What Is Long Term Care?
By definition, Long Term Care (LTC) is the type of custodial care needed when it’s agreed upon by you, your doctor and the insurance company that you need assistance with any two of the activities of daily living (ADL’s) or have a significant cognitive impairment. What are the six ADL’s? Think of what you did unassisted when you woke up this morning. You (1.) dressed, (2.) bathed, (3.) went to the bathroom, (4.) had maintained continence, (5.) ate, and were able to (6.) transfer from bed to chair, chair to car, etc.
A cognitive impairment is when you’ve lost a substantial measure of mental capacity or abilities, which could be due to a stroke, an accident, dementia, Alzheimer’s, etc. Cognitive issues alone, no matter what one’s level of competence with the six ADL’s, can qualify you to receive long term care insurance benefits.
It’s important to differentiate between long term, or custodial care at this point and health care. Health care is skilled care, typically to treat illness or disease or to repair a person after an accident. It’s typically restorative in nature, designed to heal you, to bring you back to full health or as close to it as possible. It involves doctors, nurses, hospitals, medicines, prescriptions, etc., and is covered by your health insurance. Again, its goal is for the patient to get better. And cost increases are far outpacing inflation.
The long term care provided by LTC insurance care is not necessarily designed to be restorative in nature. Instead, it’s custodial, meaning that it’s long term in nature for conditions that you need assistance with and which may, in fact, never get better. It can vary in length of care needed in hours per day, days per week, weeks per month, etc., can end after a time but can also continue for years or to the end of one’s life.
It can be very hands-on care, very hands-off care or even care that’s supervisory in nature. It may follow a hospital visit or a hospital may have never entered into the picture. In your home, if that’s where you receive your care, and there are many venues where a long term care insurance policy will allow you to receive covered care, it’s typically provided by CNA’s (Certified Nursing Assistants), or nurses. Costs for custodial care grow at a much slower rate than health care costs and clients should be careful not to confuse the two.
I’ve shared the clinical definition, but I’d like to you think for a moment about that person or persons you thought of if you answered “yes” when I asked if you knew someone who’s been in or is now in a “long term care situation.” Re-read, if you need to, the questions I asked about who needed care, how it was provided and funded, the impact it had on the family, etc., and answer them to yourself as honestly and completely as you can. Then consider this definition, paraphrased, which I learned from a superb LTC trainer, Harley Gordon:
“Long term care” is not a condition, a policy or a place. It’s a life-changing event brought about by a physical or cognitive impairment severe enough to compromise you to the point that you’re no longer fully functional or fully safe. And without a plan in place, then those who love you—your spouse, your children, maybe even your friends—would have no choice but to put part of their lives aside, step up and provide that care, even at the risk of their own physical, emotional and financial damage.”
Think about the person or persons you know that are in that long term care situation. Does this definition ring true? Did you note the term “compromised?”
Where Can I Receive Care?
Policies have always differed company to company and often in some interesting ways, especially in the start-up days of LTC insurance. In the early days of LTC insurance, policies were built with nursing home stays as the primary focus and many were even marketed and sold as “nursing home insurance.”
To aid in policy design, considerable time and energy went into studying how long people spent in nursing homes before passing away, with some studies actually sophisticated enough to differentiate between mens’ stays and womens’ stays. And with that emphasis on nursing homes, policies were further designed to pay benefits at 100% for nursing home care, but some reduced figure if the client received care anywhere else, such as in their homes. Today, those ratios would be almost reversed since nursing home care is now a much smaller slice of the LTC pie.
Moreover, companies finally came to realize that with so much happening in the long term care planning world, trying to measure the average length of any care venue’s claim is slippery business, which reflects now in the way policies are designed nowadays.
Having said that, the industry somehow manages to continue to do a very good job of providing a true value to clients while managing to stay in business itself, although many companies have left the LTC insurance arena. Those companies providing LTC insurance are trying to hit a continually moving target that regularly changes the average age of applicants, which, by the way is getting younger all the time, and must factor in rising care costs at different client ages and venues while maintaining premiums at affordable levels. Life insurance has it comparatively easy; we pretty much know how long a person will live once the medical underwriting is done and dying is all the life insurance company has to account for.
The LTC industry, though, must cope with constantly changing “length of claim” figures—for example, think how just the increasing numbers of early-onset dementia cases can skew previous assumptions, advances in medical treatments prolonging life, sociological shifts in where people want to receive their care and more–and must do so while competing in the marketplace against other LTC insurance companies and whatever products, features and benefits they roll out.
Naysayers notwithstanding, and we’ll look at objections and issues in a later chapter, the LTCI industry as a whole has done a pretty good job in a difficult environment of serving our aging population.
Nowadays virtually any policy you choose today will pay up to 100% of stated monthly benefits in virtually any venue that can provide long term care. This wasn’t always the case and represents a major step forward in the evolution of long term care policies after the mid-decade shakedown and shape-up of companies and their policies. Here are the venues covered at 100% by virtually every LTC policy today (but please ask about any particular policy you may be considering):
Home care is exactly that: care received at home while you live at home. Once a claim is filed, a plan of care is determined by the insurance company and the client, with or without family or Power of Attorney assistance. Today, more people on claim opt to stay at home for as long as possible, which is often through the entire duration of their claim or until they pass away. Care is typically provided by home health care professionals such as nurses and/or a qualified Home Health Aide such as a CNA. The pay is usually hourly and can range from an hour a day once a week to 24/7 care.
Adult day care
Similar to children’s day care, adult day care will typically take daytime care of an adult who’s in a long term care situation either for ADL assistance or cognitive issues. These facilities normally operate during standard working day hours and provide meals, med management if necessary, activities and socialization. Some even bathe their patients upon request.
Adult day care facilities meet a growing need in today’s world where often, both the caregiver husband and caregiver wife work. And adult day care facility allows the family to safely place their loved one who needs care in a safe and supportive environment so that the family can go to work or even just take a day or even a few desperately needed hours off from providing care themselves. Depending on the facility, transportation to and from may be provided. Costs are set on a per-day or per week basis. We’ll look at costs for every venue in a later chapter.
This is residential care provided in a live-in facility and can be in a private or semi-private room. There are activities, meals, outings, entertainment, etc. A long term care policy can pay the monthly charge, but prescription medicines, doctor visits, etc., are part of health insurance and will cost extra, although the assisted living facility will manage daily medications for their clients.
Assisted living facilities are definitely not for those who may be flat on their backs, but who for the most part are ambulatory, but need help with their ADLs. Most assisted living facilities also include a memory care unit for patients with cognitive issues such as dementia/Alzheimer’s. Assisted living facilities usually feature dining rooms, libraries, places to socialize, do crafts, gardening and more. The primary difference between the clients of an assisted living facility and the clients of a nursing home is typically a matter of degree of care needed and the level of abilities of the client. It’s generally accepted that they’re the fastest growing commercial venue for LTC and a look around most cities and towns at their proliferation would support that notion.
