The expert that disfavors LTC insurance is a staff attorney at California Advocates for Nursing Home Reform. His argument is that instead of buying the insurance with a $3500 annual premium, invest the premium amount., giving you $70,000 plus interest in 20 years. There is a huge psychological flaw in that argument.  The average consumer will not have the discipline to actually invest the premiums that are not paid. They are much more likely to spend it. Also, for older boomers, there is no reasonable assurance of  20 years without a long term care need.

Here is the link to full debate article which is definitely worth reading.

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1. Long-Term Care Options Change Again
2. Concerns and Misconceptions About Long Term Care

My  last comment brings me to the first topic in my list of misconceptions about Long Term Care.

1.  Long Term Care insurers can raise premiums  any time they want and in any amount.  This is mostly untrue.  In most states, insurance companies have to obtain approval of state insurance regulators to increase premiums for existing policies that allow for rate increases. The proposed premium increases have to be “justified.” Justification generally means that the insurer must show that it is losing money (and will likely continue  to lose money) on the policies as a group. Sadly, this seems to be the case for most LTC insurers, who underestimated how long its policy holders would live and how much long term care they would need. I believe that Met Life has requested an increase that has not yet been approved. I am holding my breath on this one.

2.  You are unlikely to need long term care.  This is sort of true but the risks are greater than you think. Recent data shows that 20% of older Americans will need long term care for 5 years or longer. That puts you in the one-in-five category.  The average cost of long term care is in the range of $75,000 per year.  Compare that risk to the likelihood that your house will burn down. If you own your home with no mortgage, have you considered cancelling your homeowner’s insurance because your house is unlikely to burn down?

3.  The government will pay for my long term care.  This will not happen, even under Obama Care.  Medicare only covers short-term rehab from an injury or illness. Medicaid will pay for some long term care but only after you have essentially spent yourself below the poverty line. Having LTC insurance that meets the long term care partnership guidelines actually provides a double benefit in this regard. For example, if you have a LTC policy that provides $250,000 in benefits and those benefits are exhausted because you need more care, you can get Medicaid coverage for that additional care and still keep $250,000 in personal assets. (Make sure you ask your sales person about this.)

4.  My family will take care of me.  If you need skilled care, your family can’t provide it and probably can’t afford to pay for it.  If you need care at home, do you really expect (or want) your family to be on site to bathe you, fix your meals, and (without being too graphic here), attend to your personal hygiene? I don’t think so.

5. I will get the insurance if my health declines.  While long term care insurance may not be as tough to get as regular health insurance, if you develop a chronic disease and then apply for LTC coverage, you are likely to be denied.  If you are older when you apply for coverage, you will likely be tested for cognitive decline as well.

6.  The insurance is too complicated to even think about.  I get this, because the policies can offer a myriad of confusing options. Because of this, people are concerned that they will buy the wrong coverage so they avoid the issue altogether. If you don’t understand it, don’t buy it but don’t avoid the issue either. Find a trusted and knowledgeable adviser to guide you (not a sales person). You can start exploring the topic by reading about the key provisions in long term care policies. 

Long term care is a difficult problem to think about, but the pain of not having insurance to cover it can be much greater than the pain of being prepared for it.

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1. Long-Term Care Options Change Again

The federal government recognized that across the full spectrum of seniors and boomers, long term care was an unresolved problem. Its answer was the Community Living Assistance Services and Support Act, a/k/a the Class Act, which was made a part of what now has become known as “Obama Care.” The goal was to create a plan for a basic level of care ($50-$75 per day), paid for by user premiums. The government would administer the plan but without the contribution of tax dollars. Class Act participants would pay reasonable monthly premiums.

This past week, the Administration announced that it would not attempt to actually implement that Class Act. Although technically still part of Obama Care, without rules in place to create and operate the plan, it is DOA. This was not unexpected because most experts inside and outside government believed that it would be too expensive to be sustainable.

