Most people say they don’t want to be a burden on anyone, especially their children. Clients are worried about running out of money in retirement, and the potential cost of an extended nursing home stay terrifies them. It’s not only the skilled nursing home costs that are worrisome, but also assisted living and home health care. In fact, it has become increasingly clear that people want to remain in their own homes while receiving needed care. If around-the-clock care is needed for home health care, the costs will exceed those of skilled nursing home care.

The first and most important concern of most families is high quality care. Those who can afford to private pay for a nursing home will qualify for the best facilities. At the other end of the spectrum are those who, due to minimal resources, are limited to facilities that accept Medicaid for at least a certain number of the available beds. Some patients pay their own way until they have spent down their assets sufficiently to qualify for Medicaid.

Beyond not wanting to be a burden on their children, many prefer to preserve enough of their assets to leave an inheritance. The three principal methods to accomplish this goal are:

1. Medicaid qualifying techniques described in Chapter Six
2. Self-insurance
3. Long Term Care (LTC) insurance

Self-insurance is a concept known as risk retention whereby the individual or couple has sufficient assets and/or cash flow to handle long term care expenses privately.

People often ask: “How much is enough?” Let’s start with an example of a single person.

Anita Knapp has Social Security benefits of $1,400 per month plus a pension from her deceased husband of $1,600 per month. Moreover, financial assets (stocks, bonds, mutual funds, retirement accounts) total $300,000. Assuming a 5% current yield on the investments, an additional $15,000 per year, or $1,250 per month can be generated.

Note that a 5% current yield is not necessarily a sustainable current yield (dividends and interest). With a mix of equity and fixed income securities, the hope is that growth of the principal will allow a growing income stream to offset inflation.

Since the cost for nursing home care (and other expenses) exceed $51,000 per year (the average cost in Michigan in 2005 is $64,404), Anita will be dipping into principal. Anita is a candidate for some amount of long term care insurance since her income does not cover the cost of her nursing home care. The ability to self-insure is even more problematic for a couple, because the expense level of the community spouse may decrease only slightly. Our next example, then, is a couple, Ben and Anna Splitt, with the following financial information:
 

While this cash flow is enough to handle the long term care costs of one of the spouses, the question remains whether the community spouse has sufficient cash flow to maintain the household and herself. The message is that long term care financial planning is required to project various scenarios under different assumptions. You may or may not be able to self insure the long term care risk. The examples of Anita Knapp and Ben & Anna Splitt were intended to show situations that could go either way.

That’s where LTC insurance planning comes into play. The catch is that you must be healthy enough at the time of application to qualify for coverage. But if you’re healthy, you may not feel the need. If you’re not healthy, you certainly want the coverage, but you won’t qualify. So let’s cut to the chase. If you’re healthy – and relatively young – you must consider the risk of a long term care obligation and the opportunity to transfer the risk to an insurance company. You may consciously decide to self-insure the risk if you have sufficient assets. Or, you might have unwittingly self-insured by doing nothing. Our advice is for you to make a conscious decision after assessing your own objectives, resources, and limitations.

WHAT TO LOOK FOR IN A POLICY

Assuming you’re in a position to consider long term care insurance, what elements are most important? Listed below are policy benefits and features most advisors recommend.

1. Adequate Monthly (or Daily) Benefit
2. Sufficient Length of Coverage (Number of Years)
3. Reasonable Waiting Period (Elimination Period)
4. Suitable Inflation Protection
5. Guaranteed Renewability
6. Waiver of Premium Benefit
7. Coverage for: Skilled Nursing Care, Assisted Living, Home Health Care
8. Favorable Tax Treatment

These are the core benefits of any LTC policy. If you specify the criteria you want in a policy, comparison-shopping is significantly easier because policies are essentially standardized.

Many other features are available if they fit with your needs. For example:

1. Waiver of Elimination Period for Home Health Care
2. Enhanced Return of Premium Feature
3. Non-Forfeiture Provision
4. Shared Care Riders
5. Family Care Benefits
6. Survivorship and Waiver Benefits
7. Additional Cash Benefits

Most of these features are nice to have but not mandatory. They will add substantially to the cost, so be selective. With all these provisions to consider, we’ll need to define some terms. In fact, you may want to see a specimen policy. Please refer to a reasonably representative sample policy available through the web site http://www.jhancock.com*

* This is not meant to be a recommendation of any specific policy or company. Please consult with a properly licensed professional who specializes in LTC insurance.

