Futurecare Associates, Inc.

Life used to be so simple. Folks didn’t talk much about nursing homes. The expectation was that we would live our later years in place, perhaps near or with children, that our doctors would come to the house if needed, and, in some not so defined way, we would be cared for in our final days. The world is a different place today!

For the fortunate among us, we may still age in place and be cared for by our loved ones, perhaps with some occasional professional home care. But, at least in the perception of some, medicine and the sociology of gerontology have reshaped our expectations so that we think of our future more in terms of being cared for in a health care system, a system that is defined more in terms of professional than family resources. And because it is a system, the possible use of it has created a need to plan and perhaps insure our ability to benefit from it.

Therein lays a problem. Uncertainty. How do we know if we will need to access that system? Under what circumstances? For how long? At what cost? How will the cost be paid?

Our focus in the following discussion is to provide you with suggestions to help you advise your clients as they evaluate (A) the likelihood of their future need for long term care, and (B) whether or not they will be better off personally and financially by self-insuring or (C) by paying for perhaps many years to come before a claim, if at all, arises for a non-cancelable policy providing a basket of benefits contractually fixed today at a cost known today but not guaranteed, or (D) will they be better off personally and financially relying on a currently means tested, not guaranteed, and perhaps more limited basket of government provided benefits.

Let’s first be sure we agree on at least a general description of the types of care and facilities which may be involved in meeting a future need for long term care.

Long term care may range from home care to adult day care to care in an assisted living facility or to care in a skilled nursing facility. Various levels of care from assistance through family or friends to skilled nursing care to hospice care may be involved.

Each of us has some level of knowledge from personal, family or professional experience concerning such types of care. For purposes of this discussion, we will assume that the following fairly describe the services to which we will refer.

Home Care means medical as well as non-medical services provided to an ill, disabled or infirm person in his or her residence by a person licensed to provide such care or by a family member, friend or other individual.

Adult Day Care references “a community-based center for adults who need assistance or supervision during the day including help with personal care, but who do not need round-the-clock care.” A Shopper’s Guide to Long-Term Care Insurance, p. 35, National Association of Insurance Commissioners, 2003 (Revised 2005).

Assisted Living Facility denotes a place which provides residential living, including room, board and some individualized personal care and health care services for persons who may need some assistance with activities of daily living. Such facilities offer individuals who do not need the level of care provided by a nursing home a way to maintain a relatively independent lifestyle. Assisted living facilities may also include custodial care required by persons suffering from senile dementia, including Alzheimer’s disease. In Pennsylvania, assisted living facilities are governed by the Personal Care Home statue, 62 P.S. Sec. 211; 55 Pa. Code Sec. 2620. [See: Residence Options for Older or Disabled Clients, Lawrence Frolik (Warren, Gorham & Lamont, New York)]

Nursing Home means a “licensed facility that provides general nursing care to those who are chronically ill or unable to take care of daily living needs.” A Shopper’s Guide, ibid, p. 37.

Hospice Care means care provided for a person who is terminally ill with a life expectancy estimated by a physician to be 6 months or less. Hospice care is provided by an organization licensed to do so and may be given in a facility or in the individual’s home.

Continuing Care Retirement Communities (CCRC) may provide varying levels of service with varying payment arrangements which may involve an entry fee as well as monthly fees depending on the residential and other, including health, services provided.

Each of us has both a health history of our own and a family health history. Your health history, personal and familial, and your lifestyle, aren’t a crystal ball, but they do offer about as reasonable a set of clues as to your life expectancy as you are likely to find. And, while longevity doesn’t tell us about the quality of our remaining years, it is a useful threshold consideration as we approach the subject of long term care planning.

Actuarial tables are remarkably impersonal. They don’t ask questions about you other than your sex and age. Thomas Perls, MD, MPH has created a somewhat more personal tool, “The Living to 100 Healthspan Calculator”, which you will find at www.livingto100.com. It only takes a few minutes to take the “test”. A suggestion: when you access this calculator, it will be useful to have at least the lipid panel results (HDL, LDL and Triglyceride level) from the lab report from your last physical on hand.

If you know that your life expectancy, not just an average for a person of your age from an actuarial table, may be 90 or 95 years, or more, all of a sudden you may be more inclined to pay attention to long term planning.

