As financial services expert G. David Parent knows, no one likes to talk about long-term care insurance. And since the concept of buying insurance to cover the costs of extended care did not begin to take hold until the late 1980s, relatively few people now have long-term care policies. Five million such policies were sold between 1987 and 1996, according to the Health Insurance Association of America. That number is closer to six million today, the association estimates.
Long-term care insurance picks up the cost of services where federal Medicare leaves off. According to a spokesman for the U.S. Health Care Financing Administration, the agency which administers Medicare and Medicaid, Medicare will cover the first 100 days of nursing home care after a hospital stay. After that, the patient must pay. In providing daily benefits to cover the cost of nursing home – and under some policies, home care – long-term care insurance protects the policy holder’s assets from extended term care expenses, which can now run over $100 per day.
Seifert Systems Invests in Energy Efficiency to Strengthen Operations
For manufacturers, energy is more than just another operating expense. It plays a critical role…
Learn More
Those who buy the insurance may deduct the premiums from their taxes, provided that they buy a plan that meets federal criteria. So called ‘tax qualified’ policies that meet these federal criteria are triggered when the policy holder becomes substantially unable to perform at least two of six defined Activities of Daily Living – eating, bathing, dressing, using the bathroom, etc.
Many of those who now have long-term care policies are baby boomers who are now entering their 50s. Others are the children of these baby boomers who seek to protect their parents – and themselves. The premiums vary greatly depending on the level of protection you want and age at which the client buys the insurance. The lower the age, the lower the premium. For example, a 55-year-old could pay anywhere from $105 to $1,700 per year, while a 70-year-old could pay from $355 to $5,000 annually, according to the Long Term Care Insurance National Advisory Council.
Experts say those thinking of buying long-term care insurance should consider several factors, including: the amount of money the policy provides for each day of care, the number of years the plan covers, and the number of days that must lapse before the policy kicks in. Prospective buyers should also consider adding a 5 percent simple or compounded inflation rider to their plan to protect against the rising cost of nursing home and home care, they say.
Recently, Providence Business News discussed long term care insurance with Parent, a chartered life underwriter and chartered financial consultant who operates his own business in East Greenwich.
PBN: How do you begin talking to people about long term care insurance?
PARENT: I don’t find that I’m getting a lot of inquiries yet, but I enter into this when I have people come in and (for) an overall fact-finding interview. I look to see if that’s a situation of need. And that takes on two purposes. One, if they’re old enough, then maybe long-term care insurance is something that they should consider, or, that long-term care insurance is probably needed for their parents. In the planning process with the younger people, I discuss with them the problems that they could have taking care of a parent. Because the normal attitude is: ‘I don’t need that kind of stuff. I’ll take care of my parents. My sister and I will take care of our parents. They don’t need to go in a nursing home.’ Of course, you hear that all the time.
The second part is, I’ve got people who are now of age where they should start considering it, and (they say): ‘I’m never going into a nursing home, I’ll shoot myself first. My son and daughter, my sister in-law, my brother, they’ll take care of me.’ So people aren’t really thinking in terms of what a serious issue it is. So we’ll get into a discussion – if they’re willing – of the things that can happen to them both physically and financially as a result of trying to carry that kind of a burden.
What factors come into play when deciding whether someone should buy long term care insurance or not?
One of the considerations is: What people need this kind of coverage. In terms of net worth, a lot of people think, ‘Well, I don’t need it, because I have more than enough assets.’
When I was first looking at this product and thinking about how it would fit into the inventory of products that I have to service clients, I thought, ‘Well, people with a net worth of somewhere between $100,000 and $1 million probably need this coverage, but people over $1 million, they’re not going to need this coverage (because) they have assets.’
But as I delve into this, it’s very interesting: The people that are buying this product are people who have a lot of money. In many cases, they’re the healthy ones. Because of their prosperity, they’re fit, they’re healthier, they’ve probably got longevity on their side. They’ve got the assets to take care of themselves. So they have a feeling of well being, and yet they’re saying, ‘I don’t want my hard-earned assets being used up for nursing home coverage, or home health care coverage. I’m going to buy some of this, and I’ll keep my assets. Or my assets will go to my heirs, and I’ll have the insurance policy take care of it.’