Adequate Monthly Benefit
Notice that we refer to the monthly benefit. We prefer the monthly benefit approach to the daily benefit approach, because the maximum monthly benefit covers all eligible expenses during the month, whereas the daily approach would require a daily qualification for benefits and a daily limit. Let’s use an example of the difference between a policy with a $4,500/month benefit and another policy with a daily benefit of $150.

The monthly benefit approach, in essence, provides a pool of dollars that can be used for any combination of eligible services without a daily limit. Remember that the maximum benefit period (below) also provides an aggregate pool of dollars under the policy.
ADVICE: Purchase benefits based on a maximum monthly benefit.
ADVICE: Make sure home health care coverage is at least 80% or 100% of the skilled nursing home benefit.

Benefit Period and Policy Limit
The maximum benefit period is the number of years for which benefits are payable. The most common choices are: 2 Years, 3 Years, 4 Years, 5 Years, 6 Years, 10 Years and Unlimited Benefits.

The policy limit is determined by multiplying the monthly benefit amount by the benefit period. For example: $3,000/month times 4 years [48 months] = $144,000 Policy Limit.

The policy limit, then, can also be viewed as a pool of dollars available during the lifetime of the policyholder. Note: The policy limit may be increased due to inflation adjustments (see below). Ideally, the policyholder would prefer unlimited benefits, but the premium may be excessively high and beyond budgetary constraints. As a result, clients will compromise and select a benefit period that is not only affordable but provides reasonable coverage for the most likely scenario. The average length of stay in a nursing facility is just under two years, and the look back period for transfers is three years.

The natural inclination, then, is to select a three-year benefit period. Unfortunately, the client might be on the wrong side of the average and run out of coverage. In designing a long term care policy, the client, with the help of the professional, will reach a point where the premium is still affordable and the mix of benefits is suitable to transfer an optimal amount of risk to the insurance company. Beyond that bucket of benefits, the client is self-insured. Personal assets must be used from that point forward, or other resources must be located for funding, such as Medicaid. Although the strategy of combining insurance with anticipated eligibility for Medicaid may make sense now, the rules for Medicaid are subject to change due to possible funding cuts as the population ages.

ELIMINATION (WAITING) PERIOD

The elimination period is the number of days for which no benefits are payable. In other words, the elimination period is the waiting period before benefits kick in. The most liberal provision for the waiting period lets you satisfy the requirement only once during the life of the policy, using dates of service that need not be consecutive and qualifying for eligibility in multiple ways. In some well-designed policies, if you receive home health care for one or more days in a calendar week, the company will apply seven days toward the satisfaction of the elimination period. The longer the elimination period, the lower the premium. The most common choices of elimination period are: 30, 60, 90, 180, and 365 days. Most clients can self-insure the short-term risks and will gravitate toward the 90-day waiting period as an optimal cost/benefit mix. ADVICE: Generally select the 90-day elimination period.

INFLATION PROTECTION

The cost of long term care services has risen more steeply than the general cost of living. A policy without inflation protection will become inadequate in a relatively short time frame. Consequently, most advisors recommend a cost of living adjustment in one form or another.

Common alternatives include:

1. 5% simple inflation (5% increase in the benefits each year, based on the original benefit amount)
2. 5% compound inflation (5% increase in benefits each year,
3. 5% / 3% (5% compound inflation adjustment on the monthly [or daily] benefit amount, but with a 3% compound inflation adjustment maximum on the policy limit).

The compound inflation protection approach is, of course, the most expensive.
For example, observe the difference in the twentieth year:
Original Benefit: $4,000/month
5% Simple over 20 Years: $8,000/month
5% Compound over 20 Years: $10,613/month

Many advisors advocate the compound approach, but my experience is that the premium commitment is so relatively high that clients will select the simple inflation approach, knowing that they are self-insuring an increasing proportion of the cost. ADVICE: Consider your ability to handle the compound inflation approach, but if the premiums are too steep, use the simple inflation approach.

