The Maryland Health Care Commission estimates that about 70% of individuals over age 65 will require at least one type of long term care (“LTC”) during their lifetime. If LTC is required, the cost of this care in a nursing facility in our area currently averages between $70,000 and $120,000 per year. Alternatively, according to the Genworth 2015 Cost of Care Survey, the national hourly rate for home health aides is $21.50 and is expected to increase 4% annually. Obviously, these are significant expenses that can drain or deplete the average person’s savings.
Medicaid, the government’s safety-net for LTC, may be or become available to pay these costs, but Medicaid is means-tested and is only available to persons with very limited resources ($2,500 or less in available assets, with certain additional limited exceptions for spousal needs, a car, household furniture, and prepaid burial expenses, etc.). Until persons requiring LTC “spend down” to these limits (strategically or otherwise), those persons are required to use their available individual or family resources to pay the cost of LTC. With the exception of brief stays in nursing homes following a hospital stay, Medicare does not cover long term care. Private health insurance will cover LTC only if it is a specific LTC policy.
Understanding How LTC Insurance Coverage is Priced
As with many risks, insurance is generally available to pay the costs of LTC if the insurer believes it has sufficient time to build a fund that can provide the likely benefits it may be required to pay out plus a profit for its shareholders or members. Premiums for such insurance (“LTC Insurance”) are therefore based on:
- (A) the age and health of the insured (i.e., the likely time when LTC benefits will be required and length of the probable “build-up” period for the fund to pay those benefits);
- (B) the likely amounts of LTC benefits to be paid, which, in turn, are based on:
- (1) the daily (or monthly) LTC benefit actually paid,
- (2) the length of time the daily (or monthly) LTC benefit will continue, and
- (3) the “elimination period” between when the insured first qualifies for LTC Insurance and when payments under that LTC Insurance begin (i.e., the “self pay” period before which the LTC Insurance payments commence);
- (C) the anticipated investment performance of the insurer using the premiums paid;
- (D) the costs of insurance administration anticipated by the insurer; and
- (E) the profits the insurer seeks to achieve.
Tips for Affording the Cost of LTC Insurance
Most residence owners carry homeowners’ insurance to cover the risk of loss occasioned by fires and other casualties and premises-based tort liability. Yet, while a 70% likelihood of LTC would seem to dwarf the likelihood of such casualties and tort liability, why do so few seniors have LTC Insurance? When I ask clients who lack this insurance why this situation exists, the most common response is: “we looked into LTC insurance and found that it would be prohibitively expensive.” This is when I try to make sure they asked the right people the right questions and offer the tips below:
First, start your LTC Insurance inquiry early, i.e., before you reach age 60-65. The longer the period the insurer has to “build-up” a fund from which to pay your LTC benefits (and its profits), the less the insurer needs to charge as a premium. If you are generally in good health, the optimum time to buy LTC Insurance is probably while you are in your early 50s. However, if you are already older than that, don’t give up the idea of obtaining LTC insurance. There are other ways to cut its costs.
Second, shop around. Don’t just get a quote from one insurer. Different insurers use different experience and actuarial ratings to determine how long the likely length of the probable “build-up” period for the fund and projected time when LTC benefits will be required. In addition, different insurers will have different anticipated investment performances for the premiums paid, different charges for insurance administration, and different expectations with regard to the profits sought for investors. Pricing factors (C), (D), and (E) listed above are in fact variable. Probably the best approach is to use a broker that can obtain LTC Insurance from more than one insurer. Don’t forget, however, that your LTC Insurance “eggs” will likely all be in “one basket”. Make sure the ratings of whichever insurer you choose make it likely that the insurer will still be in business if and when your LTC needs occur.
If you haven’t started your inquiry early enough and if, even after shopping around, you find that the premiums for covering all your likely LTC needs are too expensive, don’t stop the inquiry there. You can look for ways to cut the cost of LTC Insurance by limiting the coverage sought to those most likely to match some or all of your potential risks. Partial coverage of those risks is most likely better than no coverage at all. Consider the following tips for partial coverage alternatives:
Third, accept reasonable limits on the length of the period LTC benefits will be payable for your benefit. You probably will not need LTC coverage for your entire life expectancy after the onset of the need for that coverage. That need will probably make it likely that you will not live to the same life expectancy as others your age not having that need. The average length of stay in a LTC facility is currently less than three years. If full LTC Insurance coverage for the balance of your lifetime is too expensive, consider limiting the coverage period to a dollar amount equal to four to six years (i.e., because of likely medical advances, a period slightly longer than the current average length of stay). Five year LTC Insurance coverage will provide LTC payments for any “penalty” period required for Medicaid means-testing strategies. In addition, if you are married, make sure your respective policies provide that any unused coverage purchased by a decedent spouse is available to the surviving spouse after the decedent’s death.
Fourth, accept a longer “elimination period” between when you first qualify for LTC Insurance and when payments under that LTC Insurance begin. If your entry into LTC is preceded by a prior hospital stay of at least 3 days, you need skilled care (such as skilled nursing or physical therapy services), and you are admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay, Medicare will pay some or all of your LTC costs for up to 100 days. (Currently, Medicare pays 100% of your costs for the first 20 days; and, for days 21 through 100, Medicare will pay the cost of your expenses over $161 per day.) Self-paying LTC costs during the elimination period may allow you to afford better coverage to protect your assets thereafter.
Fifth, and finally, consider a daily LTC benefit that will cover part but not all of your LTC costs. You may have other income that can contribute as well. If you can’t afford $250 or more per day coverage, price out the cost of $100 per day or $150 per day coverage. Don’t settle for no coverage just because you can’t afford insuring against all of the costs of LTC. Because of monthly social security benefits, other income, and investment compounding, partial coverage may go a long way toward extending available personal or family resources.