Long Term Care Insurance – Why, When, How Much?

Today’s “Article of the Month” is a diversion from my specialization with investment planning, but perhaps even more important with a well thought out financial plan.  While the financial markets may cause investors to sustain momentary losses to their portfolio, expenditures for skilled nursing care, home health care, and/or assisted living can never be recaptured once spent.  In other words, many retirees may find themselves quite capable to sustain a comfortable retirement, except for long term medical expenses not covered by Medicare or traditional health insurance plans.  Furthermore, some medical conditions requiring long term care happen unpredictably, even at a younger age, potentially leaving a healthy spouse at greater financial risk.  Examples include Alzheimer’s disease, stroke, Lou Gehrig’s disease, crippling accidents, and arthritis.  Since many of these conditions are not immediately fatal, such care may be required for a number of years.

Many people may rationalize these events may never happen to them, and while maintaining a healthy and positive outlook is vital, the sobering statistic indicates that 1 in every 3 individuals who reach age 65 will require some form of long term care before the end of their life.  Therefore, a married couple incurs twice the risk that either spouse may be affected, normally affecting both spouse’s financial assets.  The average cost of a nursing home in Massachusetts approaches $300 per day, with higher quality facilities somewhat more expensive, and while not all those receiving long term care may use a nursing home, the average duration of care lasts three years.    

A natural skepticism, if not outright aversion, exists toward insurance.  Insurance is an intangible benefit that most people consider a roll of the dice.  The bigger role of the dice is remaining without coverage.  The purpose of insurance, similar to options and derivatives when properly deployed, is to reduce risk.  Insurance transfers the risk of a major, potentially catastrophic expense to one that is predictable and affordable.  Doesn’t sound like a bad idea to me.

Like you however, I would also prefer not to pay any more for insurance premiums than absolutely necessary.  While other legal techniques exist for protecting assets against long term care expenses, many of these techniques are limited to certain assets within certain states.  In Massachusetts for instance, one can protect the value of their home from Medicaid liens for up to $500,000 by placing ownership title to a revocable living trust.  On the other hand, the only way to protect the principal value of certain financial assets is to use a Medicaid Trust.  The Medicaid Trust allows beneficiaries to receive all annual investment income, but no investment principal and no appreciation.  Effectively, the donor loses all future control and entitlement to these assets.  What if investment income is insufficient to meet retirement income needs, especially as inflation may likely require more income over time?  Furthermore, the Medicaid Trust cannot own qualified plans such as 401(K)s, 403(b)s, IRAs, or Deferred Compensation plans without triggering a potentially significant income tax event upon disposal to the trust. 

Medicare generally provides limited coverage for skilled nursing care (nursing home care) during the first 100 days after hospital arrival.  Otherwise, the patient must spend their own income and/or assets until the care is no longer needed or the patient qualifies for Medicaid, whichever comes first.  The patient (and spouse) must reach poverty status to receive Medicaid benefits.  For a single individual, other than a primary residence, the patient may own no more than $2,000 and keep no more than $100 per month from their Social Security benefits for personal expenses.  Four couples, while only the income of the ill spouse is counted toward the cost of care, the value of both spouse’s financial assets, including non-residential real estate, is includable as countable assets.  Generally, the healthy spouse may not retain more than $100,000 of assets other than a primary residence, unless more assets are required to arrive at a “Community Resource Allowance” of $2,500 per month for personal expenses.  Most retirees I work with have lifestyles well in excess of these amounts.  Besides, who wants to become a financial ward of the state?   Effectively, those who qualify for Medicaid have defined themselves as welfare recipients, and we all recognize how poor in fiscal condition our State and Federal Government have become.

So why consider long term care insurance?  Here are some compelling reasons:

1. For a healthy spouse to maintain their lifestyle during a family illness.
2. To maintain control of financial assets so they may be spent or utilized while physically and mentally able.  In other words, to enjoy your retirement!
3. To preserve assets for future generations.
4. To accomplish these objectives with the least financial intrusion – the payment of an affordable insurance premium.

If one qualifies as an interested candidate under these circumstances, when should long term care be considered?  First, those interested in purchasing long term care insurance must be insurable, that is, with no pre-existing medical conditions that may statistically predispose one to need long term care in the near future.   Otherwise, one may be resigned to consider gifting assets if affordable (while avoiding gift taxes or a reduction to their Unified Credit), Medicaid Trusts, or in emergency situation, the conversion of financial assets to annuity income for the healthy spouse.  While a healthy spouse’s income is not counted toward the cost of long term care, these assets must be irrevocably exchanged with an insurance company for the purpose of receiving lifetime income only.  Any residual payments to beneficiaries may be recaptured by Medicaid if long term care costs were not fully paid for.

Secondly, one must be able to afford the long term care insurance premium, and not necessarily the full cost of long term care expenses.  If one cannot afford the long term care premium from income or assets, then the person is more likely to qualify for Medicaid in the first place, and not require the insurance premium.  On the other hand, if one is able to retire, and/or has significant financial assets, but would otherwise be unable to sustain the full cost of long term care expenses for an extended time, such individual must purchase long term care insurance to ensure their financial security and/or preserve financial assets.  Unfortunately, many people who fall into this category (the mass majority of retirees) are the most apprehensive to buy, most often because they consider affordability as a function of their spendable income rather than their assets.   This is a bigger mistake than any typical investment mistake most people make, because as long term care expenses are incurred, their costs are irrevocable.

