What is Long Term Care Insurance and What Does it Cover?

What is long-term care (LTC)? Essentially, it is the inability to care for oneself due to a chronic (long-term) medical condition.

So then, what is Long Term Care insurance? That’s a good question, and this article will seek to answer that question and provide some insight into what may become an epidemic in America in the near future — the accelerating population of people over 65, their need for LTC and finding a viable solution to afford the costs and services associated with LTC.

Before moving on, let’s define specifically what we mean when we say Long Term Care.

What is Long Term Care?

Long-term care (LTC) is a combination of services which provide for the medical and non-medical needs of people with a chronic illness or disability who cannot care for themselves for a long period of time. LTC is usually paying for rather unskilled care providers, but it is costly because the care needs to be provided around the clock – seven days a week. Qualifications for benefits usually necessitate being unable to do two of the six basic tasks for everyday living. These tasks are called activities of daily living (ADLs).

ADLs (Activities of Daily Living)

1. Feeding.
2. Bathing.
3. Toileting.
4. Walking and transferring.
5. Selecting proper attire.
6. Maintaining continence.

In other words, if two of the above ADLs are something you can’t do for a long period of time (typically 90 days), you would qualify for LTC. As a comparison, traditional medical care attempts to treat or cure illnesses, whereas long-term care usually won’t improve a medical condition, but it does help people maintain their lifestyle.

Who Needs Long Term Care?

Those that need LTC are increasing in number every year. More than 5,000 people in this country turn 65 every single day. And more than 2.5 million are 85 or older — which is the fastest growing segment of the U.S. population according to the U.S. Census Bureau. For any person over the age of 65, there is a one in three chance they will be confined to a nursing home at some point in the future.

Is Long Term Care Expensive?

A study conducted by Genworth Financial and published in March 2013 noted that the semi-private nursing facility cost of long-term care in the U.S. is $207 per day or $75,555 per year and the median cost for “hands-off” homemaker services is $18 per hour. The average individual that needs Long Term Care services typically needs them for 2 years. At $75,555 per year (in 2013) the average LTC recipient will need just over $150,000 to pay for LTC. And don’t expect the government to pick up the tab.

Medicare and Medicare Supplements primarily pay for the costs associated with acute (as opposed to chronic) medical conditions. Acute medical conditions are defined as being relatively recent and short-lived. In other words, if you expect Medicare to pay for your Senior Day Care needs, you will be disappointed.

Medi-Cal and Medicaid does provide long-term care benefits for many senior citizens, but they must first exhaust most of their income and assets to qualify. Don’t expect to have Medicaid pay for LTC costs if you have a couple hundred thousand in mutual funds.

Unfortunately it is common for seniors to be forced to move in to a Medicaid assisted care facility because they have exhausted all their resources for in-home care that was provided in the comfort of their own home. According to the National Council on Aging, LTC expenses drive about 7 out of 10 senior families into federal poverty levels within four months of beginning institutionalized care.

What is Long Term Care Insurance?

Today, most Long-Term Care Insurance policies are standalone policies sold to individuals. But you can also get coverage within a group through an employer. As of 2014, there were approximately 7.2 million policies in force and of those policies, 70% were individual and 30% were group.

The premium for a LTC policy will depend on the following variables:

1. Current age;
2. Amount of the daily benefit selected;
3. Length of time that the company will need to pay benefits; and
4. Number of days, months, or dollars paid by the policy holder before the company will begin paying benefits after they qualify for care.

Premiums may be tax deductible, which is good news since premiums can range from hundreds of dollars per year if purchased at 50 years of age to several thousand per year if purchased after age 75. And the policy may not cover all LTC costs and expenses.

For example, the policy may cover $120 per day in a nursing home, but the total cost of care may be $160 per day. Policyholders must pay the difference.

Also make sure you can afford a rate increase on the policy sometime in the future. A company cannot raise their rates based on your age or health, but the company can raise the rates for an entire class of policies. Check your local state laws because some have limits on rate increases. If your policy is so expensive that any increase in the premium would be challenging for the policy owner to pay, choose another policy or different coverage.

NOTE: The term “level premium” can be misleading. You may be told that your long term care insurance premium is “level.” But it may still increase in the future. Many states have regulations that prevent insurance companies from using the word “level” to sell guaranteed renewable policies for this very reason. The company is obligated to tell you that the premium may increase.

Guaranteed Renewable vs. Noncancelable

With a “guaranteed renewable” policy the insured has the obligation to keep coverage in force if premiums are paid on time. The insurer may not change the terms of coverage or decline to renew without the consent of the insured. The insurer may change the premium rates for all insureds in the same class. But changing the rates for all insured in the same class may require state insurance board approval. In other words, it’s not something they would be doing to your policy alone, but to a class of people.

A “noncancelable” policy is similar to the “guaranteed renewable” in that the insured has the contractual obligation to keep the coverage in force if premiums are paid on time. And likewise, the insurer may not change the terms of coverage, decline to renew without the consent of the insured. Here is the key difference, with a “noncancelable” policy the insured may not change the premium rate, i.e. your premium is fixed.

