Long Term Care Insurance


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The Realities of Long Term Care

The need for long-term care has become a critical issue in the United States -- one you should not ignore. As a result of demographic changes such as increasing life expectancy and an aging population, the demand for long-term care services is projected to escalate rapidly.

Long-term care refers to a range of medical, personal, custodial, and social services provided to people who are unable to care for themselves. In 1993, the United States spent more than $100 billion on long-term care, according to the U.S. General Accounting Office. The long-term care population today includes more than 12 million people who need assistance with everyday activities because of a variety of chronic medical conditions.

Long-term care may take the form of rehabilitative care for someone recovering from a heart attack or stroke, custodial care and supervision for a cognitively impaired person suffering from Alzheimer's disease, or personal care for someone who is physically disabled or infirm because of aging.


What Is Long Term Care?

Long-term care is provided for chronic conditions and differs in several ways from acute care. The distinction is important because it determines how care is paid for and where it is available.

Acute care requires the services of a physician, nurse, or other skilled medical personnel, often in a hospital. The goal of acute care is recovery. Improvement generally occurs in a relatively short period of time, even though the effects of the illness may last longer.

The goal of chronic care, on the other hand, is maintenance. Chronic care is intended to help physically or cognitively impaired people perform the activities of daily living, prevent injury to themselves and others, and sustain them over relatively long periods of time.

Since people of any age may potentially need long-term care services, their assets could be at risk at any time. The costs of long-term care can best be funded by insurance, not savings, since the sudden need for care can be financially devastating.

Don't make the mistake of counting on the government as your long-term care insurer. Medicare serves as insurance against the costs of acute care only. As a result, when Medicare does pay for long-term care, it is related to rehabilitation arising from an acute medical condition. And except in very limited circumstances, Medigap insurance also refuses to pay for custodial care.

The government program of social welfare that does fund long-term care -- Medicaid -- requires that you deplete most of your assets before it will pay your long-term care bills. In recent years several proposals to create a federal insurance program for long-term care were introduced, but none succeeded.

A handful of states have started programs that cover the costs of long-term care, but only if you buy private insurance first. The Medicaid programs of a few states are entering into experimental "partnerships" with private insurers selling long-term care insurance. In return for your purchase of an approved policy, these states will guarantee to preserve some or all of your assets from a Medicaid "spend-down" if you need care and you exhaust the benefits the private policy will pay.


Most People Needing Long Term Care Are Elderly

Note: Includes people needing long-term care in institutions or in the community. Children are those under age 18, working-age adults are those aged 18 to 64, and the elderly are those aged 65 and older.

Source: General Accounting Office (November 1994)


Who Needs Long-Term Care?

What is the difference between those who need long-term care and those who don't? People with chronic ailments or disabilities usually can't hope to "recover," but rather must try to "maintain function" as independently as they can from day to day. If they can't achieve this goal without a good deal of help from someone else, they are candidates for long-term care. Physical dependency on others is measured by how much you need help in performing the "activities of daily living" (ADLs). This refers to distinct tasks such as bathing, dressing, using the toilet, "transferring" (getting from bed to chair and vice versa), eating, and maintaining continence.

Other people who can manage the ADLs independently nevertheless suffer from mental disabilities that make them such a danger to themselves or others that they must be constantly supervised. Such people are also candidates for long-term care. Alzheimer's and Parkinson's are two common diseases associated with this kind of "cognitive impairment.


Who Supplies the Care?

Most of the elderly who are impaired -- both moderately and severely -- stay at home. However, while most people would prefer to receive care in the home, it may not always be a viable alternative, particularly if the need for skilled care is continuous.

In fact, a study by the Agency for Health Care Policy Research, reported in The New England Journal of Medicine (February 28, 1991), projected that 43 percent of those who turned 65 in 1990 will need some form of nursing home care during their lifetimes. The same study projected that 55 percent will have a stay of at least one year, and 21 percent will have a stay of five years or more. While nursing home stays average over $40,000 per year across the country, costs can be as high as $80,000 per year in some areas. Paid in-home help can lessen this burden on family and friends, but can become a financial burden in and of itself. Over the past decade, services for in-home long-term care have grown rapidly, although they are still in short supply. Even when the setting is the home, the cost of long-term care can severely strain a budget. Paid home health services range from $40 to $135 per day, depending on the skills of the providers.

