By Richard A. Aubrey
“Every one of us here can tell a story which would have the rest of us sobbing,” the Long Term Care Insurance (LTCI) seminar instructor began. Most of the audience was over 50, so it was probably true. By now, we each had a relative suffering the effects of aging, stroke, permanent injury or illness – someone who would not get better. Taking care of a permanent invalid requires an increasing and eventually impossible level of effort by another person. Eventually, we all need help. Nobody is beyond the cumulative effects of caring for a loved one.
One couple has just started an LTCI claim. The wife has Alzheimer’s and she cannot be left alone. The husband will care for her as long as he can. Yet he needs to get out: to shop, to see his own doctor, to run other errands. And he needs to decompress because as the caretaker, he cannot allow the natural resentments to build up. He will find his life and activities restricted. We have arranged for what is known as ‘companionship’. The supposed reason for the so-called companion’s visits is to provide help with housework, which gives the aide the reason to be in the kitchen when lunch is made. She sees that the microwave dish is not put on the stove and the saucepan is not put in the microwave. She will casually make sure the burners are turned off and the food is put away. While she pokes around with a dust mop or the vacuum cleaner, she’ll see that the woman does not wander off and that dangerous household chemicals are out of sight (out of mind). This caretaking is performed in this fashion to avoid hurting the wife’s feelings. Eventually, the subterfuge will no longer be necessary.
The cases we can address with LTCI are the stories of families hammered with insupportable demands on their time, their freedom and their money.
To begin, the major societal support for this problem is Medicaid—not Medicare—the health insurance program for the poor. It will pay for nursing home stays. Depending on the level of service and geographic location, those cost from $35,000 to $100,000 a year.
There are two downsides to Medicaid. First, there is a limited choice of facilities if Medicaid is all you have; second, you must be poor to have Medicaid at all. It’s said that they take all your money before you get Medicaid, but that’s not exactly true. The truth is, your friends and neighbors would rather not pick up your tab (via their tax money) until you’ve spent your own money. That’s understandable.
The government has a set of criteria for couples and individuals. You must spend down to that before you qualify for Medicaid. There’s not much left by the time Uncle Sugar steps in. So, naturally, people concocted schemes so as to look poor while not actually being without money. The most common of these was (and is) to give one’s children the money before applying for Medicaid. Not a good idea. The government presumes that money you gave away in the preceding three to five years (depending on circumstances) actually remains in your bank account. So you don’t qualify. You have all this ‘ghost money’ in the bank as far as the Medicaid folks are concerned. Might as well try and get the real stuff back from the kids.
Medicaid law requires each state to have an asset recovery program; that is, to go after the estates of Medicaid recipients who show evidence of having tried to scam the system. Few states actually do it. One tried an experiment: they counted the resources devoted to the recovery effort and compared it to the resources recovered. Turned out they got back $50 for each $1 spent. That was not enough return to be worth the time and effort during boom years; now, in a time of tight state budgets, 50:1 looks pretty good to many states.
What is LTCI?
You may be wealthy enough to handle a permanent and declining health situation out of your own assets. Or you can get LTCI, which, in simple terms, is a contract that will pay a stated benefit, usually expressed in dollars-per-day, if you qualify under the terms of that contract.
What does ‘qualify’ mean? Here, it means the insured must require substantial hands-on or standby assistance due to cognitive impairment or the inability to perform two or more of the Activities of Daily Living (ADL). The ADL are eating, bathing, dressing, toileting and associated hygiene, transferring (bed to chair, chair to toilet) and walking. Several years ago, the government regularized the qualification piece of LTCI contracts.
That’s the required part of a Tax Qualified LTCI contract (meaning the premiums are tax deductible). Another type of contract with a slightly broader definition is also available, but its premiums cannot be deducted. Most practitioners stick with the Tax Qualified contract to avoid future difficulties when somebody, usually the second generation, wants to know why they can’t deduct the premium.
Whichever contract type is selected, all will pay for nursing home expenses. There are some bare bones policies, which in return for a lower premium, will pay only for nursing home expenses. These provide no coverage for at-home care or in-home health care —such as companionship to keep someone with cognitive difficulties safe.
Some practitioners call LTCI the anti-nursing home policy. This idiom stems from the fact that the benefits for home care are sufficiently generous that people often don’t need to seek a nursing home until and unless that is the only option for the declining patient.
The broader the coverage, the better; although something – anything! – is better than nothing.
How LTCI works
When investigating LTCI prior to purchasing a policy, there are a number of choices to make; the amount of variables presents many, many combinations. It can be hard to make your way through the thicket (see short cut below).