Regardless of the type of policy, there must be a renewability provision on page one which clearly describes the initial term of coverage, the conditions for renewal, and, in the case of a “guaranteed renewable” policy, the conditions which would allow the insurer to change the premium amount.

Noncancellable LTC insurance

Due to low interest rate environment that we currently find our country in, finding a noncancellable long term care insurance policy is near impossible. In fact, we do not know of a traditional long-term care insurance company that currently provides noncancellable long-term care insurance. But there is an alternative if you believe you need the guarantee of a fixed premium through asset based long-term care insurance, which we will address below.

What Does A Typical Long Term Care Insurance Policy Cover?

As mentioned already LTC policies provide compensation for services related to Activities of Daily Living (ADLs) for an individual. But what does an LTC Insurance policy specifically cover?

As of 2015 the average LTC Insurance policy had the following features:

• 99% of the policies issued covered both Nursing Home & Home Care expenses (instead of just one or the other)
• $159 per day benefit amount for Nursing Home care
• $152 per day benefit amount for Home Care expenses
• 93 day policy deductible period
• 3.8 year Nursing Home benefit duration
• 75% had inflation protection
• $2,772 was the average annual premium

The LTC Insurance market has changed quite a bit in the last 25 years, including changes to coverage and premiums. But the designs for these policies have largely stabilized over the past five years, due in part to the increased popularity of combination products, such as annuities and life insurance long-term care rider options.

At Insurance & Estates we definitely recommend looking into the LTC rider options if you are already a permanent insurance policy owner. In most cases the value far exceeds the risk when all things are considered.

Long Term Care Partnership Programs

Another important aspect of long term care insurance to be aware is the Long-Term Care Partnership Program. The long-term care partnership is a federally sponsored program that is adopted at the option of individual states as a way to encourage people to purchase private long term care insurance.

The partnership programs allow people to keep more of their spendable assets and still qualify for the state Medicaid program if they need it. In short, whatever amount is spent on eligible long term care costs, based upon the receipt of policy benefits from a “partnership eligible long term care insurance policy”, would be offset against the required Medicaid “spend down requirements”.  If you’re considering long term care insurance, check out your state’s partnership program and reciprocity rules because this can be an important part of your asset protection plan.

Long Term Care Rider

Years ago the life insurance companies started adding terminal illness riders to their policies at no extra charge. These riders would give a portion of the death benefit to the policy owner prior to the death of the insured, based on the requirement that the insured was terminally ill. In other words, the insured was likely to die soon, and so a portion of the death benefit was given in advance to make the final weeks, or months more comfortable.

This rider is called an “accelerated death benefit” rider, because it allows the death benefit to be — that’s right — accelerated. It is a wonderful thing to have when a person is terminally ill. For some it provides the money to go on one last vacation, or to visit family, or to provide gifts to grandchildren. These accelerated death benefits became a selling point, and others were added.

The Long Term Care rider and Chronic Illness rider are both accelerated death benefit riders. They allow the insured to gain access to their death benefit prior to death. In some cases many years prior to death.

A long-term care rider is not a “use it or lose it” insurance policy like a tradition long-term care insurance policy is. Rather, with a long-term care rider attached to your life insurance or annuity, you get the benefit of the other insurance product, using the long-term care benefit only if necessary.

Additionally, some benefits of combination long-term care life insurance is that the premium is fixed, so you do not have to worry about your premium increasing. Your policy builds cash value, allowing you to tap into the your policy’s cash account for withdrawals or policy loans. Your rider also provides a guaranteed lump sum death benefit to your beneficiary. And some policies have a return of premium rider so you can get all your premiums back if you no longer want the hybrid insurance coverage.

Who Should Buy Long Term Care Insurance?

As mentioned earlier the vast majority, 70% of policies, are individual policies. So most people today are not buying these policies through their employer. We don’t have any accurate data on the average buyer that is recent, but we do have data from 2010. In that year, the average LTC insurance buyer was:

• 59 years of age
• 69% were Married
• $87,500 — Median Income
• $325,000 — Median Assets
• 71% were College Educated
• 69% were employed

In a survey done in 2014, the average amount of money a privately insured disabled elder saves each month he or she receives services was between $3,000 and $5,000 a month, depending on service setting. In 2015 the annual premiums were less than $3,000. It’s clear to see how valuable a LTCi policy can be.

Final Thoughts on LTC Insurance

Most people will need some form of long term care as they age. And yet most people are unprepared. LTC insurance options are a significant way to safeguard your family from serious financial problems in the event of a serious illness.

At Insurance & Estates we believe education is key to understanding, and initiative is key to planning. If you are planning for retirement and you don’t have an LTC solution, please contact us today to go over your options. You may be able to fund your own LTC, but if you can’t, the value provided by an LTC rider or an LTCi policy should be plain to see.