While the possible financial consequences of long-term care are well documented, there is another aspect that can be just as costly: the human toll. Seeing to the needs of someone afflicted by chronic ailments and providing care at home can be demanding and exhausting, especially for those with a job or other obligations.

Whatever the setting -- at home or in an institution -- expect little or no assistance from Medicare. Medicare accounts for a tiny slice of the total paid to nursing homes, reflecting the very small percentage of their residents who need continuous "skilled" care. Medigap policies also do not provide coverage for long-term care expenses.

When we turn to home health care, the scenario isn't much more encouraging. Medicare picks up a portion of home care, but its reimbursements are contingent upon the services being "reasonable and necessary" for the diagnosis or treatment. Also, the person must need "intermittent" skilled care to be covered under Medicare.


"Spending Down" to Medicaid

Medicaid is the federal/state program that pays the health bills of poor Americans, regardless of age. Defining who is poor enough to qualify has been left to the state legislatures. Most states set the Medicaid line for a single person at $2,000 to $5,000 in assets (aside from a home and personal effects) and a meager monthly allowance -- $300 is a typical at-home figure -- or a $50 per month personal-needs allowance that is indexed to the current Consumer Price Index.

If you are not at this level already, Medicaid requires that you get there by "spending down" all your assets, although federal law has established spend-down limits to prevent the spouses of nursing home residents from becoming poor. Keep in mind that each state has its own rules for Medicaid eligibility and for determining which assets are considered exempt. Overall, the states severely limit the strategies by which one spouse may shelter assets under the name of the other or of another relative; transfers of property aimed at doing so, for example, won't work if someone has undertaken them within three years of the time he or she applies for Medicaid.

Don't dismiss Medicaid as a way to pay for long-term care. You may decide it's your most reasonable option if, aside from your home (normally exempted by Medicaid), you have little in the way of assets to protect or if those of your spouse are already well protected.


Purchasing Insurance

If you decide to buy long-term care insurance, decide when to purchase it. Premiums vary substantially based on your age and plan design.

There are no standardized long-term care policies as there are for Medigap policies. Almost all policies for long-term care, however, are designed with the same goal in mind:

They begin to pay for long-term care when you demonstrate a need for it, either at home or in an institution. They pay fixed daily amounts toward the costs. They let you decide how much protection to buy and when to buy it. Before buying a long-term care policy, you must decide on the benefit level. That decision should hinge not solely on how much you can afford -- but on other factors governing your situation: How much in assets do you have to protect? According to the National Association of Insurance Commissioners (NAIC), people with under $20,000 in assets (excluding primary residence) shouldn't buy long-term care insurance. A policy's premiums should not exceed 7 percent of your annual income. What do nursing homes charge in the area you plan to live in when you retire? Will family caregivers be available to help you should you need care? Do you want to remain independent?

Recently, there have been several changes in long-term care insurance. Many policies now protect against inflation and loss of benefits due to policy lapses. Other plans allow individuals to customize benefits to meet their needs when care becomes necessary. Several plans, including CAN LongTerm Care, offer numerous options when purchasing a policy, such as a daily benefit amount, a maximum coverage amount, the type of care to be provided (the setting to be determined at the time care is needed), or whether to include provisions such as inflation protection.

A new law, the Health Insurance Portability and Accountability Act of 1996, provides tax incentives for long-term care insurance. According to the law, expenses not reimbursed for qualified long-term care services will be tax deductible under the medical expense deduction provision of the Internal Revenue Code, to the extent that all deductible medical care expenses exceed 7.5 percent of adjusted gross income.

Premiums for qualified long-term care policies, up to a specified limit that are based on age, will also be treated as medical care expenses. Also, benefits received from a qualified long-term care policy may be excluded from income, subject to certain limitations.


Typical Coverage Offered

* In most states, it is illegal to offer policies with a medical-necessity only trigger. For some policies, medical necessity is an additional optional trigger.