Now, to continue the good news. We’re living longer, if not necessarily better. The National Vital Statistics Report (Vol. 53, No. 15) of February 28, 2005, show that, in 2003, a male’s life expectancy reached 74.8 years and a female’s, 80.0 years, with all Americans having an average life expectancy of 77.6 years.

Data from the Department of Health and Human Services 1999 “National Nursing Home Survey”, the most recent of a continuing series of national sample surveys of nursing homes, their residents and their staff, showed the following for the U.S.:

That’s a fair number of people in nursing homes, not including Assisted Living Facilities.

In April, 2004 the Congressional Budget Office published a comprehensive report Financing Long-Term Care for the Elderly. (www.cbo.gov) The report considers the current context of long term care financing, major issues in the financing of long term care and policy approaches to long term care financing. It provides an overview of long term care services and a discussion of recent policy initiatives affecting long term care financing.

Relevant to our concern here about the likelihood of needing long term care, the article reports in Table 2-1, Probability of Nursing Home Use by Elderly People Over Their Remaining Lifetime, that, of people turning 65 in the year 2000, there is a 32% probability of such a need for three months or longer, a 23% probability for one year or longer and an 8% probability for five years or longer. For people turning 65 in 2010, the estimates project a slight increase at 33%, 24% and 9% respectively. The CBO sources the figures from Brenda C. Spillman and James Lubitz, “New Estimates of Lifetime Nursing Home Use: Have Patterns of Use Changed?” Medical Care, vol. 40, no. 10 (2002).

Among the individuals who do need care in a nursing home, the average length of stay for males age 65 to 74 was 823 days, for females 881 days; for males 75 to 84, 759 days, and for females, 801 days; for males 85 years and older, 725 days, and for females, 977 days. Table A-2 of the same CBO Report sourced by the CBO from Celia S. Gabrel, Characteristics of Elderly Nursing Home Current Residents and Discharges: Data from the 1997 National Nursing Home Survey, Advance Data no. 312 (Centers for Disease Control and Prevention, National Center for Health Statistics, April 25, 2000).

An often cited more general statistic places “[t]he average length of stay for current [nursing facility residents at] 2.4 years.” Jones, A. The National Nursing Home Survey; 1999 Summary. National Center for Health Statistics, Vital Health State 13(152), 2002 [The MetLife Market Survey of Nursing Home & Home Health Care Costs, September 2004, p 3.]

One insurer’s perspective: One major LTC insurer recently provided a report on the average length of actual claims by benefit type over a thirty year period. While, for all benefits, the average claim lasted 690 days, nursing home claims averaged 721 days, assisted living 1,079 days, and home health care 523 days.

Among those claims, dementia ranked first as the primary diagnosis, accounting for nearly 24% of the total; stroke was second at 10.6%; fractures (other than hip fractures) counted for 5.3%; hip fractures added 4.4%, and heart disease accounted for 3.6%.

Cost is only one consideration in long term care planning. Dignity, choice, the well-being of the community spouse personally and financially, the impact of care-giving on family members personally and financially are all relevant considerations as well. But cost will at least eventually impact all concerned.

The nation spent an estimated $135 billion on long term care for the aged in 2004, with 68% going to nursing homes and 32% to home based care. “Is Private Long Term Care Insurance the Answer,” Johnson & Uccello, Center for Retirement Research at Boston College, March 2005, Number 29.

Consider care at home. MetLife’s Mature Market News reported on July 29, 2004 that “[t]here are 34 million Americans providing care to older family members, according to the 2004 National Caregiver Survey by the National Alliance for Caregiving in collaboration with AARP, funded by the MetLife Foundation. Fifteen percent of those caregivers – more than five million – live more than an hour away from their relative.”

“More than 3 out of 4 adults who receive long-term care at home (78%) rely solely on family and friends to assist them. Fourteen percent supplement family care with paid services while only 8% rely solely on formal paid services.” QuickFacts from the MetLife Mature Market Institute, August 2004, quoting Lynn Friss Feinberg and Sandra Newman, Family Caregiving and Long-Term Care: a Crucial Issue for America’s Families, Family Caregiver Alliance, June 2004.

