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XI. PRESERVING YOUR ESTATE WITH LONG TERM CARE (L.T.C.) INSURANCE.

A. The basic idea of L.T.C. insurance is simple.
B. Benefit Basics.
C. Some things to consider in choosing a policy.

XI. PRESERVING YOUR ESTATE WITH LONG TERM CARE (L.T.C.) INSURANCE.

A. The basic idea of L.T.C. insurance is simple.

In its simplest form, this insurance helps cover the risk of financial loss resulting from placement in a nursing home, at an annual cost of $45,000 - $60,000 (and much higher in many areas) in 2005. Some very important "bells and whistles" make it more complicated. L.T.C. insurance can make sense for people over 40 years old with assets of $100,000 to several  million dollars.  (Those with adequate disposable funds can afford to pay out of pocket.) These people wish to avoid the increasing uncertainty of Medicaid and maintain the financial freedom to make choices when they need care.  For many of them, it is important to leave an inheritance, rather than risk depleting their estates on private-pay long term care.

L.T.C. insurance is not for everybody, but there is one criticism that makes little sense: "I don't want to pay for something I might not use." That is quite understandable, but let's be consistent. How many of us would go without fire insurance, for example? Yet the risk of requiring costly long term care is vastly greater than that of a devastating house fire.

Still relatively new, about 120 companies now offer L.T.C. coverage. Many have left the field. The industry is experiencing a "shake-out" and consolidation among those insurers with a long term commitment to a long term product.

Many policies issued more than a few years ago have some very undesirable features, such as requiring a prior hospital stay before nursing home admission, or excluding coverage for Alzheimer's. Financial planners have criticized L.T.C. insurance in the past, for these and other good reasons. Today's policies, however, are much better and deserve a look.

There is now a "Model Act" to use as a standard in regulating L.T.C. insurance policies. It is a pro-consumer "law" developed by the Health Insurance Association of America (HIAA), only as a guide for states to use in drafting their own legislation. The model law has many separate provisions, on features and benefits recommended for state adoption. The HIAA has done a state by state compliance analysis showing what model provisions have been enacted where you live. If your state has not mandated the more important of these guidelines, you should be extra studious in comparing a proposed L.T.C. policy to the important features examined later.

Some life insurers allow policyholders to tap death benefits in cases of terminal illness or the need for long term care. The policy might cost 5% to 15% extra, for the option to get 25% to 100% of the death benefit in advance. Living benefits can be useful for people unable to get other types of long term care insurance because they cannot afford it or are already in poor health. Usually, though, a straight long term care policy is a better deal.

B. Benefit Basics

Insurance companies offer a choice of daily benefits ranging range from $75 to $200 or more per day, for a set number of years.  That results in a a lifetime dollar maximum benefit. Most policies reimburse you up to the daily amount for nursing home or in-home L.T.C services once your eligibility is established.  A few policies simply pay the full daily amount directly to the policyholder to be applied toward the policyholder's nursing home bill, or any other expense he chooses.  Either way, the patient is responsible for any remaining actual charges, if higher. A few policies set no daily benefit, but instead have o be used as needed.

Insurers offer coverage for nursing home stays of two - six or more years, or lifetime coverage, with no limit. Not all options, of course, are offered by every company.

F.Y.I. Published estimates of the "average" nursing facility stay range from 450 days to 2.5 years. The American Association of Retired Persons (AARP) estimates the average stay is 2 1/3 years, with 55% staying one year and 21% for five years or more. According to a U.S. Census Bureau report, about 22% of people age 85 and older live in nursing homes, and 45% need help with daily activities. According to the Federal Agency for Health Policy and Research, half of all women and one third of all men who reach the age of 65 will later spend time in a nursing home.

Benefits can start as soon as the policyholder enters a nursing home, or they can begin after a "waiting," "elimination," or "deductible" period - usually of 30, 60 or 90 days. You might save about 15% on the cost of a policy with a 90 day waiting period, compared to one that begins paying benefits on the first day.

All new L.T.C. policies are either "guaranteed renewable" or "non-cancelable". "Guaranteed renewable" means that coverage must be continued as long as you pay the premiums. You cannot be singled out for a rate increase, but rates can go up for a whole class of insureds. "Non-cancelable" is not common. It means that your coverage and current rates are guaranteed.

Most policies have "level" premiums. The age of the insured when he/she applies for coverage determines the annual premium to be paid. Thereafter, the premium is "not supposed to" rise with the policyholder's age. However, premiums can go up if an insurer experiences more claims than it anticipated.

