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Insurance for long-term care promises
peace of mind, but at a dear price
By Leonard
Wiener
It's not only people nearing retirement who are being pitched
the concept of insurance to cover long-term nursing or other
assisted care. Even people in their early 50s, or younger, may
find they are the target of insurers who view the aging of America
as an opportunity to sell more of their stock in trade–peace
of mind. While long-term-care insurance can salvage family finances
and ease worries about having a nursing home bed if you need
one, its provisions are often misunderstood. And people frequently
develop unrealistic expectations of the amount of help such insurance
can provide. Buying too soon–or too much–can be a waste
of money. Waiting too long can make you ineligible because of
health problems. And, because it's so expensive, you may decide
it's a safety net that you can't afford or don't need at all.
Here's some help to make sense of all this:
Once someone hits 65 and qualifies for Medicare, won't
that pay for a nursing home stay?
Sometimes. Medicare pays for 20 days at a nursing home for recuperation
and rehabilitation after a hospital stay, and it picks up part
of the cost for an additional 80 days. A supplemental Medigap
policy could pick up the share that Medicare won't. But neither
covers custodial care that elderly people may need when they
can't bathe, eat, dress, or get around without help–or when
they need supervision because of Alzheimer's disease or other
forms of dementia.
What about Medicaid?
This welfare program is often confused with Medicare, the federal
insurance program that helps older people pay doctor and hospital
bills regardless of income. Medicaid, run jointly by the federal
government and the states, is a haven for people with few assets
and a low income. It may pay for long-term custodial care and,
in some cases, for at-home care or assisted living in communities
for the elderly. But it won't kick in until those bills eat up
most of a person's assets and income. Provisions vary by state,
but protections apply when one spouse is institutionalized and
the other stays at home. The at-home spouse can typically retain
about half the family's assets but no more than about $84,000,
plus the family home–and keep as much as $2,100 a month
of income, and perhaps more.
Despite those safeguards, many people worry about a reduced
living standard for the at-home spouse or an erosion of the assets
they can leave to their children. As a result, many people transfer
the title to their assets–at least in part–and make
other financial moves to appear poor on paper and thus prematurely
qualify for Medicaid. That's part of the reason there are so
many more elder-law attorneys, who specialize in helping people
with the complexities of aging.
How does insurance help?
It can reduce the incentive to manipulate finances and provide
peace of mind about getting care. Insurance can also increase
a family's leverage to choose the care it wants. Not all facilities
accept Medicaid patients, and those that do may limit the number
of such occupants because Medicaid pays a discounted rate. Residents
who pay full price from their own assets or insurance may get
preference even in cases where regulations bar discrimination
against Medicaid patients. "It's like flashing $20 to the
maitre d'," says Barbara Kate Repa, an attorney in San Francisco.
It can help if you use insurance or private funds to start off
before turning to Medicaid. A nursing home that accepts Medicaid
patients can't force out paying occupants when they go on Medicaid,
but lawyers tell of patients being moved to a less desirable
room or a different facility. Complaints by family members may
help.
Middle-income people are the prime target for this insurance.
Their income may not cover long-term care, but they can have
sizable assets that could be sliced away. Couples with modest
assets and income may need little or no insurance, as Medicaid
may protect all or most of that for the at-home spouse. The rich
can probably afford to take care of themselves.
What does a policy cover?
This is where you must read the fine print; terms vary widely.
Generally, insurance may pay $100 to $200 a day for custodial
care in a nursing home for two to four years–but sometimes
for life. A similar or reduced amount may be paid for assisted
living or care at home. A policy with such options can be useful
because alternatives to nursing homes are becoming more popular
and available.
Keep anticipated costs in mind. Nursing homes currently charge
about $100 to $300 a day, so insurance may not cover everything
unless you pay an outsize premium for very extensive coverage.
For many people, the insurance may have to serve as a supplement
to other savings and retirement planning. A policy that raises
its daily compensation each year helps protect against inflation
even before the first claim is made. It's a costly added feature
that in some cases may almost double the premium, but it's worthwhile,
particularly for younger buyers who may not claim benefits for
many years. The most generous adjustment compounds the rise in
benefits–similar to interest compounding in a savings account.
Buying minimal protection is unwise, as it will hardly dent
the bills. A better way to economize is to accept a wait of up
to 90 days after entering a nursing home before benefits begin–not
unreasonable if you view the policy as a last-ditch backstop
against the financial drain of long-term care.
To trigger benefits, a person must generally be unable to
handle two or three "activities of daily living" from
a list of five or six. Make sure bathing is on the list; that
is typically one of the first chores that can't be done. Good
policies also provide coverage for dementia. Check for restrictions
that might, for example, rule out a preferred smaller facility.
If you're considering assisted living, check the policy's definition
of what qualifies.
What if the benefits run out?