Let’s be more specific: Once the actuaries started crunching numbers, they determined that the monthly premiums would be so high that only the wealthier workers would participate. With so few participants, the government would end up having to subsidize the program which it cannot afford to do.

This is unfortunate because so many of us need an affordable option to address long term care risk. Counting on Medicaid is a particularly sad alternative because of the requirement that you spend yourself into the poor house first.

One option that is gaining some traction in the U.S. is a hybrid annuity/long term care insurance product. These are sometimes marketed by the different insurance companies as a “life care annuity”  (LCA), a “living care annuity”, a “total living coverage annuity” or simply as “annuity care.”

In a typical LCA product, the policyholder (you) pays a single premium for a deferred annuity with a long term care “rider.”  (Compared to an immediate annuity, a deferred annuity doesn’t begin paying benefits until sometime in the future. ) The annuity value will increase from the single premium amount by a minimum guaranteed interest rate.  That guaranteed interest rate will usually be less than for a simple deferred annuity because you are also paying for the LTC rider by premiums that are withdrawn from the annuity interest earnings each month.

When a LTC claim occurs, daily or monthly LTC benefits are paid in accordance with the terms of the hybrid insurance contract. The maximum benefits may be equal to the accumulated annuity value divided by the number of days (or months) of a defined time period, e.g., a two year benefit period. The maximum lifetime LTC benefits may be equal to two or three times the full accumulated annuity value.

If the LTC benefit is not needed within a defined period (e.g., 8–10 policy years), you may be allowed to annuitize (pay out over time) the accumulated annuity amount or withdraw that amount as cash without paying any surrender penalty.

Right now we are sticking with our LTC polices from MetLife but if things change, we will be looking at hybrid annuity products also.

If you haven’t spent much time exploring long term care problems and solutions, the Department of Health and Human Services has a very good clearinghouse site for long term care information.

Here is an article on the demise of the Class Act: CLASS is Killed: But How Will We Pay for Long-Term Care Services?

No related posts.

This is the question that I asked myself two years ago when we bought long term care insurance.  I looked at the costs again last winter when I heard that our long term care insurer MetLife was exiting the business. I convened a meeting with our broker.  When we compared the cost of switching to a different insurer, we were shocked by the cost differences. It made no sense to switch. I expect that our premiums will increase but we are probably at an optimal situation for now.

Genworth Financial is a long term care insurance provider. It publishes results of annual surveys of long term care costs, both nationally and by individual state and city. The 2011 survey results were interesting, at least to me.

First, home care costs remained flat while institutional care costs continued to rise.  Genworth commented on this trend as follows:

Home care rates have remained flat in part because of increased competition among agencies and the availability of unskilled labor, and by avoiding costs associated with maintaining stand-alone health care facilities.

Genworth’s own data shows that most consumers prefer to receive long term care in their homes. Indeed, two-thirds of Genworth’s initial long-term care insurance claims are for in-home benefits.

The cost of long term care can vary substantially from state to state.  For nursing home care in a semi-private room, the U.S. average median annual rate is $70,445.  The state with the highest median annual rate is Alaska at $222,285.  The state with the lowest median annual rate is Texas at $46,355. (Another reason not to retire in Alaska!)

The national median daily rate for a private room in a nursing home is $213. This is an increase of 5.1% over 2010 and is part of a six-year annual growth rate of 4.35%.

Assisted living facilities come with a national median monthly rate of  $3261, a 2.4% increase over 2010 and part of a six-year aaverage annual growth rate of 5.99%,

It is obvious to me from these trends that for long term care insurance to work, you need to purchase inflation protection for the coverage amount.

To see the data in more detail, including the ability to generate a long term care cost report for your own state and city, here is the link: 2011 Cost of Care: Long Term Care Survey.

I encourage you to read it carefully and plan ahead for your own long term care future.

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1. Long-Term Care Options Change Again

First, I have concluded that there are no rigid rules or formulas to apply in deciding how much long term care insurance to obtain. Every baby boomer is unique in two important respects: (1) The financial assets they would have available to pay for long term care without insurance; and (2) How much risk they are willing to take.