Nursing homes provide that higher, skilled level of around the clock care and are typically viewed as the final facilities-based care for clients who are not facing death in the near term. Women typically outnumber men in nursing homes by a growing three to one margin. The ‘room and board’ of a nursing home can be covered by long term care insurance; doctor’s visits and medications are covered by health insurance or Medicare.
LTC insurance policies cover this end of life care, which can take place in a hospice facility or in a client’s home.
What Does Care Cost?
In the United States, almost $725 billion is spent every year on long-term care (Source: Statisca.com: Distribution of long-term care financing in the United States as of 2013, by payer (in billion U.S. dollars)). It breaks down as follows:
- $7 billion: Private LTC insurance
- $10 billion: Veterans, state and local programs
- $63 billion: Families’ out of pocket costs
- $64 billion: Medicare post-acute care
- $130 billion: Medicaid
- $450 billion: Unpaid family caregiving
In a more perfect world, the first and last statistics would be reversed and not with the purpose of enriching insurance companies. The damage inflicted on family caregivers in our society by that $450 billion in unpaid family caregiving, in terms of stress, heartbreak, physical and emotional exhaustion, loss of income, freedom and rending of family relationships is enormous. The ability to pay for care is not only a blessing but a prudent move in both family and financial reckonings. If that is indeed the case, here are today’s costs across the full spectrum of venues.
Most major companies perform an annual cost of care survey across those care venues. Here’s some data from the Genworth’s 2016 Cost of Care Survey, conducted by CareScout®, April 2016. This information was taken directly from their website and is viewable by anyone.
But before you dig in, recognize that these are only the financial costs one could have to absorb if there’s no plan in place and care is paid care. An equally negative impact is felt by the caregivers, who face various, sometimes devastating and usually unexpected negative effects of having to step up and provide care for a loved one. We’ll examine some of those effects after we look at the financials.
- Home Care: based on a 44 hour work week for a Home Health Aide, the annual cost for home care surveyed is $45,760 or $20.87/hr.
- Adult Day Care: 5 days per week: $17,680. The national median daily rate is $68.
- Assisted Living: based on 12 months of care, one private bedroom: $43,539. The national median monthly rate is $3,628.
- Nursing Home: semi private room, annually, $82,125. This equates to approximately $6,750 per month or $225 per day. A private room, $92,378, or approximately $7,698 per month or $253 per day.
If you have a financial adviser, he or she should be fully cognizant of these full retail figures, because if an event occurs, it will obviously have a direct impact on how the retirement plan moves forward. If not, feel free to share them and inquire what plans he or she is building in should you require the services of any of these venues.
In the United States, almost 725 billion U.S. dollars is spent every year on long-term health care. It is estimated that around 450 billion U.S. dollars of that is unpaid family caregiving.
What’s the best way to pay for care?
If clients and their insurance agents or financial advisers understand the issues and risks, they eventually have to face one inescapable question: If we don’t plan for it now, when our clients are younger and healthier, where will they find an extra $3,000, $5,000 or even $10,000 per month for a possibly a period of years, maybe midway through retirement? So the question then becomes how to pay for care and there are, in fact, several legitimate ways. There are also some terrible ways. Perhaps the best way to address this issue is to look at some misconceptions still prevalent today.
“No need to pay for care: my spouse will take care of me.”
People who say this have no idea what they’re sentencing their spouses to; if they did, they wouldn’t make such a cruel and uninformed statement. Because the fact of the matter is, if one spouse has a long term care event without a plan in place, their lives won’t end, but their spouse’s lifestyle will, and the change will not be positive. I’ve had eyeball-to-eyeball conversations with couples and their financial advisers, generally directed toward the husband, that ultimately had to go like this. And I meant every word:
“Bob, here’s the bottom line, which I’d like you to strongly consider: If you had a catastrophic event today or if you become disabled in retirement without a long term care plan in place, the fact of the matter is that you’d get the care you need–you would. But unfortunately, the person who’d be providing that care is sitting right next to you. You’ve been married to Martha for 35 years and should something happen to you, she will do everything in her power, at whatever age this happens, to take care of you. And she will do it to the point of physical and emotional exhaustion or until she crumbles under the effort.
You see, Bob, study after study has shown that if you’re not a caregiver by profession, trained in how to do this work– knowing how to manage a patient through all the physical, emotional, logistical and even financial ups and downs of his or her day, knowing how to manage meds, meals, laundry, attitudes, emotions and more, not to mention her own ongoing life–then caring for the chronically ill makes that person chronically ill themselves. You and I will statistically pass away before our wives, but if we do so under this scenario, she’ll be left physically and emotionally exhausted, less money than ever anticipated, probably needed care herself with no plan for her. And in that timeframe where she was your hands-on care provider, I promise you that the family dynamic and your relationship will have changed.
Wouldn’t you rather have her, should this event strike, as your care director rather than your hands-on care provider? So that you’re still peers, still equals—still companions? And wouldn’t it be better to know that if something happens to you, or to her, that her care is already paid for?”
That conversation generally, but not always, leads a stubborn but intelligent man to a better-thought-out solution. And when it doesn’t, it can lead to the next bad decision:
“My kids will take care of me.”
When I hear this one, I always think to myself, “Really? Have you asked them?” There are several reasons why this is a poor assumption, let alone a poor choice.
First, families are different nowadays. At seminars, I ask who has kids and when they raise their hands, I ask them where their kids live. Why? To point out clearly that nowadays, people don’t tend to live in or around the same town they grew up in. My siblings live in Minnesota, Arizona, South Carolina and overseas. And changes in family dynamics aside, do you really want to ask your adult son or daughter to put their lives on hold and move back in with you? Or you with them? Do you feel comfortable with them assisting you with some of the more personal aspects of care?
Do they have the financial wherewithal? The skillset required? The desire and temperament required? What impact would taking on the additional role of caregiver have on their own families? Having a long term care plan alleviates this potentially prickly, to put it mildly, situation.
I was privy to a story recently. Four adult children of a widowed mother were gathered in the mother’s home. Their mother was in the hospital after suffering a fairly severe stroke. The conversation at this gathering was of course, what to do about Mom and was punctuated with comments like, “I can’t take her,” “Well, I can’t take her either; I live three states away. Can you take her?” and the like. One child, referred to as “the nosy sister” by the woman who told me this story, went digging through papers and found an old long term care insurance policy that provided $3,000 per month in benefits. Now, this wasn’t a huge amount, but according to the storyteller, the sense of relief that went around the table that there was some measure of help available was real and palpable, no matter how things were destined to shake out. This widowed woman had planned…and it helped.
Bluntly, one choosing to rely on “family” to provide care if he or she has adequate resources available to insure somehow is at the least irresponsible and at worst borders on selfish. According to Senior Cost Index, Caring.com Caring Inc., September 2014, almost half (46%) of family caregivers spent more than $5,000 each year in caregiver costs while 33% spent more than 30 hours per week on caregiving. Adopting a cavalier attitude about something so serious is truly unfair to family members.
“My health insurance/disability insurance has me covered.”