** For home health care, the daily benefit may be limited to 50 percent of the nursing home care daily benefit. Some plans offer home care daily benefits of 75 percent or 100 percent of the nursing home care daily benefit.


General Guidelines for Purchasing Long Term Care Insurance:

Are intermediate and, above all, custodial (or "personal") care covered? The answer should be "yes" for home as well as institutional care. Also, ask whether the policy pays for respite care and adult day care.

What qualifies you for benefits? Must a doctor certify that your care is "medically necessary"? A less restrictive policy pays simply because you can't perform certain ADLs or are the victim of cognitive impairment. Steer clear of policies that require your inability with the ADLs to be the result of "sickness or injury."

Is a prior stay in an institution a precondition? Some early policies paid for nursing home care only after a stay in a hospital and for home health care only after a stay in a nursing home. Clauses like these have mostly disappeared -- but be on your guard. Watch out for policies that cover only Medicare-approved nursing home care; only two-thirds of nursing homes fall into this category. Will you be covered if you're suffering from a mental disorder like Alzheimer's disease? The response should be a specific "yes," with an assurance as well that other "organic" mental syndromes won't disqualify you. Ask about the dementia associated with Parkinson's, which might be classed as an excluded "nervous disorder"

Are preexisting conditions excluded? For how long? Most policies exclude them, usually for six months. How many times does the waiting period have to be satisfied? Some policies impose only one over your lifetime; others require separate periods for different types or different episodes of care.

Is there more than one lifetime benefit maximum and, if so, how is it calculated? Not all policies currently offer unlimited lifetime benefits. Most set a ceiling that is often the product of the daily nursing home maximum and the number of days of coverage. Is "case management" part of the package? A few policies will pay medical professionals to judge whether you need care, design a plan that best fits your needs, locate providers, and evaluate their services. A few like TIAA offer care management as a service to you to locate providers in your area, but you are under no obligation to accept the recommendations.

Does the policy have an inflation feature? Benefit increases should be "compounded" (i.e., go up by an increasing amount each year) rather than "simple" (annual increases by the same dollar amount). What are the renewal terms? The policy should be "guaranteed renewable" -- the insurer agrees to keep on covering you up to a certain age or for life, as long as you pay the premiums and your policy benefits are not exhausted. Wll premiums stay the same? Beware of policies that can increase premiums because of your age or the state of your health. An insurer should be able to raise your premium only when it raises premiums for everyone else in your state who owns a similar policy.

Must you keep paying premiums when you're receiving benefits? Most policies contain "waivers" that relieve you from doing so under certain conditions -- for instance, after you've been in a nursing home for 90 days. If you stop paying premiums, does your coverage stop? With many policies, it does, but some companies guarantee to retain some "paid-up" benefits.

Can you buy the policy beyond a certain age? Most impose a cutoff -- age 79 is a common one -- but some do not. With a group policy, can you keep the insurance once you leave the group? Ask whether benefits are "portable" (i.e., whether they go with you when you separate from the group).

Is the insurer financially sound? Ask for ratings from A.M. Best, Standard & Poor's, Moody's Investors Service, and Duff & Phelps.


Services Covered Skilled, Intermediate, and Custodial Nursing Home Care, Home Health Care, Adult Day Care, Alternate Facility Care, and Respite Care
Daily Benefit $40-$300/Day Nursing Home
$20-$300/Day Home Health Care
Benefit Eligibility Medical Necessity Only or Inability to Perform ADLS or Cognitive Impairment
Maximum Benefit Period 2-10 Years or Unlimited
Reimbursement, than the Daily Benefit Purchased 100% of Actual Expenses, But No More
Deductible Period 0-180 Days
Pre-existing Condition 6 Months or Less
Renewability Guaranteed
Alzheimer's Disease Coverage Yes
Age Limits For Purchasing Yes (Generally 18-84)
Waiver of Premium Yes
Free Look Period 30 Days
Inflation Protection Yes
Non Forfeiture Benefits Return of Premium, Reduced Paid-up, or Shortened Benefit Period


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