Spring 2008

Long-Term Care Insurance: The Risk/Benefit Ratio
By Barbara Worthington
Aging Well
Vol. 1 No. 2 P. 32

Those long-term care insurance solicitations appear in our mailboxes about as regularly as Ed McMahon’s invitations from the Publishers Clearing House Sweepstakes. Despite the major difference in the pitch, the same burning question applies to both: Who wins?

As baby boomers mature in massive numbers, their thoughts turn to the promising prospects of increased longevity and enhanced later life opportunities. Spending vital, productive years well past actuarial life expectancies offers the appeal of exploring new interests, meeting new challenges, and excelling at new and different pursuits.

Ideally, older adults would live full and exciting lives, remain healthy and active, and make a graceful exit at a very old age. But the reality is that many will require some type of long-term care due to an accident, disability, or illness. And the stark truth is that such care is expensive—incredibly expensive.

Costs for long-term care are staggering. The average yearly cost of a private room in a nursing home is $77,745, according to the American Association of Homes and Services for the Aging (AAHSA), with the average cost for a semiprivate room now at $68,985. The average annual cost for assisted living care is $35,628.

The insurance industry offers a solution, albeit a costly one, for this long-term care dilemma with long-term care insurance. Its benefits can cover nursing home and in-home care, including services such as nursing care, physical therapy, medical equipment, adult day care, and respite care for caregivers’ family members.

Roughly 45 companies currently offer some type of long-term care insurance, according to Jesse Slome, CLU, ChFC, executive director of the American Association for Long-Term Care Insurance based in Westlake Village, CA. Although various types of long-term care insurance have been available since the mid-1980s, he says only about 8 million Americans currently have long-term care insurance policies. “It’s growing,” he says, adding that “it’s becoming more of a baby boomer product.”

For baby boomers, the handwriting is on the wall. According to the AAHSA, 69% of Americans aged 65 today will need some form of long-term care. And estimates suggest that by 2020, some 12 million older Americans will require long-term care.

Slome says the marketplace is becoming increasingly aware and more sophisticated when it comes to long-term care insurance. Consumers are likewise becoming more familiar with what’s not a viable solution, whether through experiences with their parents’ care or personal research.

Many older adults, for example, mistakenly believe that Medicare will serve as a safety net if and when long-term care becomes a necessity. However, Medicare covers only a limited amount of long-term care and typically pays for little or no home healthcare and no assisted living care. Medicare requires substantial insurance copayments after the initial 20 days in a nursing home and provides benefits for a maximum of 100 days.

Also, Medicaid is available for certain health services and nursing home care for older adults, but only for those with low incomes and very limited assets.

As with any other insurance policy, your policy purchase represents your placing a bet. You’re betting that you’ll need the benefit, while the insurance company bets that you won’t. As usual, you want the insurance company to win. But it’s expensive to find out who wins the long-term care sweepstakes.

Changing With the Times
The evolution of the long-term care insurance market has mirrored the aging of the huge baby boomer demographic, its lifestyles, and its needs. And the hallmark of the evolution is flexibility, according to Kansas Insurance Commissioner Sandy Praeger, who serves as president of the National Association of Insurance Commissioners. She admits that although less than 10% of the U.S. population currently subscribes to long-term care insurance, it’s growing in popularity due to product improvements and enhancements.

Policies include language allowing for a variety of choices in the type of long-term care services offered, as well as inflation protection options that periodically increase the benefit level without the need for the policyholder to provide evidence of insurability.

A significant benefit of investing in long-term care is the potential saving in terms of income taxes. With a 1996 amendment to the Internal Revenue Code, the federal government allowed for the favorable tax treatment of long-term care insurance policies that qualify under the law. Generally, benefits received from tax-qualified policies won’t be considered as taxable income under either federal or state law. Premiums charged for tax-qualified policies are treated as medical expenses for purposes of itemized deductions up to specified dollar limits that are indexed annually.

Praeger says a major advantage to policyholders is the “choice and control over where they receive services.” Some policies pay for home modifications to accommodate home care. And some cover homemaking services that include assistance with bathing, cleaning, and meal preparation, allowing older adults to remain in their own homes—and allowing their children the peace of mind that comes from knowing parents are most comfortable where they are happiest.

With continuing steep increases in the costs of all types of care, Praeger says inflation protection is practically a must. “Without it, [long-term care insurance] may not pay for very much by the time you need it,” she says.

Those who stand to benefit most, according to Slome, are older adults who, through accident or illness, develop a need for care and can access it faster or at higher levels than those without such insurance. Sometimes, this earlier care is instrumental in avoiding a more serious condition, he says.

Long-term care insurance presents consumers with two important considerations, says Slome. An individual’s health is key since the cost of the insurance increases with age. And insurance companies look at an individual’s health as a predictor of the future and the likelihood of the need for long-term care. Consumers can lock in a good health premium discount between 10% and 20% that remains in place even if health status eventually changes, according to Slome.

“Your health is really the No. 1 determinant of what you’re going to pay and when you’re going to qualify” for long-term care insurance, Slome says. He recommends the mid-50s as the best age to purchase a policy, emphasizing that it’s important to pursue such insurance while in good health. “A change in health can preclude you from qualifying for long-term care insurance no matter what,” he says.

Reflecting the continuing demand by consumers for flexibility in products, recent tweaks have resulted in more “life stage-type” products, according to Slome. He says an individual may purchase a product at age 55 and possibly update to a different product at 60. At 65, older adults have an even better sense of health status and may again alter a policy’s provisions. “The closer you get to potential use, the more aware you are,” he says.