Once you’ve settled on the daily benefit you wish – say, $100, there are other choices. How long is the waiting period (the time when you qualify for benefits but don’t get paid)? The longer the wait, the lower the premium and vice versa. For how long would you like to get paid? You may have choices of one year, or two, or five or 10 years, or for life. The longer you’ll be paid, the higher the premium (and vice versa).
Would you like the compound benefit increased? Good idea – and it increases the premium. Still, it means the benefit will double every 14 years, so if you don’t go on claim for 28 years, the benefit is four times its original level. And it continues to increase while you’re on claim. Some companies offer non-forfeiture benefits, meaning there is a recognition of premiums paid if you drop the policy, by application of which the policy would continue. By and large, this is not useful and too expensive for the benefit offered.
The short-cut approach
Some companies offer so many variables that there may be a couple of dozen combinations of benefit structures for the same benefit level. The highest premium might be double or even four times the lowest. How to choose? The short cut is… just figure out how much you want to pay. Chances are there will be three or four combinations for that much, plus or minus 10 percent. Choosing among three or four is easy.
Contracts can either pay the bills as presented, or they can be indemnity contracts. The first one pays up to the benefit level your contract specifies. If you have a benefit level of $100 per day and generate only $50 per day in bills and expenses, they pay the latter. The remainder is rolled over to be used after the benefit period ends. But they will have a weekly maximum to take into account that you may have two visits a week at $300 per visit. They’ll pay $600 in that case. The indemnity plan is simpler. It sort has an on/off switch. If you qualify, they pay the daily benefit, irrespective of the actual expense. If there’s money left over, you bank it. This eliminates tracking specific bills and provides certainty of cash flow. (It has another benefit which can be used in difficult circumstances; more on that later.)
LTCI benefits are not taxable under current laws if the policy is ‘tax qualified’. Benefits from non tax-qualified policies are also non-taxable, but the situation is left vague. Some agents think the tax benefits are a signal to the public. The potential expense for long term care for the folks hitting their 60s right now is staggering. The government simply cannot afford it. By providing tax benefits, the government, so the thinking goes, is telling people to get ready to take care of themselves, by themselves.
No time like the present
Folks ask how early one should look at buying LTCI. Group LTCI is available through many associations and employers and even young people in their 20s are participating. They should – the price is astonishingly low for them. What’s the risk at a young age? Most of the time, it’s accidents, which means that the auto insurance—in some states and not in others—will pay. Or the accident is on the job and workers compensation will pay. Still, OSHA doesn’t hang around the house making you wear a safety harness when you stand on a borrowed ladder to clean the leaves out of the eaves and gutters – and accidents do happen. Roughly one third of nursing home patients are under age 65. Then, of course, there are probably just as many individuals not in nursing homes who need care and who are under 65.
It’s hard convincing younger folks to buy an LTCI policy for current risks. There are future advantages, such as a lower premium and getting it before underwriting issues become a problem. You have to be reasonably healthy to get LTCI: the older you are, the less likely it is that you’ll qualify. Which brings me back to the indemnity policy. That’s the one that will pay the contractual benefit regardless of your actual expenses.
Let’s say that you and your spouse decide on an LTCI contract with a daily benefit of $100. That will mean $36,500 a year when and if one of you qualifies for those benefits. That’s a lot of money coming into your situation from the outside when you really need it. Over five years, that’s more than $180,000 even without any benefit increase provisions.
What if one of you doesn’t pass the underwriting? Here’s the solution: get a daily benefit of $200 for the insurable spouse using an indemnity contract. If the uninsurable spouse needs care, you have your assets. Since the insurable spouse is more than covered, you don’t have to worry about what will happen when that person needs help. You can spend, if necessary, all your assets on the first person to need help and still be in good shape for the second one, the one who actually has the insurance.
If the insured spouse is the one who goes on claim, the indemnity policy will be kicking out $200 per day. We already figured you only need $100, so you can bank the rest. That will be available when the uninsured spouse goes on claim.
It’s better to hire caregivers so we can see our parents as parents, instead of seeing them as patients. That takes money – and that’s what LTCI provides. If we want our children, eventually, to see us as parents instead of patients, we need to start planning our futures now.
About the author
Richard A. Aubrey CLU has been in the life insurance business for more than 30 years. His interest is in individual insurance, both life insurance and disability income coverage. A graduate of Michigan State University, Aubrey is at Piper McCredie Agency Inc. and can be reached at [email protected]