Long-term care insurance: What is it? Who needs it?

Issue December 2004 By Morton J. Potoff, CFP

Despite the recent economic downturn, more and more people of all ages are buying long-term care insurance policies. You, too, may be wondering if long-term care insurance is the smartest decision for you and your family. Below are some of the key factors in making the long-term care insurance decision.

Public interest in long-term care (LTC) insurance is quietly and steadily growing. In fact, more than four million people held individual long-term care insurance policies at the end of December 2003.1

The recent interest in long-term care insurance is likely due to four factors:

•  New products with a variety of new benefits and features;

•  More benefits and emphasis on home health care and assisted health care as opposed to just nursing home care;

•  Limited alternatives for financing care; and

•  Growing consumer awareness of the benefits of long-term care insurance.

Product evolution

Long-term care (LTC) insurance policies have evolved over time to be far more flexible than they were in the early days, when they were known as nursing home policies. Today, our policies allow the insured to receive care in the setting of their choice, whether this is at home, in an assisted living facility, adult day care center or nursing home.

HIPAA regulations established by the federal government for tax-qualified long term care insurance require benefits be paid when a person can no longer perform two out of six "activities of daily living" (such as bathing, dressing, toileting, eating, transferring from bed to chair and back, and leaving the house to do necessary errands such as doctor appointments or grocery shopping), or when they need substantial assistance due to a cognitive impairment.

Age in place with care at home

New benefits have come on the scene, such as additional cash allowances on top of basic coverage, which pays for such extras as home modifications and home safety checks. Benefits like this make it easier for people to receive assistance at home.

Limited alternatives

Almost every day we read that the public safety net is slowly disappearing and the Social Security system may be in jeopardy 20 years from now. Even today, publicly available options for managing long-term care expenses are severely limited.

For example, Medicare typically covers only certain types of care for a limited period of time, leaving many long-term care costs uncovered. Medicaid also is an imperfect solution, because it requires people to spend down their assets to state-required levels to qualify. In addition, Medicaid primarily pays for care received in a nursing facility, not at home. Perhaps this explains why even the government recently decided to offer federal employees the option to buy long-term care insurance through a special Federal Long-Term Care Insurance Program.

(Special note for Connecticut residents only - The state of Connecticut, through the Connecticut Partnership for Long Term Care, offers asset protection up to the amount of benefits used for persons who purchase a Connecticut partnership - certified policy. And partnership policies cost no more than non-partnership policies.)

Consumer awareness

In part, LTC insurance sales have been driven by a growing consumer awareness of the benefits of long-term care insurance coverage. With more than 25 million adult caregivers in the U.S. today, many people are experiencing long-term care within their families.2 Some have witnessed the positive effects of long-term care insurance, which may have allowed their loved ones to remain in their own homes by paying for in-home care.

But many families without long-term care insurance coverage in place have seen the opposite effect - that is, limited choices and the impact of the high costs of long-term care on their family's financial foundation and security.

What advisors recommend

For the majority of the population (those who cannot self-insure), financial planners are now recommending LTC insurance as a core element of a family's financial plan. The advantages of planning ahead and purchasing the insurance at younger ages (under age 60) include:

•  The younger you buy, the less expensive the premiums.

•  Younger buyers are more likely to be in a healthy condition to qualify for coverage.

•  If long-term care is needed at an earlier age, the family's finances will be protected, as the policy will help to cover the costs of care.

•  The coverage can pay for caregivers to come into the home, where most people prefer to receive care.

This may explain why the average age of a long-term care insurance buyer has dropped from 72 years old in 1990 to almost 58 years old today.3

Is it worth it?

If a 55-year-old man purchases a policy that costs $1,500 per year and pays premiums for 20 years, until he needs long-term care at age 75, he will pay a total of $30,000 in premiums over those 20 years. Compare this to the cost of care at a skilled nursing facility in New England, which can reach $80,000 per year and is expected to grow five percent each year.4 In 20 years; the average annual cost of long-term care may be well in excess of $190,000.

What to do

First, engage in a family discussion. Review your financial situation to see if LTC insurance should be included. If you are helping your parents, make sure you understand their future wants or desires. If you are a couple planning for own long-term care needs, think through your own priorities and those of your children. Long-term care is a family issue. Most important, plan ahead.

Then, seek assistance. Long-term care insurance is best understood with the help of an insurance agent or financial planner who can assess a family's situation and specific needs.

 1. 2003 LTC Insurance and Medicare Supplement Sales and In Force Survey, LIMRA International

2. "The Economic Value of Informal Caregiving." Arno, P.S., Levine, C., and Memmott, M. M. Health Affairs. Vol. 18 No.2, 1999

3. Long Term Care Insurance in 1998-1999, Health Insurance Association of America (HIAA), 2002

4. MetLife Mature Market Study, 2003