The Basics of Long Term Care Insurance

Long Term Care- A Primer

This article was written to be read from start to finish. However, the following index is provided for your convenience. Clicking on a link below will jump you to that section of his article. USBOOMERS thanks Geoff Legg for his review of this article for accuracy. This topic should be of interest to baby boomers.

Medicare Doesn't Do It

I bought long term care insurance for my wife and myself when I realized one thing. We have been saving and investing regularly for retirement. We have a dollar goal to be reached. But I watched my Dad and my Aunt go into an assisted living facility. Medicare does not cover assisted living. Medicare covers up to 120 days in a nursing home but only if the patient is improving. What did I realize? I realized that the single biggest threat to our retirement savings was the cost of long term health care.

I consider myself to be very responsible. If I need to go into assisted living or into a nursing home, I do not want these costs to draw down our retirement savings and leave my wife without enough money to live as we had planned. That is why I bought long term care insurance at age 53. Later, I'll explain why I wish I had bought it before age 50.  
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The Horror Stories

I had heard stories of people who had bought long term care insurance, later became ill, and were unable to collect benefits. The policy would contain restrictive provisions that had to be met to collect benefits. Some condition would not be met and the policy would be useless to the person who bought it.

This problem was more prevalent with earlier policies. Today, regulations have improved, policies have improved, and a more wary public is examining what is offered.

It is important to go with a reputable company and to understand the provisions available in today's long term care policies. As is often the case, knowledge is the key.  
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Things to Know About Long Term Care Policies

Qualified versus Non-qualified

This characterization of a policy has NOTHING to do with the QUALITY of a policy. A non-qualified policy will typically allow more situations to be eligible for benefits. The premium costs of a qualified policy are deductible as a medical expense on the federal income tax return up to certain dollar limits based on age. Because the non-qualified policy pays for benefits for more situations, the government disallows the cost of a non-qualified policy as a medical expense. The term "qualified" is not an endorsement by the government. It is a term related to taxes. Qualified policies disallow "medically necessary" as a triggering mechanism and also require certification by a medical professional that the condition will continue for at least 90 days. Thus if an insured person has a 0, 30, or 60 day elimination period, the policy may not pay any benefits after the elimination period unless there can be certification that the condition will last at least 90 days. Non-qualified policies can pay when a physician deems it "medically necessary".  
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Activities of Daily Living (ADL's)

The long term care policy will define Activities of Daily Living. These are the things we do every day. One way the policy will pay benefits is upon the inability to perform ADL's. Be sure to understand who will determine that an ADL cannot be performed and how it will be determined. 

Some policies will also address instrumental activities of daily living. These are the basic functions associated with remaining in one's home.  
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Policy Caps

Policies can be purchased that provide benefits for an unlimited time period. Conversely, a total dollar maximum or duration maximum can be specified. This maximum is called a cap because it limits the total payout. I purchased a policy without a cap since my goal was to protect our retirement savings from the potential cost of long term care. At younger ages, the cost is not prohibitive.  
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Inflation Protection

Policies can be bought to pay a per day dollar amount of benefits. This dollar amount may be fixed and will not change regardless of when the benefit is required. Other policies offer inflation protection. This annually increases the per-day dollar benefit to offset the cost of inflation. 

In my case, I hope to not need to apply for benefits for many years. Inflation could greatly erode the real value. My policy includes inflation protection because my outlook at age 53 is long term.
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Elimination Period

The number of days that must elapse before policy benefits are paid- sometimes called waiting period or deductible.
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Location of Services

Policy benefits can apply to in-home services as well as assisted living facilities and nursing homes. For example, imagine that you are recovering from surgery and cannot perform several Activities of Daily Living. Your policy can include in-home services up to your covered daily amount.
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Amount of Coverage

The dollar amount per day paid by the policy is another choice to be made. In my area of Pennsylvania, assisted living costs in 1999 are $18,000 to $33,000 per year. Nursing homes are in the range of $50,000 to 70,000 per year. I chose benefits of $100 per day in "1999" dollars. This covers the cost of assisted living and about half the nursing home cost. My financial planning is such that this coverage will allow one of us to be in a nursing home without threatening the financial security of the other. This is my primary goal for long term care insurance. A secondary goal is to preserve an inheritance for our children. If we were both to go into a nursing home, other estate preservation strategies might come into play. That is a subject for another day.
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Price Consideration

Long term care is state regulated. Check this out with insurance people in your state. In Pennsylvania, my provider can raise rates, but only for the entire group. I was able to find a reputable company with a low rate. If claims experience shows the rate to be too low, the state can authorize a group rate increase. To me, this is better than paying more for a policy and not needing a later rate increase. If I have paid more than necessary from the beginning, I would not expect the company to send back the extra.
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My Real Life Example

In 1999 in Pennsylvania, my wife and I purchased the following coverage for ourselves:

$100/day benefit

Unlimited payout

Inflation protection- Benefits increase 5% per year

In-home benefits included

Non-qualified policy not requiring 90 day certification of a medical professional

My age is 53, my wife 48; we are both healthy non-smokers

For this coverage, we pay a total of $1000 per year. Over $700 of this is for me because I am over 50. It would have been less if we had purchased the coverage before I turned 50. One thousand dollars per year for thirty years will pay for itself with one year of assisted living, and we have protected our retirement nest egg.
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Things to Consider

What are your goals for retirement?

What are your goals towards leaving an inheritance for your children?

What is the cost of care in your area?

What policy cost would apply to you?
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In Conclusion

We chose to buy long term care insurance and learned quite a lot in the process. Hopefully, this write-up will provide you useful information and save you time. If so, my purpose in writing it will have been served.

 

Author has requested to remain anonymous due
to the personal details included in the article.

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