Remember that we are discussing long term care, not two or three months of care occasioned by a spell of illness or recovery from an injury. In fact, the Health Insurance Portability and Accountability Act (HIPAA) requires, for a qualified long term care insurance policy claim to be considered by the insurer, that a licensed health care practitioner certify that the individual is unable to perform, without substantial assistance, at least two activities of daily living and that the condition is likely to last for at least 90 days. Severe cognitive impairment certified within the prior 12 months by a licensed health care practitioner is the only other claim trigger allowed by HIPAA in a qualified policy.

Cost will not only vary by the nature of the care required but also by the residency of the patient receiving care. Home care, adult day care, assisted living facility and skilled nursing facility care costs vary substantially in different areas of the country. It is important in counseling your clients who are approaching retirement and who are considering provision for the risk of long term care to discuss with them where they intend to live in retirement.

Consider the impact of the average 7% annual nursing home cost inflation rate. At the current average daily rate of $199.31in Pennsylvania, or $72,748 a year, the cost of a 2.4 year average stay would escalate in 10 years to $392 a day or $143,106 a year and $343,454 for 2.4 years.

The base average monthly rate for assisted living costs in Pennsylvania in 2005 varied from $3,364 in Philadelphia to $2,775 in Pittsburgh to $2,223 in the Scranton area according to The MetLife Market Survey of Assisted Living Costs, October 2005. The MetLife Survey noted that “[t]he 2005 national average, private pay monthly rate for a private room with a private bath in an assisted living facility [was] $2,905 or $34,860 annually.” That monthly rate was up 15.1%, according to the Survey, over the 2004 figures of $2,524/$30,288.

Even at a 7% inflation rate, a monthly cost of $2,775, or $33,300 a year, would rise to $5,459 a month, or $65,508 a year, in ten years. If the need for assisted living care lasted for 1,079 days, about 3 years, the cost for 3 years would exceed $196,000.

The MetLife Market Survey of Nursing Home & Home Health Care Costs, September 2005, p. 4, reports that the 2005 “average daily rate for a private room in a nursing home is $203, or $74,095 annually [and] for a semi-private room [the average daily rate is] $176, or $64,240.”

For the 152 zip code area (Pittsburgh), the Survey reports that the average private room rate is $234 with the high at $288 and the low at $180. For a semiprivate room the average daily cost in the Pittsburgh area is $215 with the high being $275 and low being $160. Interestingly, the Medicaid divisor for the Commonwealth of Pennsylvania is currently $6,062.35 which works out to $199.31 a day.

Contrast those costs, for example, with Atlanta, Georgia (zip 303) where the private rate average is $168 with a spread of $240 to $128, and the semi-private average is $144 a day with a range of $200 to $120. Then there is the Big Apple (zip 100-114) with a private room average of $320 daily ($423 to $220) and a semi-private average of $308 ($418 to $210). If Las Vegas is a consideration, the private room average was $195 with a spread of $285 to $165 and a semi-private room came in at $164 on average ($175 to $150).

While Medicare does not pay for long term care, Medicare will pay for skilled nursing facility care for the first 20 days if you are transferred into such a facility within 30 days of spending three days in the hospital for related care. The three day hospital stay requirement is waived if the patient is covered through a Medicare HMO. From the 21st through the 100th day, Medicare requires a daily copay of $119 (2006) if the patient still requires skilled nursing facility care. From day 101 on, the patient in on his/her own.

The MetLife Market Survey of Assisted Living Costs noted earlier surveyed 87 major markets in all 50 states and the District of Columbia. It was conducted by LifePlans, Inc., a risk management and consulting services firm. The facilities, surveyed at random, “had to meet the following criteria: Must be licensed according to each state’s standards for licensure; Must provide personal care assistance; Must provide private pay rate . . . [M]onthly rates were obtained for a one-bedroom apartment with a private bath or a private room with a private bath. For those facilities whose costs were based on levels of care provided, an average of the costs was used. Any facility requiring an up-front charge was excluded from the sample . . . Data from 873 assisted living facilities, ranging in size from 3 to 224 beds, were included in the sample; the average number of beds per facility was 56, and the median number of beds was 51. Six out of ten (61%) provided dementia care for residents.”

