Some Thoughts On Long-Term Care Insurance

Overview

For many persons, estate planning also includes planning for the possibility of long-term health care.  Nursing home care is expensive (even though rural Kansas has some of the lowest costs in the country, it can still exceed $5,000/month in those areas) and can require the liquidation of assets to generate the funds necessary to pay the nursing home bill unless appropriate planning has been taken.  How will that expense be funded?  Medicaid is one option.  That’s the joint federal/state program that pays for long-term health care in a nursing home.  To be able to receive Medicaid benefits, an individual must meet numerous eligibility requirements but, in short, must have a very minimal level of income and assets.  States set their own asset limits and determine what assets count toward the limit.  Assets exceeding the limit must be spent on the applicant’s nursing home care before Medicaid eligibility can be established.

Another option is long-term care (LTC) insurance.  I get numerous questions concerning LTC insurance.  That’s the topic of today’s post

LTC Insurance

Why not much usage?  Like many other industries in recent years, the LTC insurance industry has shrunk dramatically in terms of the number of companies that issue policies.  Compared to about 15 years ago, there are only about one-tenth of the number of companies that presently sell LTC policies that were doing so then.  Relatedly, annual sales have dropped.  The result is that roughly 10 percent of the U.S. population has some sort of long term care plan in place.  What I mean by that is any type of plan – LTC insurance or otherwise.   Of those 10 percent, LTC insurance would be a component of only a portion of them.  So, the point is that LTC insurance is underutilized.  Why?  Well, LTC insurance suffers from a fundamental problem – those that can afford it don’t need it and those that need it can’t afford it!  For example, the annual premiums for a couple around age 60 can vary widely anywhere from $1,700 to over $3,000 depending on the type of policy and type of coverage obtained, and the particular state.  That’s a tough amount to swallow for many people.

How much coverage to get?  It’s also hard to predict how much coverage is going to be needed.  Women typically need it longer than men – about a year and one-half longer so says the U.S. Department of Health and Human Services.  If long-term care will cost $75,000 annually (and that’s a conservative estimate), then at least a benefit totaling $150,000-$200,000 is probably necessary as a minimum.  To get five years’ worth of benefit coverage, that would indicate sufficient premiums should be paid to get about $400,000 worth of benefits.  That could push annual premiums to $5,000 year for that couple near age 60.  Why five years?  That’s the present ‘look-back” period for asset transfer without adequate consideration.  The value of transfers outside that window aren’t deemed to be available to the transferor for Medicaid eligibility purposes.  But, keep in mind that the average nursing home stay is slightly less than a year for a male and about a year and one-half for a female (based on some recent studies that I have seen).  But, that’s only an average.  So, maybe a good rule of thumb is to price a policy based on 2 and 4 years of coverage.   

Custodial care.  LTC insurance doesn’t only deal with medical issues.  It also can be used to pay for daily assistance with common tasks such as bathing and dressing.  It’s this “custodial care” dimension that many people will find necessary as they age, whether or not they are in a nursing home.  Thus, LTC insurance can be used to plug a “gap” between Medicaid and Medicare.  Medicaid can cover institutionalized care, but only after resources have been depleted, and Medicare won’t cover custodial care.  So, unless a person has family or friends or is self-insured, there will be a need, but perhaps no way to pay for it while simultaneously avoiding disposing of assets to come up with the funds to pay for custodial care.  That’s a tough spot to be in.  LTC should be looked at as one possibility in that situation.      

Peculiarities of policies.  It is possible that some of the LTC policies will discount the premium cost if a couple buys the policies together as a package.  Also, watch what the policy says about how you can use the benefits.  Do you have to use the entire monthly benefit, or can you use only a part of it and private pay the balance and stretch-out the coverage?  Some policies will allow that, but others won’t. 

Another detail to look for in a policy is whether premiums can change and, if they can, whether you will be notified of when that will occur.  The last thing a person wants to have happen is to pay on a policy for a number of years and then have the premium go up to an extent that they can no longer afford it and they drop the policy as a result.   

It’s also a good idea to analyze any particular policy on the basis of whether it is an indemnity plan or a reimbursement plan.  An indemnity plan basically means that the insured will get paid a cash benefit that is the same thing as the daily benefit.  On the other hand, a reimbursement plan pays the full daily benefit when the actual cost of care either equals or exceeds the daily benefit.  Which type of policy is more desirable?  Again, it depends.  Cash benefit policies cost more, but they do give the policy holder greater flexibility in paying a family member to provide care.  To some people, that is in important option to have.

Another question to ask of the insurer is how the policy works if nursing home care is required and the policy holder returns to their home at some later point.  It might be that the benefits paid out to cover the nursing home bill will reduce the available benefits if the insured has to go back to the nursing home at some later point in time.  That may not be the case, but it is worth knowing what might happen.

From an economic standpoint, examine any given policy to determine if there is inflation protection built in.  Nursing home costs will go up.  Will the policy benefits also increase?  If there is built-in inflation protection, how much does the premium go up?  Can this issue be addressed by delaying payment of benefits under the policy once institutionalization occurs?  That might be possible.

Conclusion

As an investment, LTC insurance is probably not at the top of the list of the good ones.  If it is purchased early and there is no pre-existing condition, and benefits are triggered early on, then it can turn out to be a good deal.  But, a person could be better off simply setting aside funds every month in an investment account that is earmarked as being set aside to cover long-term care costs.  That’s particularly the case if benefits under the policy won’t be used for some time in the future.

Whether or not to obtain LTC insurance is a difficult decision.  There are numerous things to think about, and some of those involve predicting what might happen in the future.  How clear is your crystal ball?