If You Win, You Lose
With the many variables that long-term care insurance includes, it’s somewhat difficult to understand. Elimination periods, or the number of days you must actually need nursing home or home healthcare before your policy kicks in, may range from zero to 180 days. And to satisfy eligibility requirements, most policies require you to be unable to perform specific daily living tasks such as dressing, bathing, and eating.

Once you qualify, how much will your policy pay? Generally, benefits are specified daily amounts that range from $50 to $250. You may select a benefit period that is a specific number of days, months, or years, or your maximum benefit period may range from one year to the remainder of your lifetime.

Without the benefit of a crystal ball, it’s difficult to know where to begin to navigate long-term care insurance policies. Although premiums are determined by a number of factors, including the age, size of benefit, and health status at the time of enrollment, it’s a given that they’ll be pricey.

Based on 2007 figures from the American Association for Long-Term Care Insurance, the average price for a comprehensive long-term care insurance policy with a 100% home care benefit plus skilled care coverage, 90-day elimination period, and compound inflation protection option purchased at age 55 was $1,075 per year. The premium, discounted for preferred health status, provides a $100 maximum daily benefit with a three-year benefit period.

The same coverage obtained for an individual with standard health at age 65 was $1,923. It’s important to note, however, that a policy purchased 10 years later with the identical $100 maximum daily benefit would buy considerably less in terms of healthcare services and associated costs.

Purchasing long-term care insurance is unlikely to be the best use of your assets, according to Joseph P. Newhouse, PhD, the John D. MacArthur Professor of health policy and management at Harvard University. He’s skeptical of its efficacy “at both extremes of income distribution.

“At the low end, Medicaid will pay,” says Newhouse. “At the high end, they have enough wealth to self-insure.” He says that for the affluent, long-term care insurance simply serves to protect the value of the estate. It was originally sold, and continues to be sold, as individual insurance as opposed to group insurance, he says, noting, “It’s never much caught on.” Proportionately few policies are purchased at group rates.

Long-term care insurance is a product that’s most attractive to the middle of the income distribution scale, says Newhouse. However, people in their 40s tend not to buy it, whereas those at higher risk as they age or who are facing health issues look into its provisions. “It [a long-term care insurance purchase] depends on how much risk you’re willing to assume,” he says. “Some people just plan to spend down to Medicaid.”

Among Newhouse’s concerns related to long-term care insurance, along with its high cost and significant risk assumed by purchasers, is the lack of protection against the increasing costs of healthcare. “They’re well above the increases in inflation,” he says.

Newhouse suggests that the best scenario would involve a federal policy under which employer-paid premiums for long-term care insurance would be considered nontaxable income. “That might appeal to employees to take more compensation that way,” he says.

Government involvement as a way of boosting the appeal and effectiveness of long-term care insurance is also advocated by Mark V. Pauly, PhD, a professor of healthcare systems at the University of Pennsylvania’s Wharton School. “It’s likely government action could cause it [long-term care insurance] to take off,” says Pauly. “The government could turn it into a subsidy people could claim [in order] to buy their own long-term care insurance.”

Pauly likewise agrees that such insurance is best suited to middle-income folks. “It started as nursing home insurance,” he says. “Now it’s much more flexible.” If you value your estate and don’t want to go on Medicaid, either for the stigma or lack of choice it imposes, long-term care insurance may be the way to go. It does provide the quality dimension of offering choices, including benefits if you choose to stay in your home.

He agrees that it’s not particularly desirable for upper or lower end earners. “At the upper end, it doesn’t make sense,” he says. “It simply serves to protect bequests. And at the lower end, there’s Medicaid as the safety net.”

The list of pros and cons may be extensive, but there’s no shortage of speculation on the future of long-term care insurance. “If more employers offered it, it would become cheaper and more popular,” Newhouse suggests.

Maybe we’ll find the Employers’ Long-Term Care Insurance Sweepstakes literature in our mailboxes within the next few years.

— Barbara Worthington is associate editor of Aging Well.

Long-Term Care Insurance Facts and Figures
A number of factors influence buyers’ decisions regarding the purchase of long-term care insurance, including age, life expectancy, gender, family situation, health status, income, and assets.

The longer you live, the greater the likelihood that you’ll need long-term care. The younger you are when you take out the insurance, the less it will cost.

Women are more likely to need long-term care because of their longer life expectancy and the likelihood that they’ll outlive their husbands.

Having a spouse or adult children increases the likelihood that you’ll receive care at home from family members.

Consider the following statistics:

• Forty-nine percent of people over the age of 65 will spend time in a nursing home.

• The average age of purchase of long-term care insurance in the individual market is 65.

• The average age of purchase in the group market is 47.

• The individual market represents 83% of the dollars spent on long-term care insurance.

• The individual market represents 68% of the lives covered by long-term care insurance.

• Only 6% of individuals over the age of 45 have long-term care insurance.

• The average age for making a claim is 75.

— Source: Joseph P. Newhouse, PhD, John D. MacArthur professor of health policy and management at Harvard University

Tips for Selecting Long-Term Care Insurance
Before purchasing a long-term care insurance policy, it’s important for your clients to consider the following in order to make an informed decision:

• Select the right kind of coverage, including options such as home healthcare coverage, respite care, and adult day care.

• Require admittance to all levels of care, including skilled, intermediate, or custodial care facilities without having to start at the highest level of care.

• Avoid policies with a prior hospitalization requirement.

• Select highly rated policies, verifying information applicable to your particular region or state.

• Obtain front-end underwriting with an attending physician’s statement at the time of application to protect against claim denial due to underwriter mistakes.

• Know the difference between “guaranteed renewable” and “noncancelable.”

• Obtain an inflation adjustment.

— Source: National Academy of Elder Law Attorneys