GUARANTEED RENEWABLE

Virtually all policies sold are guaranteed renewable, which means that the insurance company guarantees to continue (renew) the policy each year as long as the policyholder pays the premium, but reserves the right to increase premiums on a class basis. For example, the company can increase the premiums for all LTC policies of a particular form in Michigan by a certain percentage. However, an exorbitant premium increase may cause an indirect form of adverse selection that would negatively affect the insurance company: healthy people drop the coverage while the least healthy maintain it. Adverse selection will exacerbate the problem for the insurance company, and its claims experience will continue to worsen. Thus, insurance companies will tend to price the product carefully in the first place to avoid the necessity of increasing premiums later.

An extreme example of proper pricing is a non-cancellable policy, in which the policy is guaranteed renewable at the original premium. A non-can policy is exceedingly difficult to find and would be very expensive.

WAIVER OF PREMIUM

The waiver of premium benefit means that the policyholder is relieved of premium paying responsibility (after a waiting period) while receiving LTC benefits. The waiting period for waiver of premium is generally the same as the policy’s elimination period. If the elimination period has been satisfied, and benefits are payable (for most eligible services), premiums will be waived. If and when benefits are no longer payable, the policyholder must resume premium payments.

MAJOR COVERED SERVICES

Most policies contain broad definitions of the services covered. The most important are:

1. Skilled Nursing Care
2. Assisted Living
3. Adult Day Care
4. Home Health Care

Regardless of the location, benefits are payable if the insured person:

1. Needs assistance with two or more Activities of Daily Living (ADLs) namely bathing, continence, dressing, eating, toileting, and transferring.
2. Needs continual supervision due to a cognitive impairment in order to protect the insured from threats to health and safety.

Certain logical exclusions and limitations are common in all policies, such as intentionally self-inflicted injury, alcoholism and drug addiction. ADVICE: Make sure your policy covers you where you want to be treated. If you need coverage outside the U.S. and Canada, you should inquire about international coverage.

TAX QUALIFING

Virtually all LTC policies sold now are tax qualified, meaning that federal tax law allows for favorable results as follows:

1. Premiums paid by individual taxpayers are eligible (within limits, listed below) as a medical expense itemized deduction.
2. Benefits received (again, within limits) are income tax free.

A number of rules must be satisfied in order to qualify for these tax benefits.

1. The services required by a chronically ill individual must be provided under a treatment plan prescribed by a licensed health care practitioner.
2. A chronically ill individual is one who is unable to perform at least two of the activities of daily living for at least 90 days, or who requires protective supervision because of severe cognitive impairment.

Current law limits the annual amount of LTC premiums that are eligible for a tax deduction, based on the age of the insured. The amounts are adjusted annually for inflation.

Example values: Age Before Close of Tax Year | 2005 Limitation
40 or Less: $270
41 to 50: $510
51 to 60: $1,020
61 to 70: $2,720
Over 70: $3,400

As to the medical expense deduction, individuals or couples who itemize can deduct unreimbursed medical expenses and health insurance premiums (including LTC premiums) to the extent of the excess over 7.5% of adjusted gross income (AGI).

For example, let’s assume the situation of Jerry Attrick, age 67, a widower. His AGI is $40,000, while his unreimbursed medical expenses are $2,000. He also pays $2,800 per year for LTC and $938.40 per year for his Medicare Part B ($78.20/month withheld from his Social Security check). Jerry Attrick’s Example:

Adjusted Gross Income: $40,000
Times 7.5% (Threshold): $3,000

CALCULATIONS
Unreimbursed Medical Expenses: $2,000
LTC Premium (Limited in 2005): +$2,720
Medicare Part B Premium: +$938
Total Eligible Expenses: $5,658
Less Threshold of $3,000: Itemized Deduction $2,658

If you don’t itemize, under current law you get no federal income tax deduction for un-reimbursed medical expenses and health insurance premiums. In Jerry Attrick’s case, his total itemized deductions must be more than $5,000 before he obtains an advantage from itemizing. Even if his home is free and clear, his totals might look like this:

Medical Expenses over the Threshold: $2,658
Mortgage Interest: $0
Real Estate Tax: $3,000
State Income Tax: $1,600
Charitable Contributions: $1,200
Total Itemized Deductions: $8,458

In this case, Jerry gets a benefit from itemizing this year because the itemized deductions exceed the standard deduction of $5,000. If Jerry were married, the standard deduction for a married couple filing a joint return in 2005 is $10,000. As a result, with the same itemized deductions as shown above, the married couple would take the higher standard deduction. In either case, the benefits from a long term care policy will still be income tax free, up to $4,500 per month in 2005.