As we discussed earlier, health insurance and long term care insurance are two different kettles of fish, as are disability insurance and LTC insurance. Health insurance is there to pay for restorative costs for acute or short term illnesses, including the medicines and doctor visits required to do so. Disability insurance is working-world insurance that pays you a reduced replacement wage, usually sixty percent of your current salary, if you’re injured while still working.
I’m sometimes asked if you can use disability payments for long term care expenses. How can one possibly do that? Disability payments are now your new and reduced salary, the same salary that you’ve been using to pay your mortgage, rent, buy groceries, etc. How can you pay for long term care expenses and still put food on your table? In short, a long term care event is an added expense that is not covered by health insurance or disability insurance. In addition, most LTC insurance policies allow dollars for home modifications, medical alert systems, etc., that health insurance or disability insurance do not.
“Well, then, the government…”
Actually, there is a little bit of hope here. Long term care was not written into ObamaCare requirements—they just couldn’t make the numbers work—but Medicare, if you’re enrolled, will
- a) consider paying for long term care expenses b) following a qualifying hospital stay c) if you are
leaving the hospital to a skilled nursing facility and d) will pay for a period of up to 100 days only and then e) on a declining scale over those 100 days. It’s worth noting that many of the leading reasons that people need care, including Alzheimer’s, do not require hospitalization or skilled care. So Medicare as a go-to is just not a viable answer.
Then there’s Medicaid, which is state-funded and designed to be medical care for the indigent, but can help pay for nursing home care (only) in a state-selected facility, most likely not in a private room and then only after you’ve spend down your assets, by law, to the poverty level before you become eligible for benefits.
People say this meaning that they’ll pay themselves, which actually isn’t insuring. Insuring means joining a large number of people paying (small) premiums to spread the risk, then shifting the (large) payment burden to the insurance company when the triggering event occurs. “Self-insuring” shifts nothing, so it really means, “I’ll take on 100% of the risk and if something happens, I will pay for all of it, no matter how much it costs. Even if it bankrupts me and eliminates the retirement goals of me and my family.” So self-insuring isn’t insuring—it’s betting that your assets will hold out and that you can still maintain the lifestyle you and your spouse have planned for.
“But,” argues the client (or worse, the adviser), “I have a million dollars in my portfolio. Surely that will cover everything.” Well, it may well, except for your living expenses and retirement goals. Consider this: you’re in retirement so there’s no work income, meaning your million dollars and how it’s invested is the sole generator of your income. In a pretty good portfolio nowadays, a million dollars represents about $50,000 in annual income and that income has to last you and maybe your spouse the rest of your lives.
If the worst does happen and you end up in a nursing home for a few years, you’ll still probably have a real home with monthly living expenses and thus will begin depleting your principal by nearly a hundred thousand a year. After you politely pass away, your spouse now has only thirty-five or forty thousand in income to live the rest of his or life with and by the way, no plan for long term care for him or her.
A million dollars is a great thing, but as an income generator that must literally last forever for you, it’s $50,000 this year and every year.
In the introduction, you learned that LTC planning is the responsibility of this generation of advisers and this is why: remember that statistic about reaching age 65? It was that there was a 70% chance of having to pay for care at some level before you pass away. No matter what vehicle your retirement income is housed in, whether an IRA, 401k, a diversified investment portfolio or savings account or whatever, there is no greater risk to portfolio survivability than a long term care event. The market can only diminish it and even your death won’t hurt it; it’ll only cause its ownership to change. An unplanned and unaccounted for long term care event, however, can take it all.
And where the risks that created the need for some other financial products, such as life insurance for example, typically go down in retirement (you’ve paid off the house, kids are grown, retirement income pretty well set, so no risk of lost future income), the risks of and costs associated with a long term care event actually go up every year—in fact, every day that you’re in retirement.
The Ideal Solution: Shift the risk to an insurance company
If one can afford the premiums, there is no better way to protect future income and the assets generating that income, especially in retirement years, than a well-designed long term care insurance product for those who qualify age-wise and health-wise. In the next chapter we’ll take a high-level look at the pro’s and con’s of each type.
What Kind of Policies Are There?
Although some variations exist, there are really just two types of LTC insurance policies: Standalone, or traditional LTC insurance policies and life insurance-based LTC insurance policies of various ilks, sometimes called hybrids or linked-benefit policies. Given that LTC policies of all types are in a slow but constant state of change and improvement, the descriptions here will be fairly general and may change at any time. They’re complete enough, however, to help you initiate a discussion with your financial adviser or insurance agent. And at the end of this book you’ll find my email address if you still have questions.
Traditional LTC Policies
A traditional policy is one that is purchased for the sole purpose of providing money to pay for care should a long term care event strike. It is not associated with disability insurance, life insurance, medical insurance or any other type.
It’s characterized by recurring premium payments, benefits that grow over time and riders and discounts that provide strong benefits to spouses and partners if they insure together. Traditional LTC policies are offered by various companies including John Hancock, Genworth, Mutual of Omaha, TransAmerica and more. Men and women at the same age pay different rates—women higher—and policies are typically sized and priced by deciding on four variables:
- Monthly (or Daily) Benefit. This dollar amount, typically ranging from $1,500 to $12,000, is the monthly amount an insured would have available to call on to cover LTC expenses in the event of a claim. The range is large for several reasons, among which are geographical differences, existing assets that can be dedicated to care without disrupting the retirement plan, adding on to an old policy that lacks features but is still worth retaining and more.
All things considered, a typical monthly benefit selected for a typical client nowadays is usually between $3,000 and $7,000 per month. Note that this benefit will grow in time due to Variable #4 below, but for now, let’s use $5,000/month as an example.
If a client had $5,000 per month to call for LTC payments, then over the course of a year, he or she would have access to $60,000. Now—from Chapter 4, we learned that a nursing home can cost $94,000 per year; $60,000 falls short. True, but consider that 80% of care today is much less expensive home care. Plus a typical client will have Social Security and perhaps investment income. For many people, this is a good strong number but they’re free to go higher or lower, which will in turn, affect the cost of the policy. That leads to the second variable:
- Benefit Limit (the “number of years” multiplier). That $60,000 is what can be called upon in a year, but LTC events typically take place over more than one year. What’s the magic number of years? Well, that’s one of those moving targets that are constantly changing.
Often even experienced advisers and agents try to base it on the shifting averages of nursing home stay time, but this is immediately subject to question: why base your multiplier decision on a factor that only represents a small number of claimants? So in point of fact, choosing the multiplier typically becomes a budgetary issue.
Typically, the choices of a multiplier are typically 2,3,4,5 and 6 “years.” Here’s how it works using a sample 4-year multiplier:
$5,000 x 12 = $60,000 per year available
$60,000 x 4 = $240,000
This $240,000, is called the Policy Limit and is often referred to as a “pool of money,” which in this case is available from the day the client is approved, accessible at up to $5,000 per month. Note that if all $5,000 isn’t used in any given month while on claim, the rest remains in the pool to grow and to be used later. Thus it’s a bit misleading to call the multiplier “years.” For example, if one only used $2,500 per month, it would last eight years, not four. Remember that the money lasts as long as the money lasts based on usage up to the $5,000 per month selected. And that money grows in accordance with variable #3.