We provide the above description of the criteria used in the Survey because the term “Assisted Living Facility” is commonly used to describe a broad range of facilities. The Survey would be useful to you in helping a client who is evaluating planning alternatives and the costs potentially associated with them in various areas of the country. The figures quoted in our Inflation comments provide current costs in major areas of Pennsylvania.

The MetLife Market Survey of Nursing Home & Home Health Care Costs, cited earlier, reported that the 2005 average hourly rate for a home health aide is $19. The 2005 “average hourly rate for homemakers/companions is $17.”

Using the same zip codes, the Survey reported that the average hourly home health aide rate in Pittsburgh was $19 with a high of $20 and a low of $17. For Atlanta, the 2005 average was $16 with a range of $20 to $9 daily. New York (zip 100-114) averaged $15 ($18 to $10). Las Vegas averaged $20 an hour with a range of $30 to $15.

Medicare may provide a limited home health care benefit if the patient is homebound and requires skilled nursing care or therapy services on a part time basis. Some advocates argue that Medicare home care benefits should continue if they enable the patient to maintain his or her health at a level to which the patient has recovered, but to compel continued Medicare home care benefits in such a situation, the patient may well need to go through an appeals process with no guarantee of success.

We recommend that you read Medicare & You, published each year by the Centers for Medicare and Medicaid Services. You will find it at www.medicare.gov. That website is, in fact, very useful because it includes links to other helpful government publications concerning health care benefits.

Medigap policies, Plan C or higher, will pay the Medicare skilled nursing facility copay of $119 a day for days 21 through 100. However, it is most important that your client understands that Medigap only pays for deductible and copay gaps in Medicare. If Medicare won’t pay, but for deductibles or coinsurance, a Medigap policy won’t pay.

If a person is enrolled in a Medicare HMO, there is no need for a Medigap policy. But the Medicare HMO won’t provide long term care benefits any more than does traditional Medicare coverage.

CCRCs come in many shapes and sizes. Cost components may involve entrance fees, non-refundable, partially refundable for a period of time, or partially refundable on a sliding scale. In addition to an entrance fee, the CCRC will require a monthly fee. The admission contact will most probably provide that the fee could be increased should the operating expenses of the ccrc increase over time. The contract should also specify whether the resident is subject to any optional per diem charges.

Costs are relative to the facilities and services provided. The admission contract will detail the obligations of the parties and should not, in our opinion, be entered into without the advice of legal counsel. Anecdotally, we note that one well established CCRC in the Pittsburgh area recently published entrance fees ranging from about $95,000 to $375,000 and monthly fees ranging from $2,000 to over $4,000. Those numbers are totally dependent on the type of living facility selected and whether or not the accommodation will have one or two occupants.

Another well established CCRC has entrance fees ranging from about $40,000 to $215,000 with monthly fees ranging from about $1,400 to $2,600 with an increase in the monthly fee possible if assisted living or a higher level of care is needed. Again, the entrance fee may be non-refundable, partially refundable for a period of time or partially refundable on a sliding scale.

In the context of the provision for long term care, an individual or couple considering a move into a CCRC should carefully examine whether or not the expense for future health care needs is included in their admission contract or could result in an additional levy on their account. Long term care insurance could play an important role in that regard.

Long term care insurance isn’t for everyone. Neither is self-insuring. Health considerations may make self-insuring or taking the steps necessary to become Medicaid eligible the only alternatives for an individual. However, assuming that health underwriting won’t preclude insured coverage, it is important to consider whether a person’s financial circumstances make the purchase of any level of such coverage a reasonable decision.

If a person has very limited assets, the purchase of LTCI may not make financial sense balancing the cost of the insurance over time against the assets at risk. We would put the threshold in the area of $150,000 to $200,000. However, the individual may have personal concerns beyond the preservation of assets which motivate consideration of an insured benefit. If there is a sufficient income stream which would allow an allocation for an LTCI premium (recognizing likely future increases in such cost), or family members volunteer to pay the cost of coverage, then the purchase may make personal planning sense.

Objectivity and subjectivity, as in many important life decisions, are inextricably bound in the decision to self-insure. A very wealthy individual may well be able to handle the cost of long-term care, but still decide to shift the risk to an insurer because their very wealth makes the premium expense nominal to them and they prefer to know that, for example, charities important to them will benefit from funds which would otherwise have been spent paying caregivers.