SPECIAL TAX SITUATIONS: SELF-EMPLOYED TAXPAYERS

Self-employed business owners (sole proprietors and partners as well as members in Limited Liability Companies and S Corporation Shareholders) are able to deduct LTC premiums in full (subject to the limits above) as an adjustment to income on page one of Form 1040. In other words, the deduction is available to them whether or not they itemize.

SPECIAL TAX SITUATIONS: CORPORATE TAXPAYERS

Corporate employers can pay LTC premiums on behalf of employees (and can discriminate) and take a corporate income tax deduction. The premium paid is not taxable to the employee. Benefits are income tax free. For employer-sponsored group LTC plans, certain advantages may be evident:

1. More liberal underwriting
2. Ability to insure parents more easily
3. Steeper discounts
4. Portability

COMMENT

As part of the effort to reform and simplify the federal tax system, some commentators have suggested that individual taxpayers should have the same page one deduction as an adjustment to income enjoyed by self-employed taxpayers. The improved access to the deduction would likely increase LTC purchases substantially.

ADDITIONAL BENEFITS

Additional benefits may be payable under a stay-at-home provision that facilitates the ability to receive LTC services in the home. These are specific benefits in addition to Home Health Care benefits. Examples include:

1. Home modifications (ramps, shower bars, wider doorways, etc.)
2. Emergency Medical Response System
3. Durable Medical Equipment (hospital-style bed, wheelchair)
4. Caregiver Training (for uncompensated caregivers) 5. Home Safety Check (to make sure the home is adequately senior-proofed)
5. Provider Care Check (to ensure that providers are competent)

With the burgeoning population of older persons, and the limited number of nursing facilities, the stay-at-home option will become increasingly popular and is automatically included in some policies. ADVICE: Select a policy with liberal and broad features that allow qualification for benefits in multiple ways.

CORE BENEFIT COMPARISONS

In view of the standardization of LTC policies mentioned above, it’s easier to do comparison-shopping, but not foolproof. You could invite a parade of agents to make their recommendations, after which you can assemble a spreadsheet showing benefits and costs. Another alternative is to ask an independent specialist to do the comparison-shopping for you.

In either case, the spreadsheet might look like this:

As a consumer, concentrate on the steak, not the sizzle. Ethical, competent advisors will do the same. The benefits in the spreadsheet can be expanded to include the ancillary features that may be important to you. Once you’re satisfied with your selection of core benefits from a handful of competitive insurance companies, consider the sizzle. List those features that you’d like to have in your ideal policy and weigh the cost/benefit ratio. Next is a chart that shows representative premium comparisons based on an individual’s health, ranging from Preferred to Standard to Class 1.

Affordability may be an issue for many people. The chart shows premium levels for a solid package of benefits, varying only by health status, and lets you inspect the major (core) components. If you feel the premium commitment is too high, you can scale back in a number of ways. For example, you may reduce the monthly benefit amount, shorten the benefit period, extend the elimination period or use simple inflation instead of compound inflation. Some families decide that the children or other heirs can pay the premiums themselves.

Note the impact that health has on the premium. In fact, as noted earlier, your health may have deteriorated to the point where you do not qualify for coverage at all.

Let’s assume that you qualify for coverage at standard rates. Perhaps you are somewhat overweight or you have a condition that causes the insurance company underwriter some concern, such as arthritis. If you know your rating class (standard), you can then do some scenario testing. Examine the chart below to see the reductions you can achieve through various changes.

If you and a spouse or partner are applying at the same time, you’ll probably see a discount of 25% to 30% for each person.

COST OF WAITING

The longer you wait to buy long term care insurance, the higher the premium. You may even price yourself out of the market, or you might become uninsurable. Again our example shows solid coverage, but at different ages, using current rates for a single male.
Benefit Amount: $4,500/month
Benefit Period: 10 Years
Elimination Period: 30 Days
5%/5% Inflation
[ TABLE 1 HERE ]
ADVICE: With all the potentially moving parts, ask your advisor to generate the comparison matrixes that reflect your most likely scenarios.