- Inflation Factor.Costs, including custodial care costs, are always on the increase. To keep pace with inflation without increasing the premium, today’s traditional LTC insurance clients select an inflation factor as part of their policy design. It’s built in because as large or small as this sample $240,000 may seem today, it will lose purchasing power over time, especially given that it may be years down the road before the policy is called upon.
So an inflation factor is chosen, typically 5% or 3% compound. The mechanics are simple enough; each year, the monthly benefit is increased by the inflation factor, which in turn grows the annual amount available and thus the whole pool of money.
We’ll illustrate below but it’s important to point out that his is an important factor in pricing your policy. In today’s sustain low-interest-rate investment environment, paying out 5% compound is very difficult for conservatively invested insurance companies, so 5% compound is priced accordingly: very expensive. The majority of clients today choose 3% compound. Here’s how it works:
After the first year of the policy, the $5,000 (in this case) monthly benefit is increased by 3% to $5,150 and thus the pool of money to $247,200 ($5,150 x 12 x 4 = $247,200). This repeats next year from this larger number and every year thereafter. After 20 years, for example, the monthly benefit has grown to $9,031 and the pool of money to $433,469. Again, this is designed to happen automatically, without a corresponding increase in premium.
- Elimination Period. The last feature chosen is the elimination period. This is the period of time, expressed in days, for which the client agrees to be responsible for his or her own claim. Elimination periods exist as an effort to hold down frivolous claims and thus hold down insurance costs across the board. They also help the client design a policy that fits within his or her budget.
Choices are typically 30, 60, 90, 180 and 365 days, with 90 days being the de facto industry standard. Choosing a longer elimination period (“I’ll pay my own bill for a whole year.”) would create a less expensive policy, where one in which the client wants the insurance company to begin paying after 30 days would be more expensive.
Upon applying, a client is typically visited by a paramed team member, who takes height and weight information, checks blood pressure and gathers doctor’s information and prescription medication information. They may, in addition, perform a cognitive screen in person or by phone. This information is then provided to the insurance company, who requests medical records and upon their receipt, if they’re complete enough, makes an underwriting decision.
Note that requesting and receiving medical records is an exhaustive and time-intensive process, now handled almost exclusively by third party companies. The entire process, from application to decision, is typically six to eight weeks, most of which time is spent awaiting medical records.
A check for some amount may or may not be required with the application. Traditional policies can typically be paid annually, semi-annually, quarterly and monthly, with carrying charges built in for any payment mode besides annual. And upon delivery, most policies feature a 30-day “free look,” which means that if they’re not satisfied, they can cancel for a full refund of premiums.
Advantages of Traditional LTC Insurance
Singular Purpose Because it’s designed for one mission only, traditional LTC insurance is usually portrayed universally as providing “the best bang for the buck.” Without a doubt, traditional LTC companies have the longest claims-paying experience and history. Product evolution and market forces have driven the lesser prepared or lesser funded traditional companies to other endeavors and as a result, today’s top providers are, for the most part, considered strong financial entities.
And again, because of its singular purpose, there is never a question of what financial professionals refer to as “suitability.” That is, is the product I’m proposing for this client suitable, given his or her age, goals, financial status, etc.? In a world where the Department of Labor has moved to requiring that financial advisers become fiduciary (client interests first, regardless of how it pays) in nature, this is growing in importance.
For example, it’s not “suitable” to sink 100% of the portfolio of a client just entering retirement into highly speculative stocks just to make a buck. That’s just too risky with no time to overcome any losses. Traditional LTC insurance is always suitable and typically allows lower, amortized premiums over time.
And finally, the singular purpose allows traditional LTC clients to keep more dollars invested in their portfolios than any other product. This opportunity is often overlooked by less experienced advisers.
Couple’s Advantage A clear advantage for traditional LTC vs. other life insurance based products is that policies can be linked together to take advantage of a couples’ discount and in some cases a “shared” rider option. This can mean that should one spouse/partner run out of money, he or she can tap into the other’s pool of money. And when one spouse passes away, their pool of money is immediately inherited by the surviving spouse/partner at no cost. Traditional is the only product type that leaves the pool of money to the survivor and many companies have found ways to build in return of premium options as well.
Cost Today, public opinion to the contrary, traditional is often the lowest-cost option initially and over time, with various premium modes available. This creates the added advantage of the opportunity to invest the difference in cost between other products.
Disadvantages of Traditional LTC Insurance
“What if I buy this and don’t use it?” This is the most-often-heard objection to traditional LTC insurance. While a fair question, since there is a cost involved, it’s also fair to note that this question isn’t heard about auto or homeowner’s insurance. We buy those hoping to never use them and statistically we won’t. The exact opposite is true for LTC in today’s world. Odds are we will use it and if we’re a couple, the combined odds are even higher that at least one of us will.
On the positive side, as more and more people experience their parents or peers needing care, not to mention as they observe the proliferation of care facilities, this objection has begun fading into obscurity and rightly so, since a long term care event for accident, illness or just old age is always closer than most people want to take the time to ponder.
In addition, many of the policies being sold today feature return of premium scenarios, the aforementioned shared care options and today, even premiums themselves going to zero in later years, which to a large degree assuages this concern.
“What if my Premiums Go Up?” The next historical disadvantage for traditional policies has been that of unplanned premium increases. While all policies will include verbiage that allows potential increases in the future, many LTC companies were for years loudly self-congratulatory that they didn’t raise rates. Until they did. And while the reasons that they did raise rates, including to existing policy holders, were legitimate, doing so in 2010-11 and beyond sent a shockwave through the industry, the general population, insurance salespeople and financial advisers that they’re only now recovering from.
Why did rate increases happen? And will they happen again? Note first that rate increases cannot by law occur for an individual based on his or her claims experience. This is unlike auto or homeowner’s insurance, where a person’s claim nearly always results in rate increase. To raise LTC insurance premiums, companies must raise rates on the entire group of similar policy holders and even then after each state examines the financial justification for a rate increase and approves it.
To understand why rate increases happened, it’s helpful to note that while life insurance has a 200 year commercial history, LTC insurance as a product is only about 30 years old. And in the days it was becoming a viable product, the driving question was, “How do we price this type of insurance? What data do we use?”
The first set of data was borrowed right from life insurance: how long were people living? What the designers didn’t know was that 30 years or so ago, lifespans were in the throes of that aforementioned “jumping out,” the large increase due to advances in medical science, better nutrition, etc. So the lifespan info input into pricing models was flawed.
Next they looked at lapse rates of life insurance policies. Lapse rates are a measurement of how many people buy policies but let them lapse for whatever reason without dying and generating a death benefit payout. These rates are important because they mean that premium dollars come in, are invested by the insurance company and money made, but a death benefit payout is never required, meaning those dollars can be grown and used for other purposes. There’s nothing wrong with that; it’s just part of the business model and that “free” money helps hold pricing down on everything else. Lapse rates ranged back then from 4 to 8%, based on the type of policy and the company. So LTC designers felt safe factoring those numbers in as well.
