American Health Insurance Plans (AHIP)
Nancy P. Morith, CLU
The American College
Stephen A. Moses
Center for Long-Term Care Reform, Inc.
Special from Bottom Line's Daily Health News
October 20, 2005
A lthough I generally don't write about financial aspects of health care, the issue of long-term-care (LTC) insurance is one that is getting a tremendous amount of press. Health-care costs are rising... people are living longer than ever... and it's frightening to think that all of your retirement savings can be wiped out because of a fall or illness. So I did a little research on the ins and outs of LTC insurance...
LTC Defined
LTC insurance is designed specifically to cover a broad range of medical and personal services that you will need in the event that you fall victim to certain disabilities that prevent you from taking care of yourself. These disabilities can be mental, physical or both, and either they will not improve at all, or it will be many months before you can begin to take care of yourself again.
Though considered a form of health insurance, LTC insurance is quite different in that it covers the care side of medical issues rather than the medical treatment parts.
Medicare and Medicaid Will Not Protect You
Stephen Moses, president of the Center for Long-Term-Care Reform in Seattle, and Nancy P. Morith, CLU, an adjunct faculty member of American College in Pennsylvania, which specializes in financial degrees and certificates, feel very strongly that you can't rely on the government for protection should you need long-term care either in a nursing home or in your own home, for a number of reasons. According to Moses, Medicare and Medicaid are vulnerable with regard to future solvency, so you can't assume that they'll be there for you.
KEY CONSIDERATIONS WHEN BUYING LTC Insurance
According to Morith, there are a number of factors that go into buying LTC insurance. First and foremost are "fixed" versus "adjustable" elements.
Fixed elements: These are similar to life insurance considerations -- your age, state of health and marital status. Your premiums will be based on these factors at the time you purchase the insurance. This means that you will want to buy the insurance at the youngest age possible, when you are in the best of health and after you are married, to take advantage of discounts.
Adjustable elements: The adjustable elements, however, are not as neatly determined and require a great deal of thought before you make your decisions. They are as follows...
- Elimination period. This is the number of days that you can afford to pay for care on your own before the insurance kicks in. It is somewhat like a car insurance deductible -- the amount you will pay before insurance picks up the charges. To determine how long an elimination period you want in your policy, you will need to evaluate your current assets and expected growth of assets, plus any monies from other sources that might become available. Be sure to compare rates of different elimination periods -- the difference between, say, 30 days and 45 days is often negligible.
- Daily or monthly maximum amount of the nursing home's cost. This is the maximum amount that the LTC insurance company will pay per day or month, so your gap insurance or personal assets will need to cover the rest if your costs exceed your policy's maximum. A day in a nursing home averages $194. Prices vary based on the quality of the facility and the location.
- Type of inflation protection. Like it or not, the cost per day of a nursing home will have increased by the time you may need your benefits. Most policies offer a 5% inflation protection (IP) plan, but you need to decide if you want that 5% calculated as simple or compounded inflation.
Morith suggests that if you are still young -- in your 40s or early 50s -- you should opt for the compounded IP, which means that the 5% will be added in each year before the next 5% is calculated. On the other hand, if you are buying in your late 70s, a simple 5% inflator of the original amount might cover you just fine.
- Benefit length. How long a stay in a nursing home will you need covered? Lifetime? Two years? Unless you expect to live into your 90s or past 100, two or three years would probably be sufficient. The average stay in a nursing home is 2.4 years.
LTC insurance Can Be Very Affordable
How much LTC Insurance costs will depend on how old you are when you first purchase it, what benefits you want and where you live, as well as the current state of your health and whether or not you are married.
Susan Coronel, director of LTC Insurance for the American Health Insurance Plans, a US lobbying organization that promotes the benefits of owning such a policy, provided the following ball park cost figures for different age groups:
|
Average Annual Premiums for Top Long-Term-Care Insurance Sellers in 2002* | ||
|
Age |
Base |
With 5% Compounded IP |
| 40 | $422 | $890 |
| 50 | $564 | $1,134 |
| 65 | $1,337 | $2,346 |
| 79 | $5,330 | $7,572 |
|
* Information derived from 11 of the 13 sellers identified as having sold 80% of all individual and group long-term-care insurance policies in 2002. Note: Costs are based on coverage of $150 daily benefit amount, four years of coverage and a 90-day elimination period. | ||
What this chart says: If you are in your 40s, the base amount you would pay annually for LTC insurance would be $422. However, if you bought your policy with a 5% compounded IP (which every expert says you must have), the annual cost becomes $890. You will pay that $890 every year -- in your 50s, 60s, 70s and so on -- until you invoke your benefits. Once you invoke your benefits, most insurance companies waive the premiums -- you need to ask about this when you talk with a broker.
If you should recover, however, and no longer need benefits, your premiums will resume at the same rate (assuming the insurance company hasn't been granted an increase for your class), prorated if you've paid your annual premium.