The answer to that question is at the heart of this article. And, there is no simple answer. In our judgment, what is particularly important is that the individual make the decision based on solid objective information about the current cost of various levels of care (home care, assisted living facility and nursing facility), the current cost of various levels of insured benefits from a number of well-rated LTC insurers, a realistic assessment of their health history, and a thorough understanding of their current and likely future financial resources balanced against their lifestyle needs and risk tolerance.

In short, the same careful consideration that a person brings to other fundamental aspects of life planning should be given to what they, and their family, would do in the event the individual suffers a catastrophic illness or injury.

The Georgetown University Long-Term Care Financing Project Update 2004 fact sheet has a sobering statement in commenting on policy issues concerned with Who pays for long-term care? “Because insurance coverage for long-term care is limited, most people face the risk of impoverishment in the event that they need extensive care. Medicaid is the nation’s safety net for individuals with long-term care needs. Given the tremendous variation in state Medicaid programs and their vulnerability to changing state budgets, the security of that safety net is uncertain. Further, despite most individuals’ strong preference for home and community-based care, institutional care continues to account for the majority of both Medicaid and total spending for long-term care.” www.ltc.georgetown.edu See also Medicaid and long-term care, May 2003 fact sheet, ibid.

Medicaid is a godsend to individuals without the financial resources, personal or insured, to pay for the care they need because of a catastrophic health condition. Having adequate long term care insurance in place should the need for such care arise is, reasonably, preferable over the means tested and more limited benefit provisions of Medicaid.

Note that the Deficit Reduction Act (DRA) of 2005 signed into law by the President on February 8, 2006, significantly changes the Medicaid rules as we knew them. These changes become another reason for the consideration of long term care insurance in the development of financial and estate plans for our clients.

Please be certain that your client understands that Medicare does not pay for long term care. That said, the Medicare website on long term care provides an excellent educational and practical perspective on the subject. It is worth a visit. www.medicare.gov

Apart from the subjective considerations mentioned earlier, the individual considering the purchase of LTCI needs to make a financial judgment. Central to that judgment is whether or not he or she is willing to concede that the risk may occur. Personal health history and the more general statistics cited earlier are reasonable factors to consider in that regard.

If the person agrees that the risk of needing long term care, with the emphasis on long, is sufficiently real to merit insuring against it, then the question becomes one of structuring the benefit appropriately for the individual’s risk tolerance and financial ability to maintain premium payments for an indeterminate period of time.

It is important to realize that long term care insurance may not cover the cost of care in the early stages of a long term illness. A HIPAA qualified long term care contract, for example, requires that an individual be certified by a health care practitioner as being unable to perform without substantial assistance with two or more activities of daily living (eating, bathing, dressing, transferring, toileting, continence) and that the condition is likely to last at least 90 days or that the individual have severe cognitive impairment. In the early stages of health conditions which may develop in a manner which meets one of those triggers, the individual may still need care which will need to be provided voluntarily or be paid for out of pocket.

LTCI contracts come in many shapes and sizes. You will find a review of basic provisions and some optional riders in A Shopper’s Guide to Long-Term Care Insurance, published by the National Association of Insurance Commissioners (NAIC) and available from any long term care insurer or agent or at a nominal cost through the NAIC (816-460-7593).

LTCI Underwriting

This subject is more easily discussed if we address you as the prospective insured rather than as the advisor.

Before we look at the many different forms long term care insurance can take, please note the word insurance. This is not something you get by just signing up for it. You must show evidence of health acceptable to the insurer. That process is called underwriting. The outcome of it will determine whether or not the insurer will agree to issue a policy covering you.

In some cases of employer-sponsored LTC programs, the health questions may be reduced to just a few “knockout” inquiries designed to eliminate applicants who would immediately qualify for benefits. In some cases there may be no health questions.

However, an individual LTC insurance application typically asks a lot of questions about your health history and requires you to identify your physicians. You should assume that the insurer will write to your physicians concerning your health and that your physicians will fully disclose their records to the insurer.

If your age is 70 or beyond, the insurer will typically require a face-to-face meeting between you and a nurse or social worker, paid for by the insurer, to provide a basic evaluation of your physical and mental capacities. These are not medical exams such as you may have experienced with life insurance, though the insurer will reserve the right to require one at its expense. Medical exams are rarely used in LTC underwriting.

