of Long Term Care Insurance.  Here’s what needs to be considered in reviewing options:

1. What Plan Benefits and Features Should I Select?

2. What Daily or Monthly Benefit Amount Should I Select?

3. What Total Amount of Coverage Should I Choose?

4. How Long Should the Elimination Period Be?

5. How Can I Protect Myself Against the Rising Cost of Care?

To get the best answers to these questions requires a great deal of due diligence and care.  Seek the professional assistance of a trusted advisor to solicit quotes from a variety of carriers and  guide you through the numerous options that are available.  Use caution if speaking to a “specialist” that only sells LTC insurance.  As they say, “If all you have is a hammer, pretty soon everything looks like a nail”.  An independent advisor is the best bet.

The basic plan design should include coverage for home health care, assisted living, and, of course, a full nursing home care.  Every add-on beyond that is an additional expense that may not be necessary.

The benefit amount is based upon the potential cost of care – in our geographic area, $340/day is a reasonable target – minus the portion of that expense, if any, you would self insure.  As you might guess, the cost of the coverage is directly linked to the amount of benefit.

The total amount of benefit is linked to the benefit length you select.  In addition, benefits typically have an elimination period (waiting period before benefits are paid) of 90 days or more, and a benefit length that may range from 3 years to lifetime.  Again, the longer the elimination period, the less expensive, and the longer the benefit period, the more expensive.

It is highly likely that the cost of providing long term care will not go down, so to protect against rising costs LTC policies may contain an optional provision to build in a cost of living adjustment to the benefit amount.  It may be a fixed option or a compound benefit, and yes, you guessed it – the more generous the cost of living adjustment, the more expensive the policy.

The two most important factors that affect the cost of LTC insurance over which you have little control are age and health.  While policies can be purchased as young as 18, the most typical age that policyholders apply for coverage is between 50 and 65.  Married couples can qualify for sizeable discounts if both apply for coverage, but some medical conditions can increase cost or make issuance of a policy impossible.

Presuming that coverage can be issued, there are still several conditions to consider before purchase.  Perhaps the most important is the financial impact of the premium.  If it affects the ability to maintain a reasonable lifestyle, it is too expensive and probably not a good choice.

An individual’s health history and family health history should also be used as a guide. For example, if you are in excellent health and you have a long family history of folks living long, productive lives that ended with cardiac arrest, your risk factors are low.  If, on the other hand, there is a family history of chronic medical problems, your risk factors are high.

Finally, when reviewing quotes from quality carriers such as Genworth, MetLife, Mutual of Omaha, and Transamerica, an important thing to remember is that the premium for quality insurance plans cannot be raised due to your claims. BUT, the insurer can increase the premiums for the whole class of policies.  Cost can go up, and there are many examples of insurers who have raised their rates substantially.

So, you might be wondering what I’ve decided.  Since the target age for LTC insurance is 50-65, it may take another three years to finally make up my mind!