Do I Need It? How Much Do I Need?
By: Doug Hall, Laurel Kubin, Jacque Miller, Judy McKenna
July 22, 2001
The purpose of this memo is to give you some things to think about as you make a decision about long-term care insurance. (Once you have addressed this issue for yourself, you will be better prepared to guide others in making their own decisions.)
Read fact sheet 9.152 “Long-Term Care Insurance” as you answer two main questions for yourself and your family:
- Am I likely to need long-term care, and
- Should I buy insurance to cover all or part of the costs?
The term “long-term care” refers to a wide range of services ranging from limited help with daily activities in your home to admission to a nursing home for intensive medical care and support. To some degree, your health insurance and Medicare (you must be 65+ years of age) will cover some of the costs of skilled care on a short-term basis. However, Medicare will pay nothing after 100 days. Anyone who experiences a chronic illness or is frail and cannot perform basic daily activities will need some type of long-term care.
Barbara O’Neill, family personal finance specialist at Rutgers University, tells us that the risk of long-term care can be dealt with in three ways:
- Avoid it: hope for the best and try to stay healthy. Of course, there are no guarantees.
- Retain it (self-insure): those with sufficient net worth, those with defined benefit plans and social security benefits that can be used to pay all or part of their care expenses, and people with no spouse and no heirs may choose to self-insure. Those with limited incomes will be covered by Medicaid (not Medicare).
- Transfer it: buy a LTC policy and pay an insurance company to handle the risk.
- Do it all: stay healthy, self-insure as much as you can, buy insurance to make up the difference.
The United Seniors Health Cooperative suggests that long-term care insurance may not be right for people with less than $35,000 in annual retirement income each and assets of less than $75,000 (not including your home).
Are you likely to need long-term care insurance?
No one knows for sure, so start by taking a look at your family health history. Do your family members tend to live into their 90s and 100s? (One out of four people age 85 or older lives in a nursing home). “A Profile of Older Americans: 2001” reported that in 1997 over 4.5 million people, 14.2 percent of those 65 and older had difficulty in carrying out activities of daily living (ADLs). This does not mean that 14 percent of this group is in a nursing home or is receiving home health care services, but they do need some help. Almost 35 percent of the over 80 population reported they had one or more severe disabilities.
Following are some of the costly conditions that are likely to require extensive medical attention and long-term care. If someone in your family has had:
Alzheimer’s or dementia
Lou Gehrig’s Disease
Diabetes with amputation or ongoing complication affecting the kidney
Transient Ischemic Attack (TIA)
A note about Medicare: Medicare will cover some of the short-term costs of a skilled nursing facility if you transfer to a skilled nursing facility following a 3-day hospital stay. Some costs for home health care will also be covered. You can get more information in booklets “Medicare Coverage of Skilled Nursing Facility Care” (CMS Pub. No. 10153) and “Medicare Home Health Care” (CMS Pub. No 10969) at www.medicare.gov or by calling 1-800-633-4227 and selecting option “4” to order.
Will I Qualify for Coverage?
The conditions listed above are also those that may keep you from getting long-term care insurance if you have been diagnosed with one of them. If your family has an incidence of these types of conditions, you may want to buy long-term care insurance as soon as you can so you won’t be turned down if you apply for insurance. In general, if you have been diagnosed with a degenerative condition such as multiple sclerosis or Parkinson’s disease, or you show signs of chronic memory loss, you probably won’t qualify for coverage. But if you have been successfully treated for cancer, recovered from a heart attack, or recuperated from hip- or knee-replacement surgery, you probably will qualify.
Should I Buy Insurance Now or Wait?
Premiums are based on your age when you sign up (the younger you are, the lower the monthly premiums) and the options you select, such as length of coverage, waiting period before coverage begins, daily benefit and inflation protection. For example, a 55-year-old purchasing a federal policy for three years of coverage at $150 a day with a 90-day waiting period and 5% automatic compound inflation protection would pay $1,368 a year. The same policy would cost a 65-year-old $2,131 a year, and a 75-year-old $4,410 a year. But a 75-year-old, who is more likely to use the insurance sooner than someone younger, may not need to buy inflation protection, which would reduce the premium by more than $1,000 a year.
The argument is often made that your premiums will be lower now so you should purchase long-term care insurance when you are younger. Is that right? Maybe or maybe not. Here is another way to look at this — requires discipline we know. Let’s say you are 55 and decide to save $1,368 each year to self-fund your own long-term care insurance. You plan to save this amount for 20 years until you are 75 and then based on your health, take another look at long-term care insurance. If you can earn 5% interest for 20 years, you’ll have funds equaling $45,234.
You decide to fund a long-term care policy at age 75 because the odds grow at age 80 that you might need some type of care. (The yearly premium of $1,368 adjusted by a 5% inflation rate in 20 years would be $11,701). Your $45,234 savings would cover 3.4 years of premiums. You would have to make up additional premiums out of your pension or other assets.
