What is Long Term Care Insurance and how much does it cost?

Long Term Care is designed to provide you funding for assistance with basic activities for daily living. As opposed to other types of health care in that the goal of the long term care is not to cure an illness but to allow an individual to attain and maintain an optimal level of functioning.

In today’s society, people are getting healthier and are more conscious of the choices they make to keep their health on track. This translates into longer lives. However, the other side of the coin is that most people will need healthcare later on. Unfortunately, this type of care can often deplete their life savings as well as the risk of leaving their homes to place they really don’t want to live in.

Here are some quick statistics to back that up that statement:

  • Someone turning age 65 today has almost a 70% chance of needing some type of long term care services and supports in their remaining years.
  • Women need care longer (3.7 years) than men (2.2 years)
  • One-third of today’s 65 year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years

According to the US Bureau of Census, California has the largest senior population of any state in the country and experts predict that this number will double over the next ten years. There is also the fear that with greater life expectancy, federal and state funding may become depleted to pay LTC costs as the baby boomers age. Medi-Cal has become the largest payer of LTC services when people can’t afford to pay.  Medi-Cal is the dominant source of payment for long-term care, followed by out-of-pocket payments by individuals and families.

Medi-Cal funding will be squeezed even more over time and the sad truth is that you are low income with limited assets, then you’re not a candidate with LTC insurance. Premium payments should never create hardship, as there is no guarantee that LTC benefits will ever be needed.

Due to financial burdens, many people may opt to move into their children’s homes or have their children take care of them. In 2009, over 42 million people did that and that number has grown substantially. Over $450 billion in 2009 was due to unpaid contributions. The stress of caring for a parent often leads to anxiety and depression. Changing the dynamics of the parent child relationship is an understatement.

LTC insurance may not be an option for those with a higher income since they can self-insure. That being said, from personal experience I would take pause of your comfort level of losing more than half million in cash. As a graduate of the College of Financial Planning, I recommended Long Term Care Insurance to my own dad but he felt he had the net worth to cover the potential liability. He was correct, he does, that being said my mom is under pressure to come up with cash when so much of their portfolio is either non liquid or subject to unfavorable taxable consequence. The tremendous pressure she is under only is magnified by the cost of care.

How Are benefits Triggered?

  • You are unable to perform, without substantial assistance from another person, at least two Activities of Daily Living for a period that is expected to last at least 90 consecutive days due to a loss of functional capacity

Or

  • You require substantial supervision to protect yourself from threats to health and safety due to a severe cognitive Impairment

Activities for Daily Living:

  1. Bathing
  2. Continence
  3. Dressing
  4. Eating
  5. Toileting
  6. Transferring

Severe Cognitive Impairment means a loss or deterioration in intellectual capacity that is comparable to and includes Alzheimer’s disease and similar forms of irreversible dementia; and is measured by clinical evidence and standardized tests that reliably measure impairment in your:

(a) short-term or long-term memory;

(b) orientation as to people, places or time;

(c) deductive or abstract reasoning; and

(d) judgment as it relates to safety awareness

 

The Cost of Long Term Care Insurance  

The Cost of LTC insurance varies based on many factors including

  • The amount you purchase
  • The options you purchase
  • Your Age
  • Your Health

Article 5 of the California Insurance Code requires all carriers to make the inflation available. Long Term Care Services are exceeding the Consumer Price Index and a benefit of $200 today ($6,000 per month) will obviously not be worth $200 in 20 years from now. A 3% Compound Lifetime Inflation Protection Benefit increases the $6,000 to $10,837 in 20 years and $14,564 in 30 years.  Other options are available too. After the inflation option, my personal favorite is the “spouse shared benefit’ which increases the premium about 15%. This is available for couples and really allows you to leverage your benefits as one person can access the other’s benefits, providing they leave one year for their partner. In the event of their partner’s death the unused benefit rolls over to the surviving spouse. By the way, couples purchasing polices receive substantial discounts, about 30% with many carriers and an additional 15% discount for preferred health. The younger & healthier you are the less expensive your policy will be. Pulling an illustration for a current prospective client with one of my favorite carriers, I’m looking at John, a 65 year old male for $336 per month and Pauline, a 63 year old female for $494 per month. They are in preferred health and this is a 3 year benefit up to $6,000 per month. Options include:

  • 3% compound inflation
  • Spouse Shared Benefit
  • Waiver of Home Health Care Elimination Period

The Elimination Period is a time deductible. This policy has a 90 day elimination period, meaning that after the benefits are triggered your expenses for days 91-121 would be submitted to the insurance carrier on day 121 and you’d would get a check a week or two later. Since 70% of claims are for Home Health Care I find that many people like to have a zero elimination period for an additional 15%. Therefore, John or Pauline will be able to submit their home health care claim on the 31st day for reimbursement.

Benefit Multiplier

John & Pauline’s benefit is for three years but most likely will take them beyond three years. The three years is actually a benefit multiplier. They are looking at a $6,000 monthly benefit with three year duration or 36 months. $6,000 (36) = $216,000. They are in reality purchasing a $216,000 “bucket of money” that will be available for Home Care Benefits, Nursing Facility or Residential Care Facility. Most likely when benefits are initially triggered, you won’t need the entire $6,000 per month. For example, my dad only needed someone a couple days a week at first, then every day and lastly 24 hour 7.  If you only use $3,000 per month for the first year, than your benefits will go beyond the 36 months as the other $36,000 is still in your “bucket”. Since they purchased the inflation protection, that $216, 00 bucket of money will turn into over $390,000 in 20 years and over $524,000 in 30 years. Turning a $300-$500 per month investment into that bucket of money would require substantial risk. Remember that in the likely event that either John or Pauline goes on claim they can tap into the others bucket of money.

Are there tax deductions available? The benefits paid out through a long-term care policy are not taxed as income.  Also, most policies sold today are “tax-qualified” by federal standards. This means if you itemize deductions and have medical costs in excess of 7.5 percent (10% beginning 2019) of your adjusted gross income you can deduct the premiums from your federal income taxes.

If you have a business you can use business dollars to purchase your LTC Insurance.

Owners of C Corporations can deduct the actual premium for themselves, spouse, dependents and employees.

Self-employed business owners (Sole Proprietor, Partnership, LLC, S Corporation) may deduct 100% of the eligible premium for themselves, spouse and dependents. These were the eligible premium guidelines for 2017.

  • 40 and younger $410
  • 41-50 $770
  • 51-60 $1,530
  • 61-70 $4,090
  • 71 and older $5,110

Transfer some of the risk or most of the risk. Often people feel they have to get at least a five year benefit with a large monthly amount. Traditional long term care polices generally offer no more than a five year benefit and there are hybrid life insurance policies that can actually provide the insured with a Life Time Long Term Care Benefit Rider.  Depending on your financial plan and your risk tolerance level this can make sense. My concern is that often people feel that if they can’t eliminate the risk entirely than they may forego altogether. As stated above about 20% of LTC claims are more than five years, but the average woman’s claim is under four years and the average man’s is under three. Isn’t it better to transfer some of the risk to the insurance carrier than nothing? Work with an experienced agent and evaluate your options based on your financial portfolio, your desire to leave a legacy for your heirs and your emotional well-being.

 

Resources:

https://www.medicare.gov/what-medicare-covers/part-a/paying-for-nursing-home-care.html

https://assets.aarp.org/rgcenter/ppi/ltc/i51-caregiving.pdf