Policies help finance long-term care costs
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
For the first time in history, there are more Americans 65 and older than there are teenagers. A man who is 65 can expect to live to 80, and a woman who is 65 is likely to live to 84. There’s no doubt Americans are living longer than ever - and it’s costing a lot more, too.
A study by the Center for Long Term Care Financing estimates that Americans face a roughly one in 10 chance of spending five or more years in a nursing home after age 65, at a cost of $40,000 to $80,000 a year. Another report says that if you are 65 or older, you are roughly 10 times as likely to go into a nursing home this year as you are to have your house burn down. You wouldn’t go without homeowners insurance, so why not insure against the greater risk with long-term care insurance?
That insurance is especially attractive now that the latest policies allow benefits to be paid for in-home care, so seniors don’t have to move into a facility until and unless it is absolutely necessary. More and more baby boomers are buying long-term care insurance policies as a ``present’’ for their parents.
They buy the policies not only to preserve their inheritance but to guard against spending their own retirement funds to take care of their parents. And those still in their 50s suddenly realize the annual premiums are far more attractive for them than for their parents.
Since one in four applicants for long-term care insurance is turned down, it’s better to buy a policy while you are younger and in good health. So now we have two generations interested in long-term care policies. And the insurance industry is starting to compete to offer some very interesting policy deals. Even better, there’s a whole new category of long-term care insurance that is paired with traditional life insurance. These policies are designed to allow you to access the cash value of a life insurance policy, tax-free, to pay for long-term care. So if you don’t ever need long-term care, your beneficiaries will get the life insurance benefit tax-free when you die. In this week’s column, we’ll look at the basic long-term care insurance policies. Next week, we’ll cover the policies that are linked with life insurance benefits.
But first, you need to know some of the facts. Understanding basics Many people mistakenly assume Medicare will cover their nursing home needs.
But Medicare pays only for the first 20 days in skilled nursing care - and only immediately after discharge from a hospital. Medicare also contributes a small amount to 80 subsequent days in a nursing home if you meet its stringent restrictions - but not enough to make much of a dent in your bill. Medicare supplement policies only cover co-payments for 80 days. Medicaid is the federal; state program most often used to cover the cost of nursing home care for the indigent.
But you must spend down most of your assets and apply almost all of your income before Medicaid will pick up the nursing home bills. You can’t simply transfer assets to your children or a trust to qualify for Medicaid. Strict rules apply regarding transfer of assets within three years of entering a nursing home. And a Medicaid nursing home might not be your long-term care alternative of choice. So it’s worth taking a look at a basic long-term care policy.
But there are a lot of variables in the process, and each can affect the annual cost of your policy. Personal factors: Your age and current health are the key determinants of cost. The younger you are when you purchase the policy, the lower the annual cost. If you’re in good health and a nonsmoker, you’ll pay less for a long-term care policy. Premiums may be raised in the future, but not on an individual basis, and only if the entire group of policyholders receives an increase.
Length of coverage and elimination period: It’s a sad fact, but true, that the average stay in a long-term care facility is less than 30 months. So, unless you have a family history of Alzheimer’s, which could require a considerably longer stay in a nursing facility, you can save money on your policy by buying only three or four years of coverage.
However, if you purchase a policy while you’re still in your 50s, lifetime coverage is almost equally affordable. Similarly, if you agree to pay for the first 90 or 100 days of care, you can cut premium costs (much like raising the deductible on a car insurance policy). Amount of daily benefits, and inflation coverage: You can choose the amount of daily benefits to be paid, typically from $100 to $250 a day. Protecting against the cost of inflation by annual adjustment, which may be compounded, will increase your premium costs but will make sure you have enough coverage for future cost increases. You can offset that higher cost by requesting a spousal discount when purchasing coverages on two lives. Other factors There are some other key factors to keep in mind when purchasing a long-term care policy. All policies have ``triggers’’ before benefits can begin. Y
ou’ll want to choose a policy that has relatively easy triggers, such as the inability to bathe or dress oneself. It may be harder to verify cognitive impairment that also is considered a trigger. A physician must certify the need if it is based on medical impairment. And the policy should specifically cover Alzheimer’s disease. The best policies even pay for in-home assistance from less-expensive caregivers who meet state certification standards.
Most important, you’ll want to look for a policy that allows you to use the benefits either for care within a nursing facility or at home. The policy should pay the same daily rate no matter where the care is given, although there may be reduced payments for adult day care. That’s one of the biggest selling points for the new long-term care policies: They don’t force seniors out of their homes and into nursing facilities. And most policies waive the premium payments once you start using the benefits. The long-term care benefits you receive from the policy are income tax-free (up to $190 a day in 1999) and do not affect seniors’ Social Security benefits. And the premiums for long-term care may be tax deductible on itemized returns, since they are considered a medical expense, although there are some restrictions.
Employers can deduct the cost of long-term care premiums paid for employees; it is a nontaxable benefit to the employee, and the benefits will be tax-free to the recipient. Policy cost varies Let me give you an example of the cost of a long-term care policy for a person in good health. Premiums are the same for men and women. The quotation is based on three years of coverage, with a 90-day waiting period. The policy will pay $150 a day, whether in a nursing facility or at home, with a simple inflation escalation. For a 55-year-old, the annual premium is $1,024.
For a 70-year-old, the annual premium is $2,700. Those are annual premium requirements. You’ll have to pay all your life until you need the coverage or die, and premiums could rise. But a few companies are now offering guaranteed premiums for a period of 10 or 20 years to create a fully paid-up policy. For example, the 55-year-old person could pay $3,519 a year for 10 years and have a fully paid-up policy that covers 1,500 days of care (a little more than four years) at $150 a day. Or that person could pay $1,914 a year for 20 years and never pay another dollar for 1,500 days of the same coverage. Both of these premiums include compound inflation protection that eventually increases the daily benefit.
No matter what policy you purchase, you’ll want to buy from a reputable insurance company - one that’s going to be around in the future when you need the benefits. For guidance and price quotations on long-term care insurance policies, you might want to contact MAGA Ltd. of Deerfield at (800) 533-6242 (www.magaltc.com) or Long Term Care Quote at (800) 587-3279 (www.longtermcarequote.com).
NEXT WEEK: A life insurance policy that can be tapped to pay for long-term care. Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil Co. You can send her questions via e-mail: savage@ suntimes.com. Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s. Copyright Terry Savage Productions.