Let’s return to the definitions now, concentrating on terms that are not necessarily core benefits.

MORE DEFINITIONS AND EXPLAINATIONS

Waiver of Elimination Period for Home Health Care
The waiver of elimination period for home health care is reasonably straightforward, and provides that benefits can be paid without satisfaction of the elimination period for:

1. Home Health Care
2. Hospice Care (in the home, a nursing home or assisted living facility)
3. Adult Day Care

You must still satisfy the elimination period before benefits are payable under the LTC benefit for confinement in a nursing home or assisted living facility.

Enhanced Return of Premium Feature upon Death
This provision attempts to answer the objection that premiums are wasted if there are no significant claims. That’s like hoping your house burns down so you get value from all those premiums you paid. Nonetheless, the enhanced return of premium feature upon death compares total premiums paid to all benefits received. Any excess premiums paid over benefits received will be paid to the beneficiary, and may be taxable if the insured policyholder had enjoyed a tax deduction during life. ADVICE: Skip it. Use the savings to maintain or purchase legitimate life insurance. Note: As a standard part of the policy, a return of premium upon death rider would provide a death benefit over benefits already paid for death before age 65.

Non-Forfeiture Provision
Under a common form of this optional benefit, if the policy has been in force for more than three years, and the policy subsequently lapses for non-payment of premium, the policy will remain in effect with no premiums required, but the policy limit will be equal to the aggregate premiums paid. ADVICE: You can pass on this rider under the assumption that you had planned to pay premiums anyway.

Shared Care Rider
The shared care rider is intended to be attached to two policies, one each for a husband and wife (or two committed partners). In the event that the limits under one policy are exhausted, benefits are continued based on the remaining limits in the partner’s policy. The shared care rider may be especially useful if it is anticipated that one of the spouses (or partners) is more likely to incur long term care expenses. ADVICE: Consider this benefit for inclusion in your and your partner’s policies.

Family Care Benefits
The family care benefit allows the policyholder to designate up to three family members who can have access to policy benefits. The rider may be viable for someone who wants to insure parents or children under the same policy. The provisions of the policy can become rather complicated, but in the right circumstances, the arrangement can satisfy multiple needs. ADVICE: Consider this rider if your circumstances warrant.

Survivorship and Waiver Benefits
This rider allows a policyholder to enjoy a paid-up policy in the event of death of a spouse/partner, usually if all of the following conditions are met:

1. No benefits were paid under either policy during the first ten years.
2. Both policies had been in force for ten full consecutive years (other than under a non-forfeiture benefit), and
3. On the spouse’s/partner’s death, the survivorship and waiver benefit rider had been in force for at least ten years.

In a similar way, premiums will be waived if all the conditions above are satisfied and premiums are being waived on the spouse’s/partner’s policy. ADVICE: In view of the onerous conditions, the rider has dubious merits. Avoid it.

Additional Cash Benefits
In another effort to encourage home health care, this rider will pay additional cash amounts for any purpose as long as home health care benefits are paid during at least one day in the month and you have not been in a nursing home or assisted living facility. You must also have satisfied the elimination period and the ADL and/or cognitive impairment requirement. ADVICE: Don’t sweat the small stuff. Skip it.

RIDERS, RIDERS... EVERYWHERE!

If you’ve checked out the specimen or an actual policy, you know there are more riders than we have covered. We’ll use a table to summarize our opinion of each rider’s usefulness.

FINAL NOTE

Remember that insurance companies are in business for a number of reasons. A mutual insurance company is owned by the policyholders, so there are no stockholders to satisfy. A stock insurance company is owned by stockholders, who must be rewarded for the risks they assume.

In either case (mutual or stock company) the insurance company is genuinely interested in paying all legitimate claims. Otherwise policyholders would be upset and the company’s poor reputation would spread.

On the other hand, premiums must be adequate, and ineligible claims must be denied in order for the insurance company to survive, grow and prosper for the benefit of all constituents: policyholders, beneficiaries, company owners, employees and the community. Thus, it makes sense to investigate the claims paying history of the company in addition to the financial stability. Sources for this purpose include A. M. Best & Company, Standard & Poor’s, and Weiss. Most professional insurance advisors will be pleased to provide the A. M. Best rating and other details regarding any proposed company.

FINAL ADVICE: Be careful out there!