The L.T.C. insurance market has matured, so that virtually all NEW policies sold:

- Provide coverage for Alzheimer's disease;

- Pay all or part of the cost of alternative care services, such as assisted living facilities, home health and adult day care;

- Have a six month or less wait for coverage of pre-existing conditions;

- Offer inflation protection (usually as an extra cost option);

- Give the customer a 30 day "free look," with right to cancel.

Most of today's policies also use the following criteria, any one of which is sufficient to trigger benefits (more later):

- Need for assistance with two or more of the "activities of daily living" (ADLs);

- Severe cognitive impairment.

Fortunately, the trend in L.T.C. insurance is toward benefit flexibility in covering home health, alternative and adult day care, as well as traditional nursing home placement. Matching the benefit to the customer's needs and desires is a "win/win" situation. It is cheaper for the insurance company to pay to keep people close to (or at) home, providing only the level and amount of care really needed. Most people, of course, would prefer this anyway.

C. Some things to consider in choosing a policy.

Shopping around can be difficult, because it is almost impossible to compare "apples to apples." Despite the Model Act for states to follow, there still is no "standardization" in policy features for comparison shopping.  Most states, however, publish a "Shopper's Guide to Long Term Care Insurance," probably available through your state's department of insurance.

With or without the Shopper's Guide, one should consider:

1. The financial strength of the insurance company is always an important factor. This is >particularly so with L.T.C. insurance, because of the long time before coverage might be needed. It is a new product in a rapidly changing health care environment. Insurers have relatively little historical data or claims paying experience to guide them in setting rates. We must hope they will make enough money at this to be around for the long haul, but it may be years before the companies themselves know for sure.

Meanwhile, seeing the elder population grow, many insurers got into L.T.C. to make a quick buck. But many of the companies selling L.T.C. insurance in the product's early years have left the market. So go with a well established and highly rated company that could take some financial lumps, if necessary.

2. Cost; long term care insurance is not cheap. Any ethical sales agent should assess whether a client can afford it over the long haul. Don't be a sucker. Just as you would with any other product, be skeptical of "low-ball" quotes that are way out of line. The key to low rates is buying the insurance when one is in his/her 40's or 50's, or at least no older than 65. Even if one is older, however, for many people it would still be "better late than never."

The increase in premium as one moves from 45 to 55, and then to age 65 and beyond, is dramatic. In fact, at whatever age one starts shopping for a policy, if that prospective purchaser decides to wait five years before actually buying, the total premium dollars paid till age 85 will probably be far greater than if he/she had not waited. Of course, during the five year delay, the buyer can invest the money that might have been spent on premiums. Simple arithmetic, however, will demonstrate that this investment return is unlikely to make up for the increased policy cost.

There are so many variables involved in the cost of a policy that it is difficult to generalize. Moreover, both premiums and policies are in a state of change. Ultimately, that should provide rate stability for consumers. Meanwhile, here are some typical situations, with strictly "ball park" estimates:

A 65 year old can expect to pay around $1,500 a year at most companies for two or three years of $100 per day coverage, including both nursing home and home care, with inflation protection and a 90 day waiting period. A 75 year old might pay over $2,000 for the same coverage. For top-notch, lifetime coverage, those premiums might double. The 45 to 55 year old purchaser, however, can probably buy the same policy for well under $1,000 per year. The key to affordability is buying L.T.C. insurance while you are relatively young.

Prices vary widely among insurers.  But it is a mistake to shop solely based on cost.  Premiums for some L.T.C. policies have had to be increased sharply because of unrealistic "low balling" initially. This is not so of the higher quality, more responsible companies that set premiums more accurately from the beginning.

TIP: The younger the L.T.C. policyholder, the easier it is to use this simple plan to pay for it: Just set aside a portion of your savings in a safe investment to produce interest income each year to offset premiums payments. E.g., $50,000 earning 4% yields $2,000 per year. That would cover much of a couple's annual premium, while the principal would be preserved.

F.Y.I. Health insurance legislation enacted in 1996 provides that buyers of <most L.T.C. contracts sold in 1997 and beyond (as well as the large majority of those already in force) will enjoy some new tax breaks. These will apply only to "tax qualified" policies, which must contain certain provisions that are, quite arguably, less "consumer friendly," - i.e., more restrictive - than some good L.T.C. policies already on the market. Insurance companies are hurrying to make sure their new policies comply with these requirements, so they can tout the "tax qualified" status to consumers. Note, however, that for certain people, the best policy for their overall needs might be a somewhat different variety that does not qualify for all the tax breaks.