In that case, the resident would pay all expenses until he or
she eventually qualified for Medicaid. The following projections
aren't fun, but the average nursing stay is about two years,
and the chances of surviving long enough to need care for more
than four or five years is low. Alzheimer's patients, though,
tend to have longer-than-average stays.
Some states are trying to reward those who buy long-term insurance.
Pilot programs in California, Connecticut, Indiana, and New York
allow residents who have bought insurance to retain a larger-than-normal
amount of assets when they go on Medicaid. But the individual's
income may be tapped to reimburse Medicaid costs.
What does it cost?
A 55-year-old might pay as little as $300 a year for minimal
long-term coverage, or $1,500 for comprehensive benefits, estimates
the United Seniors Health Cooperative in Washington. An individual
who first purchases insurance at 75 might pay $1,000 to $6,000.
Changing the level or length of benefits has a big effect on
the cost, but also check for specials, such as a discount of
perhaps 10 percent to 20 percent for couples who sign up.
Consider whether you can afford the cost–buying a policy
and later letting it lapse is generally a bad strategy, and it
is something that many buyers of the first generation of unattractive
long-term-care policies did. One rule of thumb is that retirees
should not spend more than 5 percent of their income on such
insurance. Some insurers allow policyholders who get stretched
too thin to downgrade the coverage to a level they can afford–a
half-loaf-is-better-than-none approach. In some cases, the premium
will be waived once benefits begin, a good feature. It's not
unreasonable for children who will inherit the protected wealth
to help out. But for many, coverage won't be affordable.
Can the premium rise later?
Once you pass an insurer's health requirements–the older
you are, the harder that might be–the initial premium can't
be increased as you age or as your health falters. But the rate
can legally rise if the insurer generally raises it for everybody–not
just for you or those your age. That could happen if claims are
heavier than forecast or if a firm initially set prices low to
drum up business. Some experts believe that sizable boosts may
come in a few years; you may want to consider that when budgeting.
Ask an agent about a firm's record of recent price increases
and be wary of a premium that's way out of line.
Who sells the insurance?
Sellers are life and health insurance companies, including big
names such as General Electric Capital, IDS Life, and John Hancock.
A buyer who wants to be conservative should choose a company
that receives at least three of the following ratings, advises
Joseph Belth, professor emeritus of insurance at Indiana University
and editor of the Insurance Forum. They are: AA- or better
by Standard & Poor's, A1 or better by Moody's, AA or better
by Duff & Phelps, B- or better by Weiss Ratings, and A+ or
better by A. M. Best.
Any tax breaks?
All or part of the cost of a policy that meets certain federal
standards can be considered a tax-deductible medical expense.
But that may not help much, because most people don't qualify
to deduct medical expenses–and those who do can deduct only
a portion. Congress is considering an easier-to-claim deduction,
but no new break is likely soon. More important: Payouts from
such "tax qualified" policies are not considered taxable
income. The Internal Revenue Service hasn't definitively ruled
on the taxability of payments from other policies, so buying
one of those means a possible future liability and other complications.
A tax-qualified policy may be more restrictive–a disability
must be expected to last for more than 90 days, for example–but
it's the better choice.
Is it smart to buy when you're young?
Buying in your 50s or earlier will get you a low rate (chart,
Page 82) and protection against being rejected for coverage later
on. But most advisers suggest waiting until your early or mid-60s,
when coverage makes greater sense. Also, policy features and
long-term-care choices are changing, so buying a policy early
could leave you with an outdated one. Many policies bought prior
to the mid-1990s, for example, are more restrictive than current
ones and may require a hospital stay before going to a nursing
home, or may make it difficult to get benefits for Alzheimer's
disease. (Consumers with those policies may want to look into
the cost and feasibility of upgrading, but they should be sure
a new policy is officially in force before canceling the old
one.) A more important priority for younger people is to build
a retirement nest egg, says Robert Pearson, president of CareQuest,
an employee counseling firm.
What are the odds of needing care?
Not as high as you might be led to believe by the hoopla–and
the trend may be in your favor. At age 75, only about 2 of 100
men and 3 of 100 women are in a nursing home; at age 85, it's
fewer than 9 of 100 men and about 13 of 100 women. At 90, it's
fewer than 13 men per 100 and about 21 women per 100. Statistics
are massaged to advance a point–some studies show that at
age 65, the average person has a 40 percent to 50 percent chance
of entering a nursing home at some time. But while there are
real financial and medical disasters, more than half of the people
going into a home are estimated to leave within three months,
and a sizable number leave soon afterward. And the long-term
outlook is favorable. "People who are 65, 75, or even 85
are in much better health today than in the past," says
Shahla Mehdizadeh, a researcher at the Scripps Gerontology Center
at Ohio's Miami University. Nursing home occupancy is declining
as assisted living and other less intensive care proliferates,
she says. That, at least, is good news. |