Here's something else to consider: Instead of an annual premium that you pay till you invoke your benefits, some states allow you to fully pay a policy in one, five or 10 payments -- or until you're 65 -- and then you'll have a fully paid-up policy. If cash flow is not a consideration, this is worth checking into, although it will not necessarily save you money. For example, if a 55-year-old has a premium with a lifetime payment option of $1,500 annually, and if he were to elect a 10-pay premium, it would become $3,900 annually for 10 payments. If he were to pay premiums for 30 years with the lifetime payment option and need care at age 85 and the premiums never went up he would have paid $45,000. If he had done a 10-pay option he would have paid $39,000. However, if he paid for 10 years, had a stroke and needed care at age 65, he would have only paid out $15,000 with the lifetime payment option, but with the 10-pay, $39,000.
In general, as with life insurance, the price for LTC insurance is lower for younger people. Morith believes that the best time to purchase is when you are in your 50s. In your 40s, you have conflicting priorities, such as college tuition, orthodontia and other such large expenses. But by your 50s, these expenses are completed, your income is higher and you have more disposable income.
Services and Benefits
All of the information above is for "basic" nursing home and in-home care. There are, however, an array of add-on alternate care benefits to consider, including coverage of care provided by assisted living facilities.
Assisted living facility
If there is another type of care that would be suitable for the insured, other than something already mentioned in the policy, and the insured and his doctor and the insurance company all agree that it would be a good thing, the insurance company will go outside of the explicit benefits of the policy and provide coverage for that kind of care. This includes...
- Hospice care
- Respite care
- Bed reservation benefit
- Care coordination
- Caregiver training
- Medical equipment coverage
- Restoration benefit (when you invoke your benefits then recover, so you no longer collect payments but want to restore your policy)
- Survivorship benefit
- Variety of payment options
- Alzheimer's disease coverage
- Premium waiver when services are invoked
- Spousal and "preferred health" premium reductions.
Some of these additional benefits may be covered in certain basic policies while others will add to the cost of your annual premium. Each company will be different, so ask the broker to clearly list all benefits included in the basic policy.
Rates Don't Always Go Up
Rates are determined based on actuarial tables, which means that the insurance company may not raise your annual premium just because you have a heart attack or get cancer. However, if the actuaries at the insurance company determine that your rate class is being undercharged for the amount of risk, the company can petition the state regulating agency for an across-the-board increase for your rate group. Then your rates as well as the rates for everyone else in your group would go up.
But in order to get that increase, the company must document that it is necessary. Morith says that the insurance companies are sometimes turned down, and even when they do get the increase, it is not always the full amount asked for.
Getting Started with Long Term Care
A meeting with your family is the first place to start the long-term-care discussion process. Sit down with your children, siblings or anyone you feel should be in on the decision of how to handle long-term care.
Look at your income and decide how much you can comfortably spend a year for an LTC insurance policy as well as what you can afford to pay for nursing or disaster care coverage. Do not go into debt or give up your lifestyle to pay for LTC insurance. You should choose a policy, no matter how minimal, that is financially manageable.
Consider how much money will be coming in when you probably will need to invoke your benefits. Will you have a pension? Social security? Investment income? Does your family want to contribute?
What is your family's health history? Are you all in good health? Do some relatives live into their 90s? Is there a history of heart disease, stroke or cancer?
How is your health and that of your spouse? If you've had major health problems and there's reason to believe they may be recurrent, you'll want to consider more benefits. If you're healthy and expect to remain so, you may want to opt for just a catastrophic policy.
Where do you think you will want to be if you need nursing home care? Near your family in another state -- or do you want to stay where you are? If so, and it is feasible, would you rather be cared for in your home instead of in a nursing facility?
Take into account different scenarios. Worst case scenario for married people: One spouse goes to a nursing home, so you will need to pay for two households. Worst case for a single person: He/she wants to stay home, and so will need live-in care.
These are important questions that you must answer before you can decide on what policy to purchase.
How Do I Find a Reputable Salesperson?
Though there are many companies selling LTC insurance, Moses points out that 10 companies sell 80% of these policies. Among the largest are John Hancock, Genworth (formerly GE Capital), Prudential, MetLife, UNUM, Bankers Life and Casualty and MedAmerica. Speak to three agents, he advises, before making a decision.
You also can find more good information on LTC insurance by visiting the Web sites of AARP www.aarp.org... the National Association of Insurance Commissioners www.naic.org... and American Health Insurance Plans www.ahip.org.
Moses believes that everyone should have LTC insurance. The question is how much and of what type. Hopefully with the help of all of the other health and wellness information you are reading (including Daily Health News) you will have a long, active life. Unfortunately, no one ever knows when disaster may strike, in which case it is always good to have disaster plans that may or may not include LTC.
Sources
- Susan Coronel, LTC director, American Health Insurance Plans (AHIP), Washington, DC.
- Nancy P. Morith, chartered life underwriter, adjunct faculty, The American College, Bryn Mawr, Pennsylvania, and president, NP Morith, Inc., Long Term Care Planning & Insurance Brokerage, Princeton, New Jersey.
- Stephen A. Moses, president, Center for Long-Term Care Reform, Inc., Seattle. He conducts graduate seminars on LTC for the financial community.
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