02/05/99

Long Term Care Insurance

[This article is for people wanting to protect their estate and for younger people who have an interest in protecting their parents’ estate.]

You have worked hard all your life. Now you are retired or, about to retire, and enjoy your golden years. The "nest egg" you have saved-up is more than adequate and should provide for a comfortable life style with an ample sum remaining for your heirs. However, there is one major obstacle to living this pleasant scenario -- you or your spouse needing extended long term care. The cost of long term care could greatly reduce or even consume your estate.

What is long term care? Formally stated it is day-in, day-out assistance when you have a serious illness or disability that lasts for an extended period of time in which you can not care for yourself. For example, if you had difficulty with "activities of daily living" such as bathing, dressing, eating, toileting, transferring (getting in and out of bed, etc.), continence or if your ability to reason had been affected.

When most people think of long term care, they think of nursing home care. Certainly, nursing homes are a major care provider. However, there is a wide variety of services available to meet yours needs. In fact, there is an emerging trend towards having a home health care provider come to you on a daily basis. The full spectrum of long term care services includes adult day care centers, respite care (which gives family members a break from care), home health aides or chore services, assisted living facilities, and Hospice Care. Depending on your circumstances, you may be able to avoid a nursing home all-together.

The cost of long term care is considerable. For example, the average cost of nursing home care in Connecticut is approximately $200 per day. With the average length of stay in a nursing home 2 1/2 years, the total cost for care averages $180,000 per person. Bad as that may seem, this is an approximate cost in today’s dollars, most of us will need care at some point in the future, in which the cost will be even greater. Home health care costs vary greatly with the type and amount of services needed. In many instances, these costs rival that of a nursing home care.

The first assumption made by many families is that Medicare will pay for long term care. Currently, Medicare covers only "skilled" care in-full for the first 20 days and only partially for the next 80 days. Chances are greater that you will need custodial care not skilled care. Medicare does not cover custodial care.

Medicaid will pay long term care costs, but only if you qualify. To qualify you must "spend down your assets" to government established poverty levels. If you had hoped to leave assets to your heirs, this is not a viable option. There are ways to transfer assets to your heirs in advance of qualifying, but this must be done for alternate reasons. You cannot legally transfer assets solely for the purpose of qualifying for Medicaid assistance.

You could consider self-insuring -- paying the cost of long term care yourself. However, the costs are staggering and most people would prefer not to face the serious erosion of their lifetime savings.

Long term care insurance is a good way to transfer the financial risk of incurring large expenses for this care. The insurance is designed to meet the costs of nursing home care, community based services, and home health care. With most long term care policies, you are actually purchasing a benefit pool of dollars. Then, when you need and are approved for care, the costs are deducted from your pool of funds. The pool can be used to pay for the full spectrum of services, depending on the choices you made when purchasing the coverage.

Five Major Protection Factors of Long Term Care Insurance

The following five factors affect the coverage you will receive and the cost of that coverage:

1) Benefit Period - You can buy a policy that will pay for services for a minimum number of years to a lifetime. The choices generally range from 2 to 5 years and lifetime coverage.

2) Daily Benefit - Policies pay benefits out on an "amount per day." You choose the daily benefit you would like for coverage. Policies often have a daily benefit range of $40 to $300 to choose from.

3) Home Health Protection - this coverage meets your home health expenses. You are not obligated to choose this coverage or you can purchase it as a percentage of your daily benefit.

4) Elimination Period -With most policies, you are able to decide how soon after care begins that you want your benefits to start. Common options are 30, 60 & 90 days.

5) Inflation Protection - long term costs are ever increasing, and the inflation rider helps to ensure that your coverage will be adequate when you need it. Standard inflation options

are none, simple or compound.

Policies have different "benefit triggers" -- the circumstances that dictate when the insurer must begin making payments to the policy holder. It is common for benefits to begin when a licensed health care practitioner certifies that you will be unable to perform two of the activities of daily living (ADL’s) mentioned above for a period of 90 days or more. The other benefit trigger is often cognitive impairment -- such as Alzheimer’s or Senile Dementia.

If you have assets to protect, want those assets to be available for your spouse or other heirs, and you can comfortably afford the premiums, you should give strong consideration to purchasing long term care insurance. Some adult children share the cost of the insurance coverage on their parents’ to protect their inheritance.

Sharing the cost of the insurance is done because the policies are "expensive". Depending on your age and the coverage you select, annual premiums could be $2,000 to $8,000 per person. The older you are the more expensive the coverage. Before the potential costs dissuade you though, let’s do a quick cost-to-benefit analysis. Suppose your insurance premiums are $5,000/year and you pay them for 15 years before needing nursing home care. Your total cost $75,000. With the average cost of nursing home care at about $72,000 (in today’s dollars), after only one year of residence you will have broken-even on your investment.

The Partnership is an alliance between the State of Connecticut and the private insurance industry. The most intriguing aspect of a CT Partnership Long Term Care Insurance Policy is the Medicaid Asset Protection feature. It works like this: for every dollar a Partnership policy pays out in benefits, a dollar of assets can be protected from the Medicaid spend down rules. Therefore, you can become eligible for Medicaid benefits long before losing the entire value of your estate. For most people, this estate protection feature makes a Partnership policy very attractive.

In summary, families need to treat this subject carefully, because it could mean the difference between protecting or losing your estate.

Please send questions or comments to dcoffin46333@wradvisors.com.