Long-Term Care Insurance

Psychologists tell us that denial is a natural defense mechanism, shielding people from the unpleasant realities of life. The need for long-term nursing care is one of those unpleasant realities. Unless one actually experiences, first-hand, the costs associated with nursing home confinements and home health care, it is quite natural to dismiss the entire matter as “something that will never happen to me.”

The truth, however, is that the need for some form of care is something that will happen to many of us. Let’s look at some more unpleasant realities:

• 43% of those who are 65 or older will spend some amount of time in a nursing home; of those who do, 21% will require care for longer than five years.

• Nursing home costs throughout the United States range from $2,000 per month to over $5,000 per month. According to a Harvard University study, one-half to two-thirds of all nursing home residents are left penniless within a year.

Denial is not the only reason people avoid dealing with the subject of long-term care. Often, it’s a matter of misinformation concerning who is responsible for paying the costs of nursing care. Many people over 65 assume that Medicare will pick up the tab. Not true. Medicare pays only the costs of “skilled” care, following a mandatory three-day hospital stay for the same condition that triggers the nursing home stay. Medicare does not pay any expenses associated with “custodial care,” which is defined as personal care, such as bathing, cooking, and shopping. Over 90% of all nursing care is defined as custodial.

Another misconception, especially among younger people, is that group medical insurance will cover custodial nursing care expenses. Same problem: Custodial care is generally excluded. Check the exclusions section of any medical insurance policy; one of them is typically custodial care. Some employers now offer long-term nursing care insurance on a group basis; some even help pay the premiums. But the typical group medical plan does not pay for custodial nursing care.

A third misconception is that younger people don’t need long-term nursing care. In fact, 45% percent of nursing home patients are under 65 years of age. Does anyone remember what happened to Karen Ann Quinlan or Joni Eareckson? How about Christopher Reeve (Superman)?

The point of this article is not to depress the reader but to issue a wake-up call for the need for advance planning for one of life’s unpleasant realities. It’s especially important for people with diabetes. By the time a physician recommends nursing home care, it’s usually too late to seek out insurance with which to pay the nursing care bills.

Long-term care insurance

Long-term care insurance is a form of privately purchased health insurance designed to pay the costs of custodial nursing care (as well as skilled and intermediate care). Many insurance companies now offer such insurance coverage, with a wide variety of rates, benefits, and riders, or additions.

Before shopping for coverage, the applicant would be well advised to give some serious thought as to what should and should not be a part of a nursing care insurance program and what he can comfortably afford to pay for the coverage. The National Association of Insurance Commissioners publishes “A Shopper’s Guide to Long-Term Care Insurance.” One can obtain a free copy from any of the carriers or agents who market this type of insurance. Be sure to read the material before enrolling in any long-term care plan.

The older one is at time of purchase, the higher the annual premiums (other things being equal). So if you have been getting senior citizen discounts at the movie theater for a while now, be prepared for sticker shock; premiums of $3,000 or $4,000 per year are not at all uncommon for those who delay purchasing coverage until after age 70. People who have diabetes can anticipate an even higher premium outlay, assuming they can pass the carrier’s underwriting criteria and qualify for coverage. Most policies are issued on what is known in the trade as a “guaranteed renewable basis.” That means that rates are based on entry age and will not increase unless the company increases the premiums of everyone who bought similar coverage. Once you have it, they can’t take it away from you, but they can increase your rates if they do so across the board.

Qualifying for coverage

Most plans are issued on an “underwritten basis,” meaning that the company may reject an applicant outright, based on much the same health history data it collects in connection with other forms of health insurance. In many cases, the same underwriting department that reviews medical insurance applications also evaluates long-term care applicants. Fortunately, most of them tend to be more liberal with evaluating long-term care applicants than with medical insurance applicants. A person with Type 2 diabetes may be rejected for medical insurance but accepted for long-term care coverage, probably at an increased premium over that paid by otherwise healthy applicants of the same age.

Type 1 diabetes poses a more difficult barrier to obtaining coverage. A person with Type 1 diabetes would be well advised to seek out some kind of group coverage, either through an employer, a union, or a professional association. Such plans are generally not as selective as comparable, individually purchased policies.

Most carriers have a maximum age at entry of 79 and a minimum age of 40. Why a minimum age? Because younger applicants are more likely to experiment with drugs, alcohol, unprotected sex, bungee jumping, jumping out of airplanes, fast cars and motorcycles, and God knows what else. Those who survive to 40 are generally considered good insurance risks.

Most plans require that a physician recommend the nursing care before they’ll cover a claim. For some plans, that is all that is required for admittance to a nursing facility. Others require that the person be unable to perform certain “activities of daily living” (ADLs). ADLs include such things as bathing or dressing oneself, eating and using the toilet without assistance, and getting in and out of bed. Alzheimer disease is normally an automatic trigger, although a few policies still exist that exclude cognitive impairment of any kind, unless the person is also incapable of performing two or three of the ADLs.

Premiums vs. benefits

Most of us, particularly those living on fixed incomes, have budgetary constraints. We can’t all drive Cadillacs, BMWs, or Lincoln Navigators. Most of us are content with Chevies and Fords, and generally speaking, get good service from them. Perhaps we won’t arrive at our destinations as comfortably, but we usually manage to arrive in pretty good shape.