For qualified policies, neither employer-paid premiums, nor amounts received as policy benefits will be considered taxable income to employees. Premium payments by individuals buying their own L.T.C. coverage will be considered "medical expenses," which are tax deductible - but only to the extent they exceed 7.5% of adjusted gross income. (There are also dollar limits on the L.T.C. premium deduction, which depend on the taxpayer's age.) Note, however, that self-employed people, like corporate employers, can now deduct the full premium cost. Public health policy-makers hope this tax favored treatment of L.T.C. insurance will expand the pool of covered persons, thereby spreading the risk more widely and decreasing premium cost.

3. Home and community based health care is an essential policy feature. It encompasses a wide range of services, from assisted living communities to adult day care centers, from skilled Registered Nurses to homemaker aides who cook meals. This might be the most confusing part of the L.T.C. insurance maze.

Recognize that the intended purpose of home and community health care coverage is merely to assist the person taking care of the infirm patient. An adult day care center can be used to free a child to work during the day. Help can be obtained for a few days per week, or for certain periods of the day or night. In some states, a policy's home health care benefit, by law, cannot exclude personal care services (eating, dressing, etc.) given by a home health aide. Be sure this exclusion is absent from the policy you choose.

Do not buy a policy without home health care in some form. (Often, the benefit for home health care is stated as a percentage - usually 50% to 100% - of the maximum daily policy benefit.) It can turn an utterly impossible predicament into one that can at least be managed and tolerated.

4. "Benefit triggers" are preconditions (with accompanying restrictions, if any) that must exist before an L.T.C. policy will pay for services. They are also called "gatekeeper" provisions, because their purpose is to keep you away from benefits. Read closely and look for a policy that has as few of these as possible.

For example, beware of older L.T.C. policies that require a prior hospitalization before benefits can be paid. This policy provision is now banned in most states, with respect to new contracts. Many other undesirable policy features have also been modified by law in various states. But older insurance contracts, otherwise valid, are not affected by such laws, so these L.T.C. policies should be reviewed and replaced, if necessary.

A good policy will pay for care if:

You need help to perform 2 of the following activities of daily living (ADL):
Eating
Dressing
Bathing*
Maintaining continence
Toileting - the ability to move to, from and within the bathroom, taking care of all personal needs and hygiene.
Transferring - the ability to change body position (e.g., from bed to standing).

*Note that bathing is often among the first difficulties faced by the elderly. For this reason, many older policies do not include it in their list of ADLs - or if it is included, the policy requires that help be needed with 3 of 6 ADLs, instead of 2 out of 5.

These ADLs have no precise, universal definitions, so the definitions given in individual policies vary and should be examined closely, cautions Deena Katz, CFP, a Florida financial planner and LTC expert. Look for broadly worded definitions that won't allow the insurance company to nit-pick and "wiggle out" of coverage.

The policy should also provide coverage if you suffer from "severe cognitive impairment."

When comparing policies, look closely at the definitions of "cognitive impairment." This is a common reason for requiring long term care. Therefore, the more broadly defined that condition is, the better.

5. "Upgradability" of the policy; The LTC insurance business is still evolving, with better policies sure to come in future years. If you buy now, will the company give you the option of "trading up" to better coverage if and when it is offered to the public? Present policies are generally silent on the subject, so that is an important question to ask, suggests advisor Katz.

6. "Underwriting" refers to the health standards the company uses to evaluate the applicant for insurance. For some people, L.T.C. insurance is easier to qualify for than life insurance. The risk of death is different from the risk of needing long term care.

In most states, all medical questions, examinations and the decision to issue coverage must now be made "up front." In tax qualified policies, the practice of "post-claim underwriting" is now banned. No more selling policies to anyone who can write a check, then looking for excuses not to pay after a claim is made!  Older policies, however, might still allow post-claim underwriting.

As a rule, most companies decline to insure people who have had recent strokes, diabetes, multiple sclerosis, recent cancer surgery, severe high blood pressure, or already have Alzheimer's disease. But some companies are more selective than others. Every company has its own set of criteria. If a condition, such as high blood pressure, is under control, or has remitted for a certain time, buying coverage may be no problem.

Several insurers will accept people with present health problems. A substandard risk class has been developed for L.T.C. insurance policies. Some companies have even introduced three - tier rate structures: Preferred, standard, and substandard.

The substandard tier is typically reserved for applicants with conditions like arthritis, diabetes, or certain kinds of heart conditions. Companies use several approaches in structuring the cost and benefits of these "rated" policies:

Same price, slimmer benefits, or same benefits, moderately higher price, or slimmer benefits, much higher price.

7. Coverage of pre-existing conditions is a very important consideration for many people. Insurers differ in how they handle this problem. Some impose a six month wait before they will provide benefits attributable to a pre-existing condition. A few policies have no such waiting period.