But I find the struggle comes with the people between $100,000 and $1 million. Those are the people that resist it, or deny it, or think, ‘The heck with it, I’ll let the social system take care of me.’ And they’re also under the feeling that Medicare and Medicaid take care of all this. So there’s an education process there.
Are there other considerations?
One of the things is that the interview process takes a long time. Qualifying people as far as need is concerned, convincing them, and then qualifying them from a health point of view. You’ve got to be in excellent condition to get this type of coverage. If there’s anything, the littlest thing that’s wrong with you that looks like it could lead to types of dementia or permanent physical disability, insurance companies just back away immediately. You really need to think about it when you’re younger. It’s reasonably priced now that you really should think about it when you’re 50.
Should everyone consider buying the insurance, or are there some people who would be better off without it?
In terms of people who are so marginal that they would be covered by the social system, and then it wouldn’t be long until their assets would be used up anyway, for people where the premium would really be a burden, it doesn’t make any sense for them. I’m talking about people with net worths of under $100,000.
For people within that $100,000 to $1 million range, how do you advise them on choosing such benefits as the number of years the policy lasts, the daily benefit amount, and the elimination period (deductible, the number of days before the policy kicks in)?
You look at the locale that you’re in and what are the going customary charges for these services. Usually the waiting (elimination) period, some policies say 90 days, and some say 100 days; for the premium, that’s probably the best value. Usually we’re talking in the area of a $150 a day benefit, and then you put on your cost of living riders, so that the benefits are indexed up, and that would normally be a 5 percent simple. That’s the most reasonable plausible option. That pretty well fits most circumstances.
Do waiting periods ever go lower than 90 days?
They can go lower, but it becomes quite prohibitive, in terms of the cost. That’s where the (Medicare) situation comes in where there is a little window there that actually covers you up to 90 days for certain types of care, and then this kicks in after that.
Do you advise people to check the ratings of insurance carriers before buying a policy?
The companies that I provide services from are all the highest rated companies, so I’ve already done the due-diligence on that. But the business is changing rapidly. (With) disability insurance the primary policy is non-cancelable guaranteed renewable, which means the premium is guaranteed and never can change. These don’t have that kind of feature. If on a whole their (the insurance company’s) claims experience is bad, then on the whole they can increase their premiums for everyone across the board. They can’t do it on an individual basis. None of the carriers that I get involved with have had rate increases.
Top companies, Transamerica, John Hancock, GE Financial (Assurance), these are companies that are good quality, and their track record has proven to be, so far, they haven’t had big jumps in premium. But that’s not to say that’s not going to happen. This is a new situation, this is where the experience is going to come in to see how good our medical system is in keeping us all out of the nursing home and out of ambulatory situations.
Can you discuss the tax advantages to buying long term care insurance?
The government is really encouraging people to buy this coverage. The system is not going to support these up and coming problems. So the encouragement to get people to buy this coverage is giving them a tax break. Who benefits from it? The deductible is on your itemized deductions, so not everybody’s going to qualify, they’re not going to have enough expenses or income to be able to take advantage of that.
In the federally qualified policies. a person must need substantial assistance to perform at least two of six ‘Activities of Daily Living’ for the policy to kick in. Therefore, an important consideration when buying a policy is how the policy defines ‘substantial’ assistance. Can you discuss this problem?
This is all legalese that goes into putting these products together. And so there are different ways of wording things that can favor the insurance company getting out of a claim. In the old policies that aren’t tax qualified – there’s a lot of that language in there. If you are able to get out of a chair, let’s say you can get up, but you can’t go anywhere from there without assistance, in some plans you may not qualify for the ‘activity of daily living’ because you’re able to maneuver yourself up out of the chair, (even though) you weren’t ambulatory to actually get yourself around. In other policies, and other definitions, you did qualify. There are a lot of real little fine lines drawn. And that’s one of the benefits of this (federal) tax-qualifying thing coming out. It’s gotten rid of a lot of the ability to use language in these policies to escape the claim.
In disability insurance the best definition of qualifying to be disabled for a long-term disability was ‘unable to perform the material and substantial duties of your own occupation.’ Those were two key words (‘material,’ and ‘substantial’). So when you see that in the definition of Activities of Daily Living (in long term care insurance) then you’re getting a quality product.
