Here are some of the key provisions of the new public long term care insurance plan:

1. Effective Dates. The Class Act was part of the health care reform bill passed in March 2010. The law takes effect in January 2011.  However, the Department of Health and Human Services has until October 2012 to create and implement all of the rules. Therefore, most observers do not expect enrollment in this new long term care insurance plan to begin until 2013.

2. Plan Eligibility. The key requirement for eligibility to participate in the long term care plan is that you must be working, either full or part-time. More specifically, plan participants must pay premiums for a five-year vesting period they are eligible to receive benefits. Moreover, they have to continue working for three of those five years. This means that folks who are already retired (and not working part time), non-working spouses, and the unemployed may not participate.

3. Pre-Existing Conditions. Most private long-term care insurance companies will not issue policies to applicants with substantial pre-existing health problems, such as diabetes. Under the Class Act, a pre-existing condition will not disqualify you, as long as you meet the five-year vesting period, with three of those years being working years.

4. What it Will Cover. The long-term care coverage from the Class Act will be provide a daily cash benefit. The dollar amount of the benefit is yet to be determined. The plan drafters and Congressional Budget Office expect the long term benefit will be in the range of $75 a day, with an average minimum benefit of $50/day.

To receive the benefit, a participant will have to require help with two -three activities of daily living, e.g., eating, bathing, dressing, using the bathroom, transferring from bed to chair to wheelchair, and continence care. ) Equivalent cognitive impairment will also be covered.  An important feature of the plan is that after you qualify to receive a long term care benefit, that benefit will continue for as long as you require care.  Furthermore, the benefits will increase with inflation, another key feature.

This benefit amount will not cover all long term care costs but it was not designed that way.  A $75/day benefit can cover as much as 3/4 of the national average cost of an assisted living facility. That could be huge for many middle class baby boomers.

5. What it Will Cost. The cost factor is another present unknown. An expert panel is working on this issue now. The Class Act requires that it be self-supporting from premiums with no tax dollars used. The CBO estimated an average age-adjusted monthly premium of $123. This assumes that just 5 or 6 percent of eligible will workers will join the plan. Some experts think that the participation rate will be higher because Class is an “opt out” program. If a larger percentage join, premiums will be lower.

The issue of concern for baby boomers is timing. If enrollment does not begin until 2013 and vesting takes five years thereafter, the public long term care insurance may not help us much. For example, that would force a 60 year old baby boomer today to work at least until 2016 and not become eligible for benefits until age 68.

My intention is to keep our private long term care policies in force for now but I will definitely be following and taking a close look at the new public long term care insurance plan.

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How do these combined annuity and long term care products work? Each is different but the general concept is as follows:

A purchaser may be looking for a lifetime retirement income with additional protection if long term care is needed. The purchaser buys this hybrid annuity product with a single premium payment. The product functions exactly like a fixed annuity, providing a lifetime of annuity income. There is also a long term care multiplier built into the policy. In some cases, the long term care rider means the purchase would require medical underwriting, e.g, a health questionnaire and maybe a physical.  A portion of the internal investment return in the contract is used to pay for the long term care benefit. The long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company may offer a payout of two to three times the initial policy value over two or three years after the annuity account value is depleted. For example, a purchaser of a $100,000 annuity who had selected a benefit limit 300% and a two-year long term care benefit factor would have an additional $200,000 available for long term care expenses, even after the initial $100,000 annuity policy value was depleted. The policy owner would spend down the $100,000 annuity value over a two-year period and then receive the additional $200,000 over a four year period or longer. In other words an annuity purchased with $100,000 could potentially payout LTC benefits of $300,000.

One feature that may make on of these hybrid annuity/long term care products attractive is a provision in the Pension Protection Act of 2006 that became effective on January 1, 2010. This provision allows long-term-care benefits to be paid from an annuity tax-free.

There are variable annuity products that also can include a long term care benefit. Generally, these products allow the owner to use the LTC benefit up until the time that the value of the annuity account is annuitized.

I think we will see more products that combine fixed annuity features with long term care benefits. The different products from different companies will probably carry a dizzying array of confusing features. Careful study and consideration of the costs and benefits will be important.

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First, consider these statistics regarding the actual need for long term care:

60 percent of Americans  over age 65 will require at least some type of long term care services during their lifetime.

Once you reach age 65, you have a40 percent chance of entering a nursing home.

Approximately 10 percent of folks who enter nursing homes will be there for five years or more.

68% of Americans have a family member or friend who has received long term care in the past three years.

(Source)

If that doesn’t scare you into considering the purchase of long term care insurance, Northwestern Mutual has introduced a long term cost calculator that may do the trick.

The data used by this calculator was compiled by the  Northwestern Long Term Care Cost of Care Survey in November 2008, through the Long Term Care Group, Inc.

Further assumptions used by the calculator:

• Annual cost of home health aide based on average hourly rate, 8 hours a day, and 365 days a year.
• Annual cost of assisted living based on average monthly rate for 12 months. Annual cost of nursing facility based on average nursing home private daily room rate for 365 days.
• Five (5%) annual inflation rate for long term care costs.