Let’s quickly review the risks.

The first risk is that you or a spouse will require long term care but cannot afford it. In that case, Medicare won’t help much but Medicaid might. But if you need Medicaid benefits for long term care, most of your other financial assets will be used up first. That’s the law.

That brings us to the second risk:  Can you and your spouse survive in retirement (i.e., meet your basic living expenses) if a long term care event exhausts all or most of your retirement nest egg? In other words, if you self-insure or rely on Medicaid to pay for long term care, what will happen to your or your spouse afterward? Will you become part of the retired but poor class? Will you become dependent on your children?

A third risk if you are uninsured (or under-insured) is that your options for long term care will be limited. With insurance, you may have more options for in-home care and/or in-patient care at a facility that is better than a basic-needs nursing home. If you are completely dependent on Medicaid, the bureaucrats will be deciding what you can and cannot afford. You may not be happy with the result.

Perhaps at this point you are thinking that you and your spouse are too healthy to worry about needing long term care. If so, I recommend you read my earlier post on why we bought long term care insurance.

Here is a list of the criteria we considered in deciding how much long term care insurance we should have:

1. The Costs of Long Term Care. Long term care is more expensive than you might think. It can also vary dramatically depending on where you live. For more information, read my earlier post on predicting the costs of long term care. More cost information is available at this government long term care site.

2. Ability to Self-Insure. Many retirement planning experts believe that there are two groups of people for whom deciding whether to purchase long term care insurance is easy: The very wealthy and those with few or no retirement assets. The very wealthy can afford to pay for their own care. Those with little or nothing have nothing to lose before Medicaid steps in. Those in the middle (like us) have to strike a balance.

Let’s assume that a long term care event lasts for three years.  Three years in a nursing home can easily cost $225,000. Can you afford to pay that from your own assets, then live on what remains?

If the long term care event is less severe, perhaps requiring a home health aide three days each week for three years, that can cost $18,000/year for three years = $54,000. That is a much easier financial hit to absorb using personal resources.

3. Income Security. A related factor is the stability of your retirement income if a long term care event depletes your retirement nest egg and/or takes away the ability to work. If you are able to survive on Social Security and/or pension benefits, the need to buy a large amount of long term care insurance is decreased.

4. Cash Flow and Affordability. Unfortunately, for many people the number one factor in deciding whether and how much long term care insurance to buy is the cost. Some of this thinking is short-sighted. If you own a home, you definitely must insure it against loss due to fire. Your mortgage lender will insist on it. Did you know that you are more likely to need long term care than experience a destructive house fire? This suggests that you should make room in your budget for some level of long term care protection. One option for basic coverage is the new public long term care plan that will be available.

5. Availability of Alternative Care Resources. Perhaps you have a lot of family members nearby. Perhaps some of them like you enough to help with your care if you need it. Do you really want to depend on that? Do you really want to burden family members with ling term care – something that you can insure against?

We decided to purchase enough long term care insurance to cover a five year event, with a $150/day benefit. Thus, the lifetime benefit is approximately $275,000. This benefit is inflation-adjusted. If one of us has a significant long-term care need, this probably won’t cover all of the costs but it will be enough that our personal assets can handle the rest. (For more on our policy: Long Term Care Insurance – Key Policy Provisions.)

A decision on whether to purchase long term care insurance and how much coverage to buy should not be procrastinated away. You may decide not buy any coverage but at least it should be an informed decision.

Related posts:

1. Long-Term Care Options Change Again

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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1. Long-Term Care Options Change Again

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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1. Long-Term Care Options Change Again
2. Vanguard Enters the Guaranteed Lifetime Income Space

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 a 40 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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1. Long-Term Care Options Change Again

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.

Related posts:

1. Long-Term Care Options Change Again

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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1. New Social Security Calculator for Estimating Retirement Benefits
2. A Refresher on Ways to Lose Your Retirement Nest Egg