The same is true of long-term care policies; one can purchase a Mercedes or a Ford. If one actually drives a Mercedes, one can probably afford a “Mercedes-type” policy. Otherwise, the applicant should purchase the minimum plan necessary to satisfy his perceived need.

One method of reducing premium outlay while not gutting benefits is to impose an initial deductible, also called an elimination, or waiting, period, ranging from 20 days up to a full year, prior to actually receiving benefits from the plan. A waiting period of 90 days is common. If one has the available cash to pay for the first three months of care (perhaps $15,000 or more), the premium savings can be substantial. If self-insuring the first three months of care is not possible, consider purchasing a plan with no waiting period and a reduced daily payout. Let’s assume a policy’s maximum daily payout is $200 and the applicant purchases the plan with a 90-day elimination period. For about the same premium outlay, but without the elimination period, the applicant could purchase a benefit of only $150 per day.

Insurance agents will advise the applicant as to what is an appropriate combination of benefits. While evaluating their recommendations, keep in mind that the higher the premium outlay, the higher the sales commission earned by the agent who sells the product.

What about home health care?

The final design of any nursing care policy is determined in large measure by the past experience(s) of the applicant in caring for a disabled family member. To such a person, the most important feature of a policy may be the ability to receive care in one’s own residence, as opposed to inpatient nursing home care. If that is the case, the applicant may wish to investigate plans that only pay for care at home. Depending on the age and health of the applicant, home health care may be the only option available. Some carriers will issue home care policies to applicants after age 79 while refusing to issue inpatient nursing home coverage.

Most professionals advise against purchasing home health care as a stand-alone product if there are alternatives available. There are several reasons for this. First, the condition that triggers the need for nursing care may worsen, requiring institutionalization. Providing care at home for a severely ill or disabled person may prove to be impractical, if not impossible.

Second, most such plans have a deductible, or waiting period, before home-care benefits are actually paid. A 20-day waiting period is common. Normally, home care is limited to three or four visits per week. If the plan has a 20-day waiting period, and the beneficiary receives only four visits per week, the waiting period is actually five weeks long, not 20 days. Many people who are disabled and remain at home for five weeks either recover or enter an inpatient nursing facility. Either way, the insurance carrier pays nothing under a home-care only policy.

A third argument against home-care policies is that they generally cover only one 8-hour shift per 24-hour day; perhaps not even that much. Who will look after the person during the remaining 16 hours?

Inflation riders

Inflation riders are usually offered in one of two forms: those that automatically increase the daily benefit each year and those that require the insured to make a decision to increase the daily benefit at each anniversary. Typically, the amount of the increase is 5% and may be purchased on either a simple or compound interest-rate basis.

If a 50-year-old applicant purchases a plan providing a daily benefit of $100 with an automatic 5% simple-interest inflation rider, at the end of 10 years, the daily benefit would amount to $150. By the time he reaches age 70, the benefit will have doubled. So far, so good; but what about the additional premium cost?

Adding the inflation rider can increase the annual premium outlay by 50% or more. Is it worth it? It depends. If a person turns 80 before entering a nursing home then lives only two years or so, no. If a person enters a nursing home at age 70 and lives to be 100, absolutely.

There is another factor to consider besides the difference in annual premium outlay: “Have nursing homes in my area actually increased their rates by 5% each year for the past 20 years?” If so, the inflation rider might be a wise decision, but perhaps the person could be transferred to a less costly facility. There are rural areas where the daily room charges are half those of large metropolitan centers. As long as care is rendered anywhere in the United States by a licensed facility, most policies will pay the claim.

Help from the government

Medicare only pays for skilled care and even then only on a very restricted basis. Of course, that could change. If Congress and the White House agree on adding a meaningful prescription drug benefit to Medicare, the next logical addition would seem to be a limited nursing-home benefit of some kind. There is simply too much pressure being brought to bear for the Feds to ignore the clamor for nursing home coverage. But for now, don’t expect any help from Washington.

A person’s state of residence is another matter. If one can meet the income and asset qualifications of Medicaid, one can receive “free” nursing home care as a guest of that state. Don’t expect a suite at Trump Towers or the local Hilton. Nursing facilities that accept Medicaid payments are not five-star luxury resorts and may have a limited number of beds available to Medicaid recipients.

What about those whose income and assets are too high to qualify for Medicaid? A whole field of law and estate planning has developed over the past 20 years that provides those with money with perfectly legal methods of transferring their assets to family members, so as to meet a state’s tests of eligibility. In many cases, the state’s Department of Social Services will actually instruct callers how to “spend down” to qualify for financial assistance.

If a person needing care is a veteran and is willing to seek treatment from a Veterans Affairs facility, he should explore that option. The Veterans Affairs Health Care Programs for Senior Veterans provides for a range of services, from in-home care to day health care to full nursing or hospice care. The phone number for the Veterans Affairs Health Benefits Service Center is (877) 222-VETS (222-8387).

Facing reality

Anyone over 39 who can afford the premiums but hasn’t yet purchased long-term care insurance is either uninsurable, uninformed, or in a state of denial. It’s time to wake up. The longer one postpones the purchase, the more expensive the premium outlay will be.