Michael Stein, author of The Prosperous Retirement, says that later in life many people actually spend less money than in early retirement. People are less likely to travel, buy lots of clothes and household items. If you think this is the way you will live, you may have more money to cover care expenses later in your retirement.
The big gamble of waiting until age 75 to purchase long-term care insurance is that you might acquire a condition that would make you uninsurable. On the plus side, many people will find they never need nursing home care and their savings can be given to children, charities or could cover a majority of the costs of home care.
Should I Buy Long-Term Care Insurance to Cover 100% of the Potential Costs?
This is another crystal ball question. You cannot know for sure how your situation will turn out. For those who are single or expect they might be single, they can count on their pension and perhaps social security to cover some of the daily costs. For example,
if you expect that your pension will start at $30,000 a year when you retire. That translates into about $82.00 a day. Today, the average daily nursing home cost for a private room in Denver is $141. You could select a policy that will pay for $59.00 a day (inflation-adjusted) of expenses. This project is much more difficult for employees on defined contribution plans. Long-term care insurance may be even more important because of the ups and downs of pension assets.
If on the other hand, it is likely that you and your spouse will live a long time, the healthy spouse will need pension dollars to maintain his or her lifestyle so long-term care insurance may be an important risk management strategy.
Visit the federal long-term care web site (ltcfeds.com) to gather benchmark information. At the web site, you are guided to answer a brief set of questions and will be told what lump sum that you should fund. Then you must decide if you think you should insure for the total amount.
One of the ways of reducing premiums is to buy coverage for a shorter period. The average stay in a nursing home is 2.6 years. If a 55-year old purchases a $150 a day policy with a 90-day waiting period that will cover 5 years of nursing home expenses, it will cost $1,674 a year compared to the same policy that covers 3 years of expenses with a yearly premium of $1,368.
If you require nursing home care after staying in the hospital for 3 days, Medicare will cover some portion of your costs for 100 days which covers the 90-day waiting period. In the situation where you need care but have not been hospitalized, you can reduce premiums by having adequate savings to cover the first 90 days.
How Will I Qualify for Benefits?
Many policies state that you are eligible for funds if you can’t perform two or three out of five or six activities of daily living (ADLs), including bathing, dressing, continence, toileting, transferring (moving from bed) and eating. Someone must certify that you are chronically ill and expect to continue this illness for at least 90 days. The certifying person is often a doctor. It may also be a representative of the insurance company. As you compare policies, it is critical that you understand how the insurance company defines the ADLs. Be sure and ask the insurance agent how each ADL is defined; for example, “What do you mean when you define transferring?”
Are There Any Tax Breaks for Buying Long-Term Care Insurance?
There are both federal and state tax breaks. If you have enough medical expenses (they must be more than 7.5 percent of your adjusted gross income), you can include the cost of your long-term care insurance premiums in your deductions on your federal tax return. The maximum that you can deduct depends upon your age. For those, 51-60, $860 can be deducted. If you are between 61 and 70, you can deduct $2,290. In Colorado, people who are single may take a maximum $150 tax credit for their long-term care premiums if their taxable income on their federal return is less than $50,000. Couples who are paying premiums for one policy are eligible for the tax credit if their taxable federal income is less than $50,000 or less than $100,000 if they are each paying premiums on a long-term care policy. You cannot claim reimbursement for your premiums from your CSU reimbursement account.
Your federal long-term care insurance policy choices can be divided into two major plans: 1) facilities only and 2) comprehensive. Facilities only coverage can only be used when someone is institutionalized and is living in a nursing home, assisted living facility or hospice. A comprehensive plan covers the same expenses as facilities coverage plus home care and respite care.
There is a growing trend for long-term care insurance policies to pay family members to provide “informal” care to relatives. This may be especially important when a family member must quit a job to provide home-health care.
Will Future Rate Increases Make LTC Insurance Too Expensive For Me?
One of the major concerns of anyone buying a long-term care policy is how much rates might increase in the future. If you buy a policy when you are 55 years of age, premiums will be lower, but will they jump so much as you approach 75 that you will be forced into dropping coverage when you need it?
There is always a possibility of rate increases. For federal employees, we anticipate that federal oversight and the size of insurance pool will be a strong factor in monitoring increases in premium rates. For those who are not eligible for the federal plan, they will find assurance in an AARP study that ranked Colorado near the top (7th) of best practices and capability to determine if rate increases are warranted.
What does the industry say about the federal long-term care insurance?
It’s interesting to read what the financial services industry is saying about the federal long-term care coverage. For the most part, they think it’s a good thing because it is educating people about the need for this type of coverage. They respect the provider, John Hancock, and believe that the coverage is good. They do say that the federal coverage does not offer preferred rates for people under 60 and in super health, and there are no discounts for married couples. Check other private policies and compare several companies (see the Long-Term Care Insurance Comparison Worksheet that follows).
Here are some additional web sites where you can get premium quotes:
The following two documents are in pdf format and require the free Adobe Acrobat Reader program.