Estimates then had to be made on claims, based on what was observable in the world at that time, plus what was projected to occur ten, twenty, thirty, forty years into the future. Projections on rates of return from invested premiums also had to be made. From these inputs plus other internal company factors, policies were created, priced and put on the market.
As more companies joined the market, competitive forces came to bear and companies began competing in terms of product features and benefits. This was not always to the insurance carrier’s bottom-line advantage as they fought for market share. Features such as lifetime benefits, extended benefit periods (years) and overly generous rider terms and more were offered. And while all this was occurring, the financial world was entering a long term and still existing phase of sustained low interest rates, which had a negative effect on the returns conservative insurance companies could make.
These pressures all came to a head in the early to mid-2010’s as several factors became obvious. First, the original lifespan data were proving inaccurate: people were actually living longer than anticipated and thus calling on their benefits more often and for longer periods of time.
Lapse rates, planned at 4% to 8% were actually less than 1% for LTC, which meant that virtually no one was lapsing his or her policies. This meant less “free” money to invest and pay claims with and as mentioned, those claims were already larger than anticipated.
And finally, the sustained low-interest-rate environment in the typically conservative investment sub-accounts created another negative pressure on the industry’s overall ability to pay claims and stay in business. The standard inflation option for most policies written before 2010 was 5%, which in this low- interest rate environment and post-2008 equities market crash environment was proving extremely costly for companies already struggling with payouts. The bottom line was that the planned premiums could not sustain current and future claims payouts. So companies had to make some decisions.
Many companies left the industry, selling their policies, which will still be honored as will all existing policies, even from defunct companies. Those companies that chose to continue in the LTC arena had to make several often painful moves. The first was to go back to existing clients and let them know that regrettably, their premiums would have to increase. Some companies did this by simply raising the premium and letting the client take it or leave it; others offered a “landing spot:” pay an increased premium or keep the current premium but reduce benefits or the 5% compound inflation to a more reasonable 3% or thereabouts. Most clients offered this option took the reduced inflation option and retained their policies.
Going forward, there came an industry-wide tightening up of product offerings. Lifetime benefits were for the most part eliminated, benefit periods reduced, some costly riders dropped and more. Once the industry caught its breath, new product designs began emerging based on more realistic projections and with an eye on precluding future rate increases while holding costs down. Today, clients can find very reasonable policies designed for the future with strong benefits, return of premium options, even premiums declining to zero in later years.
So, where are we today with traditional?
There was a marked slowdown in the selection of traditional LTC policies in the mid 2010’s due to the uncertainty caused by inforce rate increases and the introduction, as a result, of many other product choices. The rebound of traditional has been slow, but has been picking up speed in the past two or three years as traditional companies have responded to market forces and customer perceptions.
But some companies are finding the uncertainties of claims too much to speculate over. John Hancock, only a year after launching a new product, announced that they were pulling out of the market as of December 2016. Existing policies would of course be honored, and the announcement had two results. First, a rush to purchase their new product as clients recognized they could take advantage of a policy that had value that would most likely never be seen again. And second, confidence was shaken in the remain traditional players, but to what degree remains to be seen.
What to watch out for
Assuming that traditional LTC companies have handled the potential rate increases, which really won’t unfold for years or decades if at all, then potential areas to watch out for will come from the actual construction of the LTC policy itself. Traditional policies are relatively straightforward, but eager or uninformed buyers can be oversold or can buy poorly assembled policies.
For example, some inexperienced advisors or agents may try to talk clients into fully funding the monthly cost of a nursing home in today’s dollars. The better ones do not. Why? First, because approximately 80% of all care being paid for today is home care, which is much less expensive. Adult day care and assisted living facilities constitute about 10% and classic nursing homes only represent about 10% of outlays. And in those nursing homes, women outnumber me by a large margin. So most clients are very safe finding an affordable middle ground given the slight odds of needing full nursing home coverage, and those odds are even less for men. Plus, clients will have social security, savings and investments and often, help from family.
Shared care may also allow clients to lower their overall benefits slightly since the odds of both exhausting their benefits before passing away are very small.
What’s another example of a poorly assembled policy? Admittedly subjective, but consider these different ways of creating, for example, an initial $180,000 pool of money:
$3,000 x 12 months x 5 years = $180,000
$5,000 x 12 months x 3 years = $180,000
Which provides the better value for the client? The answer, as I said, is subjective. The $3,000/month policy will be slightly less expensive on an annual basis; after all, the insurance company is on the hook for less each month. But imagine monthly a bill of $4,000. Under the first scenario, after learning about long term care, assessing options, finally buying a policy and paying premiums every month or even annually, this client would still have to come up with $1,000 every month to pay the bill, since the insurance company is only liable for $3,000.
With a $5,000 monthly benefit, the whole bill would be paid with money left over to grow and be used later, resulting in a much happier client. The number of “years,” is immaterial. The money lasts as long as the money lasts.
Aside from poor policy construction issues, traditional is usually the safest and most cost effective bet.
Life Insurance with Long Term Care Rider
Another way to potentially cover LTC is with a life insurance policy with a long term care rider, again offered by several companies and classified as 7720B in the tax code. This relatively new method of meeting a LTC need allows for an accelerated death benefit to be used by the insured while living in case of a long term care event. The Long Term Care rider typically provides mimics closely the benefits of a traditional policy, but does have inherent drawbacks that we’ll explore. Here’s how these products work.
Typically, a universal life insurance policy is purchased (LTC riders cannot be added to term policies).
This policy will have a defined death benefit or face value that’s payable upon death as long the policy is kept in force. According to Statista.com, in 2014, the average face amount of individual life insurance policy was $168,000 U.S. dollars, although these face amounts can range from $100,000 to over $1 million.
At purchase, a long term care rider can be selected, which would allow the death benefit to be used prior to death should a long term care event arise. The client selects at time of purchase the amount of the face value that can allocated to LTC purposes; typically 2% or 4% on a monthly basis. This creates a monthly benefit that can be used to pay for long term care expenses and which brings down the death benefit on a dollar for dollar basis if used.
For example, if a client purchased a policy with a face value (death benefit) of $200,000 and selected the Long Term Care rider with a 2% payout, then should a long term care event occur, the client could then call on $4,000 per month for 50 months or until the face value was exhausted. If the client had chosen 4% as the payout factor, the client could call on $8,000 per month for 25 months.
If not used for long term care, the death benefit is left to the beneficiary after the client passes away. Many people find this an attractive feature as it seems to overcome the “use it or lose it” objection.
There are disadvantages to this option, however. The first is the cost of the policy, which can be higher than a standalone LTC policy. Plus, the LTC benefit amount is the same as the face value, which is set in stone; there is no inflation growth, meaning that if the policy is not used for several years, the face value and thus the amount of monthly benefit available will lose ground to inflation and the client may find himself underinsured.
Also, if the clients are a couple, individual policies must be purchased with no shared care options available.