It is also important to realize that different companies may underwrite the same health condition differently. If you have any significant health history, be particularly careful to speak with an LTC broker, an individual who does business regularly with at least three different LTC insurers. Ask the broker to discuss your health history with the insurer offering the policy benefits most appropriate for you before you submit your application.

Such “pre-qualifications” don’t guarantee the underwriting outcome because they are conducted anonymously (you are not identified by name) and the underwriters always condition their comments on subsequent reviews of your actual medical records. However, such an inquiry will give the broker and you a better idea whether or not underwriting by that company may be favorable to you or whether you should consider another insurer as well. Be careful here, because, if you are declined by one LTC insurer, you’ll find that many other quality insurers will not consider an application from you.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created “qualified” LTC policies. If policies incorporate certain provisions specified in HIPAA and exclude certain other provisions, they are said to be qualified under HIPAA.

HIPAA also “grandfathered” LTCI policies issued prior to 1/1/97. They are considered qualified so long as material changes aren’t made to them after 12/31/96. If you have an LTCI policy issued prior to 1/1/97, be sure to let your advisor know.

One value in having a qualified LTCI policy is that you may receive an individual income tax deduction for some or all of your premium. The income tax deduction depends on whether the eligible portion of your premiums paid in the current tax year, together with your other unreimbursed medical and dental expenses, exceeds 71/2% of your adjusted gross income. The HIPAA eligible premiums are age graded and can be found at IRC 213(d)(10).

            Age 40 or less . . . . . . . . . . . $   280
                     41 through 50 . . . . . . . $ 530
                     51 through 60 . . . . . . . $1,060
                     61 through 70 . . . . . . . $2,830
                     71 and thereafter . . . . . $3,530

HIPAA also provides for favorable tax treatment of LTCI premiums paid by an employer. The tax benefit varies depending on whether the employer is a C-Corporation or other business entity (Self-employed individual, Sole Proprietor, Partnership, Sub-chapter S-Corporation or LLC) and, in the case of a Sub S-Corp or an LLC, whether the insured is a 2% or greater owner.

More importantly, and regardless of business ownership status, the insured under a HIPAA Qualified long term care policy is guaranteed that any benefit he or she receives from the policy, up to the 2006 $250 per diem limitation, will be exempt from federal income taxes. Benefits in excess of the per diem limitation will also be free of such tax so long as the insured actually incurred qualified expenses at least equal to the benefit received.

Benefits received from non-qualified LTC policies are not exempted from federal income taxes by HIPAA. However, non-qualified policies are permitted to have a benefit trigger not allowed in qualified policies. That trigger is medical necessity. A “trigger” is a condition that may cause you to be eligible for policy benefits.

Non-qualified policies may also allow you to be eligible for benefits by needing assistance with just one activity of daily living (ADL). Qualified policies require you to need at least stand-by assistance with two of six ADLs (eating, bathing, dressing, toileting, continence or transferring) in order to be eligible for benefits. Qualified policies require that a healthcare practitioner certify annually that your condition is likely to last ninety days or longer. Thus non-qualified LTC policies appear to be somewhat more liberal in how you may become eligible for benefits.

We note that both types of policies also provide that you are eligible for benefits if you have severe cognitive impairment, the most common example of which is Alzheimer’s disease.

It is our opinion that the HIPAA guarantee of federal income tax exemption for benefits paid from a qualified LTC policy outweighs the possibility that you could develop a long term health care need which would involve a deficit in only one activity of daily living or that would be sufficiently medically serious as to cause you to require long term care services but not need stand-by assistance with two activities of daily living.

Which type of policy you select is, of course, your decision—just be aware of the pros and cons of each type.

Your eligibility for benefits will depend on the terms of your LTC policy. Before you apply for a policy, review a specimen policy that stipulates the provisions for each of the terms that you want included in your coverage. Be sure that you understand the terms before signing on the dotted line.

The following provides an overview of the basic provisions which appear in all policies. But be warned, companies do differ in how even these provisions are applied. We will note some of the variations.

