How and Why I Bought Long Term Care Insurance
November 29, 2008 by Mr. GoTo
Filed under Long Term Care
Mrs. GoTo and I recently bought long-term care policies for ourselves. I actually did it through my employer although the policies are such that we can take them with us.
This post discusses the analysis and logic we considered in making this purchase.
Long-Term Care Insurance is for All Boomers
Also, the majority (66%) of long term care that is insured is provided in the home, compared to only 17% being provided in a nursing home.
The leading cause for needing long term care is cancer, not dementia or other age-related ailment.
(Source: UnumProvident Study)
There is interesting data also from the AARP about the cost of long term care in the U.S.:
The average cost for a semi-private room in a nursing home is $5,566 a month.
The average cost is $6,266 a month for a private room in a nursing home.
In an assisted living unit, the average cost is $2,968 a month.
A home health aide on average charges $19 per hour.
The Recent Market Collapse Creates a Need for More Financial Risk Management
Millions of baby boomers have experienced dramatic declines in their retirement savings. Many of us do not have pensions. We may need to take increased investment risks to more quickly recover from the market losses we have experienced.
To consider taking on more investment risk, careful boomers should compensate by reducing our risk in other areas. That’s where I think long-term care insurance can help.
A true disaster would be to lose everything to a major health problem while trying to regain what has been lost in a market downturn. If you are like me, you are not extremely wealthy but you have some assets that you want to protect. Therefore, you want to insure against such a worst-case long term scenario. The more that you can insure against a financial risk such as that caused by a disabling health problem, the less you need to worry about boosting your retirement savings to be large enough to cover that risk.
Long-Term Care Partnerships Increase the Value of Long Term Care Insurance
One of the biggest issues in considering long term care insurance is the role of Medicaid. Medicaid regulations require a sick person to effectively exhaust all his or her personal assets before Medicaid can be used to pay for long term care. Healthy boomers considering long term care insurance weigh the insurance premium costs against the assets that would be at risk before Medicaid could be used.
The Deficit Reduction Act (DRA) of 2005 changed rules for some LTC policies. Under the DRA, a state can adopt regulations that establish Long Term Care Partnerships applicable to residents of that state. The partnerships are between long term care insurance companies and the state’s Medicaid long term care program. The Partnership arrangment allows a beneficiary of long term care to retain more assets while remaining be eligible for LTC reimbursement by Medicaid. This is accomplished by purchasing a long-term care policy that meets Partnership regulations. If you do this (as I have done recently), you can obtain Medicaid ong term care benefits without exhausting all of your assets.
According to the Partnership plan, tt works like this. Assume that you are insured under a long term care policy that pays $300,000 in benefits, after which the benefits are exhausted. You then become eligible for long term care under Medicaid. However, you do not have to spend down all of your assets to achieve eligibility. Instead, you are allowed to assets equal to dollar value of the long term care insurance benefits you received. In this example, you could retain $300,000 in personal assets while receiving Medicaid long term care. This puts you in a vastly improved financial position compared to not having long term care insurance.
More states are implementing insurance regulations that create these Long Term Care Partnerships. Our state did so on October 1, 2008. You can check with your state Department of Insurance to determine if your state is on or will soon join the Partnership program.
Not all long-term care policies are eligible for the Partnership program. An important requirement is that, for those under age 65, the policy must include compound inflation adjustment of the benefit. That adds cost to the policy but it’s a worthwhile feature. Make sure you inquire about this discussing a long term care policy with an agent.
Buying Long-Term Care Coverage as a Group is More Affordable and Accessible
Another reason why I started exploring long term care insurance is the discovery that group LTC coverage can save money and a lot of underwriting. My employer began discussions with a major provider of long-term care insurance. Because we had the minimum required number of employee and spouse participants (10), we obtained coverage for employees and employee spouses, at a discount of 25%-35%. These long term care policies are also transportable, meaning that when I retire, I can take the policy with me, as long as I keep paying the premiums.
Another important aspect of the group long term care arrangement is that there is virtually no underwriting. You answer four simple health questions and that’s it. That is critical because my wife has chronic health problems that would probably disqualify her from obtaining a separate long term care policy. For the group policy, none of the four health questions relate to the problems she has. This means that I was able to purchase the long term care insurance for her at normal rates.
A last point about group long-term care coverage is that you don’t need your employer to pay for all or even very much of it. If you are in a small business like ours, a group of interested employees can come together and seek out a plan that would work for them, then present it to the business owner as an option to consider.
Although we remain invested for the long term, the economic events of 2008 prompted me to explore other money strategies to help us reach our financial goals. Using long-term care insurance to cover a significant financial risk is one of those strategies.
If you decide that this insurance is for you, pay close attention to the long term care policy provisions you are being offered.
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Great article! Too often we see either denial or procrastination on the subject of long-term care. The realization is that most of us will need long-term care sometime in our lives. It’s hard to imagine what we will be like 30 years from now. It is important to get the information from a Long-Term Care Specialist, one with no bias toward any company. This financial crisis has changed many people into thinking that they do need to create a solid long-term care plan. How do we get the point across of how important it is to have a plan in place well before a long-term care event occurs?
I know that it is contrary to conventional wisdom, but generally speaking, a married couple, that is healthy, can get significantly better benefits by buying an individual long term care insurance policy, rather than buying a policy through an employer or association on a group basis.
In your case, however, it certainly made sense to go with the group coverage because of the “simplified underwriting” for your wife.
Scott A. Olson