While this type of LTC solution is growing in popularity, primarily because of the “use it or lose it” objection to traditional, additional caution must be taken in terms of suitability. Insurance agents and advisers are already experiencing blowback due to the law of unintended consequences if due diligence is not undertaken in the needs analysis, best portrayed in the following true story:
I was asked by a financial adviser to a meeting in his office to discuss a long term care situation. As it turned out, I shouldn’t have been invited to this meeting, which the adviser should have known, but didn’t realize at the time. But maybe my being there was fate, because it pointed out to me early on the potential danger of the life-with-rider solution if a thorough needs analysis is not performed.
I went to the meeting and a woman was there. She was thirty-nine years old, a single mom and had a son in second grade. She wasn’t the client—her father was the client. Her father was 69 years old and had met with the financial adviser to try to find a way to help pay for this grandson’s college education when the grandson reached college age.
The woman’s father had decided he was too old to open a 529 plan (a college savings plan, similar to a 401k or IRA) so his plan was to buy a life insurance policy, thinking he would pass away before the second grader grew to college age and that the death benefit of $200,000 would help pay for his college. The adviser agreed, then with the best of intentions, asked if the client wanted to add the LTC rider. Not thinking much about it, the client agreed.
Not long afterwards, the client was diagnosed with Alzheimer’s and was now in a facility that at the time cost $6,000+ per month and had been there for well over a year. Here’s why I shouldn’t have been called to the meeting: the woman asked if she could now buy a traditional policy, which of course, since her father was not only on claim, but with Alzheimer’s with no chance of recovery, she could not. The adviser should have known that, but somehow didn’t.
But she went on to tell her story and I’m paraphrasing from memory: “I go in to see Dad every week. Most weeks he knows me, sometimes he doesn’t, but every time he knows it’s me, he takes my hand and says, ‘I’m in this awful place with this awful disease, but it’s okay. At least I got Jared’s education paid for.’ I don’t have the heart to tell him that that money is virtually gone. In fact, I was in this meeting to see what else of Dad’s we may have to liquidate.”
The lesson I learned there, as did that adviser, is that if there is a real insurance need and in this case there was: Jared’s college education; then adding the Long Term Care rider actually endangered that plan. Consider: if there’s a 70% chance that one will be making long term care payments just by reaching age 65, then adding the rider to a life insurance policy means that there’s a 70% chance that some or all of that need will get intercepted by a long term care event. And it’s not that this woman would have wanted her father not to have care. She was thankful for it but knew that now, some other method had to be found to pay for Jared’s education. The simple solution, since there was a true insurance need and a long term care need, would have been to separate the policies.
So, where are we with Life Insurance With Long Term Care Rider?
We’re still very much in the growth stage with this solution and sometimes it’s exactly the right choice. Its sales vs. traditional when long term care coverage is needed are almost solely due to the “use it or lose it” objection, which traditional is overcoming incrementally and more care will hopefully be taken in the future to ensure that cross-needs do not jeopardize each other.
What to watch out for
Due diligence: How vital is the life insurance need? Can it absorb the risk of a long term care event “intercepting” the life insurance need? If it’s the second or third policy or a large face value amount, this can be an excellent solution, but it all comes back to the tangible and intangible value and expectations associated with the life insurance needs, if any, of those policies. Even future needs that may develop around that policy years down the road should be taken into account.
The thing to remember is that unlike the sales jingle of “either way, you’re covered,” the more accurate statement is that, “one way or the other, someone may not get their needs met.” So if a true life insurance goal such as wealth transfer, education for grandkids, charitable legacy, etc., is linked to the life insurance policy, recognize the risk of solving for a long term care solution in this manner. It’s usually possible to separate the policies and buy stronger units of each, especially given the declining relative value of the pre-determined LTC benefit due to inflation.
Life Insurance with Chronic Care Rider
This type of solution is very similar to the aforementioned life-with-LTC-rider insurance policy. The main difference is in the nature of the rider itself. A long term care rider mimics the qualifiers for and benefits of a traditional policy with the exceptions noted above such as the lack of growth to combat inflation.
A chronic care rider is much the same but has two additional differences: first is the indemnity rather than reimbursement model of claims payment. Equally important is why chronic care riders cannot use the phrase “long term care” in any of its marketing, sales presentations or even sales literature: where with a long term care rider or traditional LTC policy, the doctor must agree that the event will last at least 90 days but may in fact end any time after that, to qualify to draw benefits from a chronic care rider, the doctor must document, and often reaffirm annually, that the condition “is likely to last the rest of the insured’s life.”
This means that many conditions that would be covered by a long term care policy or rider will not be covered by a chronic care rider, as I found out personally in the attempt to save money for a client when I was an adviser. Here’s that story:
In my newly-found desire to ensure that my clients were aware of and covered for a long term care event if possible, I found myself comparing products for a mid-50’s couple, relatively affluent, who rode Harley Davidson motorcycles. I looked at the various options and thinking they were more or less the same—I said this was a learning process—and was going to try to save them money by choosing a life with chronic care rider product. A fellow adviser, however changed my mind by telling me what had happened to a client of his. Also motorcyclists, his clients were on one bike, going properly through an intersection with full right of way when a car turned and broadsided them. Both were fairly severely injured and were laid up at home for nearly a year with caregivers coming in. But because the doctor knew they would recover, which they did, and would not classify this as a permanent injury, the rider would not pay.
Mild stroke recovery, physical complications from surgery and other conditions that could be covered by traditional LTC or a LTC rider will not be covered by a chronic care rider. This is not to say that there is not a time and place when this type of policy is not suitable, but the insurance agent or adviser needs to ensure that the client is fully briefed on the limitations this type of product has.
The advantages and disadvantages of this type of policy are almost identical to the life-with-rider policies: possibility of missed objectives, no inflation option, no state partnership, etc.
What to watch out for
If considering a life-with-rider policy, be sure you understand the difference between “chronic care” and “long term care.” And understand the difference between the “reimbursement” model and the “indemnity” model for claims payment.
Most advisers are not aware that while policies are constructed different ways by different companies, some feature differences between policy types are actually not choices the insurance companies are allowed to make; regulatory issues dictate by product type how some specific policy provisions must be administered.
In those cases, company representatives have no choice but to put the best spin on things–certainly understandable. A good example is our first benefit up for discussion: Is the claims payout indemnity or reimbursement?
From my own experience in competitive situations, here’s an example (again, not a quote) of how an indemnity company representative may present its best case:
“With us, your client will get the full value of the monthly benefit when he or she goes on claim. That is, if the monthly benefit is $5,000, you’ll get a check every month for that amount. You won’t have to bother with sending receipts in like other companies will require you to do. Paperwork is the last thing you’ll want to be involved with when a long term care event happens. We don’t require you send in receipts.
You get the full value of the insurance you bought, which by the way, gives you some great options because you can spend this money any way you want. You can pay your mom, your brother or the minister’s wife if she comes over to take care of you for a few hours, for example. You aren’t restricted to agencies only like with other companies. And if you need to widen a doorway or pull up carpeting so it won’t snag your walker, you’ll have the funds on hand to do that. It’s your money!”