The Benefit Amount. LTC insurance policies usually express the basic benefit in terms of a maximum daily benefit amount. Thus you may buy a policy with a $150 a day maximum benefit. Some companies express the benefit amount in monthly terms (e.g., $4,500 a month), but the daily benefit is the most common benefit description.

Minimum recommended benefit

You select a maximum daily benefit when you apply for a policy. We think that today a $150 daily or a $4,500 monthly benefit is a reasonable starting point. We suggest using a $150 daily or $4,500 monthly benefit, recognizing that in most cases some personal funds may be available to contribute to the cost of care and that the more likely need for care will be at a custodial rather than a skilled nursing level with a corresponding reduction in the cost of the care.

We discussed earlier the average costs of care nationally and locally. You should consider your comfort level depending on your risk tolerance and personal circumstances. In our opinion, an adequate daily dollar amount is more important than the duration of the benefit period.

You may have seen $100 a day referred to in media articles on long term care. In our experience, that number, at least in Pennsylvania, is an underestimate even for the cost of quality custodial care. Your needs and resources will be the ultimate arbiter of the basic benefit appropriate for you, but we recommend that your competitive evaluation require at least $150 a day as a constant for each insurer’s quote.

If you prefer to use a lower daily benefit number with the assumption that you will supplement the cost of your care with personal funds, be sure to consider whether or not the available amount of those personal funds will increase as time passes. Otherwise, you may find fifteen or twenty years from now that, even with a 5% automatic annual compound benefit increase built into your insured benefit, the total funds (insured and out of pocket) available for your long term care are seriously deficient.

At the outset of this section, we referred to the basic daily benefit amount. Some companies persist in offering “nursing home only” or “home care only” benefit policies. Unless you have a full proof crystal ball, we recommend that you avoid such limited benefit contracts. Be sure that the policy you purchase provides “comprehensive” benefits, that the policy will cover your care whether it is delivered at home by a licensed home health care provider, in adult day care, in an assisted living facility, or in a skilled nursing facility.

Every company also offers riders, extra benefits for extra costs, which can enhance your coverage. When comparing costs, be careful to first examine the basic, no frills, comprehensive benefit cost of each insurer you want to consider.

Practice point: Be sure to ask how the “daily” benefit is actually paid out in the event of a claim. Some companies limit what they will pay to the stated daily amount. If your daily care costs more, the excess cost over the daily benefit is your responsibility.

The trend appears to be for companies to provide for the stated daily benefit to be accessible at claim time as a weekly or even a monthly multiple. For example, your daily benefit may be $150 but the company will allow you to access during a seven day period (or a calendar week) $1,050 (7 x $150) without limiting the payout to a daily maximum. Thus if you need physical therapy but only three times a week and the therapy costs $250 each time, the LTC policy will cover you for the full amount each time because the total covered expense didn’t exceed $1,050 during the seven day period.

Incidentally, if your benefit is paid on a reimbursement basis (the structure used by the majority of LTC policies,) the left over $300 ($1,050-$750) is kept in reserve for you and could extend your maximum benefit period.

The Benefit Period. This is the number of years for which the full daily benefit is payable once you are eligible for benefits.

You select the benefit period when you apply for your policy. Companies may offer 2, 3, 4, 5, 6, 7 and even 10 year benefit periods, called “limited” because the number of years for which benefits are payable is limited. You can also elect an unlimited or lifetime benefit period although some companies do not offer a lifetime benefit period with certain policy structures.
If you have a limited benefit period with a reimbursement based policy and the cost of your covered expenses does not use up the full amount of your daily, weekly or monthly benefit amount, the balance is kept in reserve for you and will extend the maximum duration of your benefit period.

There are a few policies on the market called indemnity contracts for which the last statement is not applicable. Indemnity policies pay the full amount of your daily benefit to you if you incur covered expenses even though the expenses don’t add up to your maximum daily benefit amount. Most LTCI contracts, however, are structured on a reimbursement basis and pay, up to your policy’s maximum benefit, only to the extent you actually incur covered expenses. Several major insurers do offer the option to select either type of policy structure at the time of application for coverage, and at least one company gives you the option of electing, at the time you initially apply for the policy, a reimbursement structure for facility care and an indemnity structure for home health care.