8. The choice of waiting period before benefits begin, and the length of a covered nursing home stay are obviously critical decisions. These factors have a lot to do with a policy's cost.

The waiting period is similar to the deductible amount on car and homeowner polices. You should know that some L.T.C. policies apply this "deductible" period to each occurrence of need; some only once.

Clearly, a long nursing home stay must at least be contemplated. But there is also a trend toward getting people out of the hospital as quickly as possible. ("Sicker and quicker"). This has resulted in sicker patients entering skilled nursing facilities to recover.

Remember, however, Medicare pays only for necessary days of skilled care, once there. E.g., Mom falls in the bathtub and breaks her hip. After several days in the hospital, she enters a skilled nursing facility requiring weeks of recovery, but skilled care for only one week. Medicare will pay for only one week.

This economic fact, in turn, has encouraged the early discharge of patients from the skilled nursing facility, as soon as they can receive less than skilled care safely at home. A "revolving door" situation can occur, in which some patients go in and out of the skilled nursing facility several times, each for a relatively short stay. Today, less than50% of skilled nursing facility patients stay 90 days or more.

Policies offer waiting period options from 0 to 90 days or more. You face a significant choice, to which there is no universally correct response. It's a trade-off. A long elimination period keeps rates lower - maybe much lower - but the policy might leave you vulnerable to unacceptable out of pocket expense. (E.g., Can you absorb the cost of a 90 day skilled nursing facility stay at $150 - $200 per day?)

9. Inflation protection is a policy feature designed to maintain, over the long haul, the purchasing power of the daily benefit you select. Remember, even a 65 year old who buys a long term care policy today might not need it for 20 years. Even at a  low inflation rate of 3.0%, a $100 per day facility would cost $156 in just 15 years! Without protection, the real value of the daily insurance pay out will have, in effect, shrunk drastically in that time.

The law of most states requires L.T.C. policies to offer, as an extra cost option, a 5% annual increase in benefits, or to promise to pay a set percentage of charges, no matter how high, or to let policyholders buy additional coverage every few years at the then-current price, based on their then-current age, although they do not have to prove they are still insurable.

The last option is a very undesirable feature. Future price increases for the additional coverage are unpredictable and might make the policy unaffordable. Also, those who do not buy each additional benefit increase when offered lose their right to buy more in the future.

Most policies, fortunately, offer the "5% annual increase" option. Often, there is a choice between a "simple" 5% annual increase and a "compounded" 5% increase. Compounded inflation protection is calculated like compounded interest - and like inflation itself. Therefore, "compounding" is more realistic and better protection, especially for those with long time horizons. But it costs more. If it makes the policy unaffordable, "simple" 5% yearly benefit increases will do fine.

Inflation protection is expensive, adding 25% - 40% to the premium, and sometimes more. To keep premiums low, some agents might recommend against purchasing an inflation option that automatically increases benefits. Think twice before taking this advice - unless you use a different strategy to deal with inflation. Some insurance agents suggest buying more coverage than you need to begin with. You can purchase a daily benefit amount greater than the current local nursing home cost. If the inflation protection option has not been chosen, that amount will remain constant. Over time, inflation will erode the value of the daily benefit dollars. But since an "excess" daily benefit was purchased initially, it will provide adequate coverage, even after inflation shrinks it. Often, it can be cheaper to deal with the inflation problem in this way.

Some approach to protection against inflation is a "must." If it makes the cost unaffordable, it may be that L.T.C. insurance is just not for you. But there is no point paying thousands of L.T.C. premium dollars over many years, only to be left with a benefit inadequate to avoid financial ruin, if the need for care arises. There are a variety of policy options and variables that be adjusted to result in a price you can realistically pay. You will just have to sit down with an agent and do some arithmetic.

10. Non-forfeiture options protect you from the following scenario: The L.T.C. policy lapses for some reason after a long time, and all premiums paid till then will have been wasted. Non-forfeiture provisions come in two varieties. One plan provides for limited, but fully paid up future benefits in case of lapse after a certain number of years of payment. E.g., two years of coverage might be provided, even if the policy lapses - after at least 10 years. The alternative arrangement simply offers a rebate of a portion of the premiums paid until the policy lapsed.

Non-forfeiture is a popular option, but it is very expensive, so I do not recommend it. If you buy insurance, plan to keep it in force! If the future affordability of premiums is in serious question, you should question the decision to buy L.T.C. insurance in the first place. Nobody expects a homeowner or auto policy to return premiums if the policy lapses, and most people would decline to pay more for a return feature in these policies.

Your comments, suggestions and constructive criticism are welcome.