While that sounds compelling, here are some reasons why those companies that had a regulatory choice moved from indemnity to reimbursement years ago.
First, dollars have purposes (a good phrase for many situations!). The purpose of the pool of insurance money is to secure long term care services for the client for as long as financially possible. Taking $5,000 per month whether the full sum is needed or not depletes the pool of money as fast as mathematically possible, which can mean that care may be cut off well before desired and well before what would have been available through a more favorable methodology.
Plus, there are limits of benefits usable without tax implications and more complications can occur if it cannot be proven that the full amount is used for long term care purposes. You may not have to send the insurance company receipts with indemnity, but saving receipts for potential audits is vital with this option.
In addition, since the early days of LTC when indemnity was much more prevalent, the care environment has suffered from fairly widespread abuse and fraud. Unscrupulous relatives, friends and others acting as “caregivers” have routinely pocketed portions of the incoming checks while providing less than professional-level care, if any, to the sometimes helpless insured. Many wardrobes have been enhanced and more than one swimming pool built with what should have been long term care money.
While much of this was eliminated by the enactment of the reimbursement model where regulations allow, it would be less than prudent to say that similar fraud does not take place today with the clients of companies and policies still obligated to operate via indemnity.
There is one other less frequent but equally unsavory practice associated with non-professionals providing care. When the pool of money was nearly depleted, some unscrupulous caregivers would feign injury while supposedly caring for the client and sue both the client for additional assets (“I got hurt on his property while I was taking care of him!”) and often the LTC company as well (although usually unsuccessful there).
With a reimbursement system:
- A plan of care with direct billing is typically set up with the professional caregiving agency selected; clients get copied on bills but don’t have to handle them directly unless they choose to
- Licensed caregivers with that real facility or home care agency are employed and are on the clock, which means a.) professional care, b.) properly billed and accounted for, c.) virtually eliminating that kind of theft and fraud
- The point of “properly billed and accounted for” alone should be the deciding factor for any advisor who has the client’s best interests at heart, emotional word-picture appeals featuring moms and “ministers’ wives” notwithstanding. The client is only billed for what’s used, leaving the remaining money in the pool to grow and be used later, typically resulting in months and even years more (professional-level) care available.
- Growing benefits are a feature of traditional, meaning that the monthly benefits and thus the pool of money are designed to grow and keep place with inflation. Most indemnity plans are with chronic care riders; that accelerated-benefit pool of money will still be the same years down the road.
Since dollars do indeed have purposes, I’m clearly in favor of the reimbursement system and consider it a far more responsible, accountable and fiduciary-minded way to do business. That is not to say that indemnity-based payouts are wrong or always abused, but the opportunity is certainly there for the unscrupulous.
Asset-Based Hybrid Policies
Disclaimer: If there’s any product that causes my personal preference for traditional to come to the forefront and park itself there, it’s probably the asset-based hybrid product. And I’ll freely admit that any prejudices I have came from the way my wholesaler kept presenting it to me and the objections it raised in my own mind, although it isn’t difficult to find better financial values in other products.
This type of policy was created and designed to directly counter the (fading) objection of “what if I buy this and don’t use it?” The primary vendors of this product are good companies such as Lincoln, PacLife and others. In their first iteration, these types of polices were single-premium vehicles (now you can stretch the payments out up to 10 years), where the client would make one lump sum payment of $50,000 or $100,000 or more, which would buy a large pool of money for long term care and then provide a death benefit if long term care was not used.
While this may sound similar to a life insurance with LTC rider model, its design centered on using the client’s “lazy money” assets to fund the policy up front, which buys long term care insurance as well as a small life insurance death benefit. Agents and advisers were coached to uncover this “lazy money,” identified as money sitting in low interest savings accounts or CD’s and “leverage it up” into the asset-based hybrid.
The advertising slogans employed by at least my wholesaler included, “Live, die or quit, your client wins either way!” and “You can have your money back at any time!” The “You can have your money back at any time!” was designed to be attractive to advisers and agents and thus to clients but was the sales jingle that actually peaked my interest—but not in the way desired by the hybrid wholesaler. But let’s continue.
This type of policy will provide a long term care dollars as well as a (small) death benefit if those long term care benefits are not used. And it’s convenient: once a single premium payment is made, the client typically never has to put another penny in.
Disadvantages: The most glaring disadvantage is the lost opportunity of investing the lump sum with an adviser, who can typically earn enough each year to pay traditional premiums and continue to grow past the initial amount invested, even in year one. And like with the hybrid, the client never has to put another penny in if the firm is set up to handle payments.
Using this methodology, this side account can now grow, with the client benefiting from compounding rather than allowing the hybrid company to do so with his money. By age 100 for a typical client, this “death benefit” account has paid the traditional long term care premiums and has grown to many times the amount of the hybrid’s death benefit.
In addition, while there is no inflation built into standard hybrid polices, clients can opt for 3% compound, but at a price: if you “want your money back at any time,” perhaps to handle a short term emergency situation, the client will typically pay a 20% penalty upon cancellation. It can usually be demonstrated that if the client wants his or her money back from the side account scenario, it can usually be withdrawn without having to drop the traditional LTC policy, since the annual payments are relatively low and with some policies, moving to zero.
To the cynical mind who hears the drumbeat of “You can have your money back at any time,” it looks as if the hybrid company is advocating taking the lump sum, investing it and earning the money the client could be making as long as possible. Then if the policy lapses, which is what “your money back at any time” requires, taking a 20% additional bonus. And to top it off, they never have to worry about paying a claim to that client.
An added consideration of the “money back at any time” scenario is if the client takes his or her money back, say, six years down the road, then solves his or her emergency and then wants back in. At this point, now years older, the lump sum will buy less insurance, assuming the client is still insurable healthwise. A traditional policy could conceivably have been kept intact, growing in value and benefits.
The last disadvantage, besides no shared care opportunities and no partnership opportunities, is that by handing over a lump sum to a hybrid company, a client is actually paying that amount of the claim himself, using his own money. The principle of insurance is paying a small amount to join a large pool of people who are shifting the larger risk to the insurance company. Given that many claims are satisfied at $100,000 or less, the client is often absorbing the entire risk himself while foregoing the opportunities described in the side account. In my opinion, while all companies must make money to stay in business, too many financial factors are stacked in favor of the hybrid company rather than being devoted to meeting clients’ needs with this product.
So while these policies are sold every day and will meet many of their policyholders’ needs, to this author’s mind they’re not the best solution. There is also the risk of losing the life insurance death benefit to a long term care “interception,” if in fact there is a legitimate life insurance need. And most advisors to whom I’ve pointed out the advantages of traditional and all its benefits plus the side account agree.
Who Should Buy Long Term Care Insurance?
By now it should be apparent that I’m a strong proponent of long term care planning. I firmly believe from my time as an adviser that everyone deserves a conversation about the consequences to portfolio and family of a long term care event.