At the other end of the spectrum, those who can afford to pay the full cost of long term care expenses from income and assets have the discretion to self-insure, but may also consider using long term care insurance as an alternative rather than assume responsibility for that risk themselves. 

If financially qualified and medically eligible, one should purchase long term care insurance as soon as possible.  Many people may consider themselves too young for long term care insurance, as most events typically occur in later age, but the longer one defers this decision, the more expensive that premiums become, and if health changes, they may no longer remain insurable, or at best, may sustain even more expensive rates for their age.  By default, even without change to health status, I have never seen any applicant better off by deferring their purchase decision to a later date.  If calculated by life expectancy, each year a candidate waits to purchase long term care insurance, the higher total premiums they will pay for the remainder of their life.  That’s because annual long term care premiums become exponentially more expensive the older a person becomes before purchasing it.  On the other hand, while long term care premiums may increase for a risk group under contract (not per individual due to changes in health), most long term care policies are actuarially designed so that annual premiums are not expected to increase once coverage is approved and paid for.  Today, there exist some insurance companies who have never raised premium rates on their existing contracts.

Furthermore, while most insurance companies prefer to cover standard or better risks, some insurance companies also consider, even specialize, in substandard risks.  Therefore, it is always a worthwhile exercise to shop for coverage, if only to determine insurability.  By working with a knowledgeable financial advisor who serves as an independent agent for many carriers, you may customize a program that best fits your specific needs.

To summarize once again, when should one consider purchasing long term care insurance?

1.  When one has sufficient income and/or financial assets at risk.
2. When one is otherwise able to retire, can afford the insurance premium, but cannot afford the full cost of long term care for an extended time.
3. When one is able to pay the full cost of long term care expenses, but would prefer to transfer this risk to an insurance company.
4. When one is medically qualified to purchase coverage.  If one has a more extensive medical history, check a variety of carriers who may be willing to offer coverage, or work with a financial advisor who is an independent agent who represents many insurance companies, some which may specialize in substandard risks.

…and how much should one purchase?  How much will it cost?  In addition to your age and insurability, the features and benefits you choose for your long term care policy will be significant determinants to its cost, so choose carefully:

First, be sure to avoid any unnecessary bells, whistles, and frills that benefit the insurance company more than you.  Examples include return of premium riders, paid up benefits for the surviving spouse in the event of the first spouse’s death, reduced paid up coverage for unintentional lapse, restoration of benefits coverage, indemnity riders (flat benefit payout rather than re-imbursement for actual expenses incurred).  The first four riders are additional coverage that provide little extra in the way of basic benefits, and should be avoided to maximize the utility and economy of your policy.  Insurance premiums will also be lower for those policies that pay a re-imbursement of expenses up to a daily or monthly maximum benefit.

The less that is purchased in the way of riders can be used to buy more raw coverage that pays daily benefits for actual care.  Most policies have a daily benefit maximum that can be selected anywhere between $50 and $400 per day for nursing care, assisted living, home health care,  or care provided at an adult day care facility.  Different benefit durations may also be selected ranging from two years to lifetime.  The benefit cap is determined by multiplying the daily benefit limit by the selected benefit period, so that is the daily benefit limit is not reached for a period of care, the remaining amount may be deferred beyond the benefit period and used later.  Most importantly, be sure to choose an inflation rider so that the daily and total benefit amounts will increase along with the rates for care.  This feature is especially important for younger applicants who may not make claims on their policies for many years, if not decades.  Lastly, a modest deductible period can reduce policy costs as the insured assumes responsibility for care during the first 30 – 365 days.  Often times, a portion of this care may be subsidized by Medicare, or if not, remains an affordable co-pay by the insured.  Once this deductible period has been met, it normally no longer needs to be achieved for future policy claims that may arise.  Normally, a waiver of premium will be sustained for as long as the insured is collecting benefits and the deductible period has been met.  Since home health care may often be less expensive than full time skilled care received at a nursing home, the policyholder may also select a lower daily benefit percentage for home health care, thereby lowering policy costs even further if desired.

In some cases, it may be more economical for a couple to have a shared plan rather than two separate policies.  This is especially true of older couples whose rates are more expensive.  Since it is more likely that one rather than both spouses may eventually require care, the benefit period selected on a shared plan is more consistent with that likelihood.  However, the total eligible benefits for both spouses will be less than separate plans with the same benefit period available for each.

Ultimately, the amounts selected for daily maximum benefits and duration of benefits is a personal matter, but should ideally be dictated by risk exposure and premium affordability, along with personal choice.  How much coverage one buys will be determined by these preferences and constraints.

As with other financial decisions, a number of factors may influence the outcome.  Also be sure to consider the carrier ratings from the insurers who may offer coverage.  It is equally important that any carrier have significant assets to pay claims, with sufficient reserves to insulate against unexpected losses, either from poor economic conditions or higher than expected claim rates.  That said, there are many reasons to consider using a financial advisor who is well versed in the area of long term care insurance to help ensure you have covered all the bases with your financial plan.

Be well!

Neil Gendreau, CFP, ChFC

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