I ran the calculator for myself. If I were to have a long term care event beginning at age 70 and lasting for two years, the estimated care cost in my state of Tennessee is $256,000. My current long term care insurance policy will cover only about 75% of that amount. Thus, I need to have sufficient funds available to cover the difference.

If the government LTC plan is available to us and will coordinate properly with our own coverage, we may buy into that plan as well. Why? Because insuring against financial risks is more predictable right now than most investing options.

Have you considered the costs of long term care? How are you planning to handle a worst case scenario?

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2.  Benefit Period: Five years.  This is the maximum period of time that I can receive benefits under the policy.  Statistically, this should cover everything I might need.  If I need long term care for more than five years, I will have to self fund and/or use Medicare/Medicaid benefits.

3.  Benefit Amount: $150/day and $273,750 lifetime.  This is for all covered care services.  In addition, the policy provides a $275 benefit for needs assessment and a $750 benefit for training of an informal caregiver (e.g., a family member).

4.  Covered Services: Nursing home/hospice facility (skilled, intermediate, and custodial); assisted living facility; home care; community care; respite care (21 days/year).  The key here is the home care, meaning that I can live at home and still receive long term care benefits.  “Respite care” is when I might need a temporary period of help 24/7 (in or outside the home) in case of illness or short term disability.

5.  Compound Inflation Protection Rider: This is another very important provision that automatically increases the benefit amount by 5% at the end of each year of the policy, without an increase in premium.  Obviously, the cost of long term care will continue to rise with inflation and I need a benefit amount that rises with it.  This rider is also necessary to take advantage of the long term care partnership rules if adopted by your state.   If your long term care policy qualifies for the long term care partnership program, you are allowed to keep more of your assets when becoming eligible for government long term care benefits.  Unfortunately, adding compound inflation protection is expensive.  In fact, the premium for this rider is larger than the base premium.

6.  Indemnity Rider: This is something else that is so helpful.  With an indemnity-type long term care policy, you are paid the full daily benefit regardless of the actual charges incurred.  For example, if I am  “chronically ill” and receiving long term care at home (even if mostly from a family member), I will receive the full $150/day benefit, as long as part of the home care involves a non-family member, such as a paid homemaker or private aide service.

7.  Benefit Eligibility: This is the operative policy language that defines when you are receiving “long term care” for which benefits are payable.  In my policy, it requires that I be “chronically ill.”  I am “chronically ill” when I am unable (for a period of 90 days) to perform two “activities of daily living” without substantial assistance.  “Activities of daily living” are bathing, dressing, transferring (in or out of a bed or chair), using the bathroom, continence, and eating.

Of course, there are lots of other policy terms that are important (including the premium amount) but these are the most significant in my view.  What about your policy?

Here is the how and why of our decision to buy long term care insurance.

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Predicting our own demise is neither fun (in the conventional sense) nor a matter of exact science (thankfully!).  However, there are several of tools out there that I have used that can accept individualized lifestyle data and feedback life expectancy information.

The Longevity Game from Northwestern Mutual Insurance

The Longevity Game online tool walks you through a sequence of twelve basis lifestyle questions.  After you answer each question, your predicted age of demise is adjusted up or down on screen.  According to the longevity game, I will make to age 87.  Unfortunately, it does not assure me that you will even know how old I am when I get there!

Real Age Health Age Calculator

Another longevity-related tool I’ve used is Real Age.  Real Age doesn’t actually predict your end point.  Instead, it calculates your health-related age by asking a large number of health and lifestyle questions.  It may tell you that you are “really” younger than your chronological age, suggesting that you should live longer.  Or it could tell you just the opposite.  You can continue to add new information that might cause your “real” age to go up (not good) or down.  So far, my “real age” is a few years younger than my chronological age.  I intend to keep it that way if I can.

Eons Longevity Calculator

A third life expectancy tool that I have used is the Eons Longevity Calculator.  In about five minutes you can answer a series of questions about your stress, health, activities, and family, resulting in a prediction of how long you will live.  The Eons calculator says I will live to age 89, giving me an extra two years beyond what the “Longevity Game” predicted.  I like Eons a lot better!

Other Online Life Expectancy Tools

Update 1: More recently I have come across some other online life expectancy calculator tools.  These are the Living to 100 Life Expectancy Calculator, the Peter Russell Virtual Age  Calculator, and the Northwestern Mutual Lifespan Calculator. I have not used these yet myself but they may be worth a look.

Mr. GoTo is not suggesting that any baby boomer make important financial decisions by directly relying on either the Longevity Game or Real Age. I am suggesting that you try them out.  Staring at some real data related to your present and future aging may cause you to think more carefully about some of your most important retirement planning decisions.   That’s a good thing for all of us to do.

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This post discusses the analysis and logic we considered in making this purchase.

Long-Term Care Insurance is for All Boomers

I was surprised to learn that 58% of those making claims under long-term care policies are under the age 65.

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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