As a wholesaler, I work with hundreds of advisers, some young and some old. And I’ve sat with many who’ll look at their client base and point some client out to me and say, “Yeah, I’m going to wait about two years before I talk to them about long term care.” Or, “I don’t think the time’s right for these folks yet. Maybe next year I’ll have that conversation.” Or, “I don’t talk to anyone about long term care til their annual review at age 55.”
All I can think of and eventually try to convince them of is, “Really? You’re going to wait and somehow time that conversation? You really don’t have that right.” No matter what our perception of their health, wealth or family situation, every client that even remotely qualifies deserves that conversation. Why? Because no matter how well wholesalers like your author, or advisers or insurance agents believe they know their clients we’re always working with imperfect knowledge.
We don’t really know where all their assets lie, whether as an adviser we’re the third one in the mix and the lowest on the totem pole at that, or whether they’re silently agonizing over their mother, who just went into a memory care unit in an assisted living facility and would jump at the chance to insure themselves if they knew how. This isn’t a subject to pick and choose who we talk to and when. We’re just not smart enough to leave people at risk by literally withholding information until we deem it the right time.
And if you don’t work with an adviser, information is readily accessible from your insurance agent, many of whom specialize in LTC products or from company websites if you’d like to explore online.
But is LTC insurance right for everyone? Actually, since you know that I believe in casting a wide net, it’s probably easier to ask who probably shouldn’t or can’t consider LTC insurance.
- I can’t afford the premiums Though there are some very cost effective policies out there and while most insurance professionals believe that some coverage is better than none, if buying LTCI puts daily expenses in jeopardy or precludes savings of any sort, then buying LTCI can probably wait til your financial situation improves. This means that you may end up in a family-dependent or Medicaid situation where your care is basic and your options are limited, but you will not be left destitute. But if it only means skipping a restaurant or the movies every now and then, strongly consider doing so.
- I Really Can Afford To Pay For Care Myself I’m often asked that old chestnut, “How much money would I need to have if I want to ‘self-insure?’” We’ve already discussed the misnomer that term is, but here’s my answer how to safely answer the question: If you have enough cash that you can cover the worst case scenario, a nursing home, for a slightly-longer-than-average-plus-a-bit stay, taking trending dementia into account—call it six years– and can do so without affecting planned retirement and/or legacy goals, then you can probably forego insurance. But why would you? If you could pay for your house if it burned down, would you forego homeowner’s insurance? If you could write a check for a new car from your savings…The point is, if you have lots of money, use some it wisely to fund a policy rather than bet it at full retail.
And why would one care about keeping goals financially intact if the worst case occurs? Because you may have a spouse that will continue with those goals or plans to hand money down to a beneficiary, charity, etc., after you pass away. And needing LTC yourself doesn’t necessarily mean you’re on your last legs. Many people on claim ate their steak dinner last night, visited their grandkids, had a glass of wine and more.
- My health or weight is precluding meEvery company providing LTCI can provide you in advance with a list of ailments or conditions that would cause your application to be declined. There is also a table of medications which if prescribed for you, would prevent you from obtaining LTCI. Proportionate weight to height are important and these tables are strictly adhered to. Note that in terms of your health, it doesn’t matter that you’ve just passed or failed life insurance underwriting; LTC underwriting considers some different criteria. And there are conditions that may not generate a decline themselves, but combined with other conditions may. Your adviser or insurance agent should “field screen” you, but underwriters make the final decision.
- I’m too old or too young Fair enough. Different policies have different age criteria for applicants which can range from 18 to 40 on the low end to 70 or 75 on the upper end. The age limits for a policy you’re considering are readily available and your agent or adviser will know them.
One takeaway from this chapter is that while you pay dollars for your policy, age and health are really the coin of the realm. Policies are more expensive as one ages and buying young always saves money vs. waiting and paying more. And you will never be younger and probably never healthier than you are today.
Dealing with Declines. Declined applications, mentioned above, do happen. I feel it’s important nowadays to appeal any decline if you feel your application was declined mistakenly. Why? One reason is that doctor’s records are not always accurate. Coding errors, entries made about minor issues that underwriters must take seriously by default—I’ve even seen information recorded in a woman’s records that should have been put in her brother’s records.
Now—like someone with bad credit who is unsurprised to be turned down for yet another credit card, if you’re declined and you agree, then so be it. Challenging a decline you know or suspect is legitimate is disingenuous at best, dishonest at worst and causes more work for everyone.
There is one scenario worth mentioning, no matter what type of policy is applied for because forewarned is forearmed. That’s the underwriting decision that approves one applying spouse while declining the other.
First, recognize that this is almost always an emotional time. Lots of feelings rear their ugly heads like anger, pride, shame, resentment toward the company denying them and a false sense of protectiveness. Plus there’s no more shared care or couples’ discount if it was a traditional application.
This often manifests itself as, “Well, if he/she can’t get it, then by golly, I’m not taking it either!” Wrong decision—never walk away from approved coverage if you can get it!
First, be logical: the reasons you applied for LTC insurance haven’t changed just because your spouse or partner has been denied. In fact, it makes it more important that they take it. Why? Let’s look.
If the wife is declined: Imagine the wife being turned down for health reasons and the angry husband then refuses his policy as well. Ten years later he needs care but now has no plan. Who has to step up and undertake that burden? The woman who already wasn’t healthy enough to begin with. Now she’s ten years older and has the extra burden of being a hands-on caregiver. Is it fair to put that burden on her if you could have taken the policy? Challenge the denial if appropriate to do so but take the policy!
If the husband is declined: If the husband is declined and both end up not taking it—the sad fact is that the husband will statistically pass away first, leaving the wife with no plan for herself and the distinct possibility of having to use retirement funds to pay for care instead of their intended purposes…when she should have accepted coverage when she was able to. Remember too that the reason her policy costs more at the same age is that women use LTC insurance at a much higher rate and for longer periods than men. Challenge the denial if appropriate to do so but keep the policy!
Also Consider, Mr. and Mrs. Client: If you change your mind in a week–or a month or a year–will you still be healthy enough to qualify? Things do change on a dime sometimes. Make the decision now that if this scenario occurs you will move forward with the approved spouse/partner while challenging the denial if appropriate to do so. Again, the axiom is, “ Never walk away from approved coverage if and when you can get it.”
So before any decision is reached that may cause you or your spouse to be placed in the role of caregiver, here are a few notes from Genworth about caregivers. They opened by saying, “Our survey respondents said that they appreciated the opportunity to care for their loved one and were proud to be able to do so. In fact, 83% of caregivers experienced some positive feelings.
However, their personal health and well-being are often negatively affected and the stresses of the situation can impact their relationships with family and friends.”
- 43% of caregivers said the LTC event negatively affected their personal health
- 41% experienced negative physical side effects such as depression
- Nearly 33% reported an extremely high level of stress
- 55% did not feel qualified to provide physical care
- 54% experience negative feelings as a result of caregiving
- 51% worry about the lack of time for themselves and their families as a result of caregiving
We also see impacts on income as people leave or change jobs to provide care, even move to other states, all of which impacts quality of life and can even affect social security payments later in life if income is diminished.