It is worth noting that, in the early days of a claim, an indemnity policy could pay you benefits even though Medicare is covering the cost of your care. However, because of a provision in HIPAA, a reimbursement based policy cannot pay benefits if Medicare is paying for your care. We don’t think that the HIPAA limitation on a reimbursement based LTC policy is, in itself, a reason to purchase an indemnity policy structure, but it is a planning consideration of which you should be aware.

Just as your premium cost is affected by the length of elimination period you elect, so also will the premium be impacted by the benefit period you select. The longer the benefit period, the greater will be the cost of the policy.

Minimum recommended benefit periods

Because the average long term care claim is about two and one-half years, we encourage you to consider at least a three year benefit period. For greater planning flexibility, we think that a five year benefit period is a prudent minimum, especially under the DRA of 2005, extending the “look back” period to five years. However, your financial circumstances now and for the foreseeable future will guide you to the appropriate, manageable premium level. It is certainly better to have even a two year benefit period in force than no coverage at all.

Shared Benefits. This is a relatively new concept in LTC benefits and may take the form of a rider on a policy or of a joint policy.

A shared benefit rider may provide that you and your spouse (or, with some companies, your life partner) can “piggyback” on the other’s policy benefit if one of you exhausts your own benefit. Using this option would reduce the maximum benefit available to the healthy individual should she or he need long term care at a later date. However, policies which structure the shared benefit in this manner may provide a floor or minimum benefit which will be available to the healthy spouse in the future, although it will not be as great as the benefit they originally purchased. Be sure you understand the impact of using the shared benefit before electing such a policy structure.
An alternative structure creates a third pool of money which either individual or both can access after their individual policy benefits are exhausted until that pool is also used up. This format assures each individual that they will always have their own policy benefits for their own use in the event of a long term care claim.

The advantage of a shared benefit rider is clear where a limited benefit period is purchased. You could effectively double the maximum number of years for which benefits would be payable for one of two individuals depending on how the future unfolds.

A disadvantage is that one insured could exhaust the benefits available to both insureds. Be sure to select a company that allows the healthy partner to purchase some coverage at his or her attained age without evidence of insurability should their partner completely exhaust the healthy person’s individual benefits.

As with any additional benefit, the shared benefit rider adds a cost to each policy. You should examine that cost and the potential benefit in terms of your long term budget and the needs which most concern you.

At least one major insurer takes a different approach by offering a joint policy which insures two individuals under the same plan. Either or both insureds can access the single benefit account. If you consider such a policy, be sure to weigh the premium savings you may achieve against the risk of one individual completely exhausting the policy benefits.

Practice Point: If your clients are considering limited benefit period policies, be sure to consider shared care riders or a shared benefit policy, and consider whether the healthy spouse has the option to acquire coverage should one person exhaust both benefits.

Inflation Riders. This benefit is intended to provide some protection against the future cost of long term care. It can take several different forms; an automatic annual fixed percentage increase in your benefit or a periodic option for you to purchase an increase in your benefit.
The increase can be simple or compound or it may be based on a periodic option to purchase an additional percentage of your base policy benefit. The cost of the benefit increase may be included in the cost of the rider itself or it may be an additional premium based on your age at the time you exercise an option.

Inflation rider recommendation

Which rider, if any, is appropriate for you is more than anything else a function of your age at the time you first apply for long term care insurance. In our opinion, if you are younger than age 70 at the time you apply for a policy and are financially capable of sustaining the cost, you should consider an automatic annual compound benefit increase provision. If you are 70 or more senior, you should consider a simple benefit increase rider.

An inflation rider is likely the single most expensive additional benefit you can include in a long term care policy. It can double the initial cost of the policy. But the longer the interval between the policy issue date and a claim on the policy, the more critical in hindsight the decision to purchase the rider becomes. A benefit increase of 5%, compounded annually, will double the policy benefit in about 15 years. An annual 5% simple increase will double the benefit in 20 years. Think about what the cost of long term care may be in 15 or 20 years.

An alternative planning approach is to purchase coverage at the outset which significantly exceeds the current cost of care in your area and decline to purchase an inflation rider. All of your premium dollars will then go for current benefit dollars. This planning concept may be appropriate if you have substantial and reasonably liquid assets which could be used in later years to cover the gap which will likely exist between the cost of care and your fixed insured benefit.

Note that, if you use this concept and purchase an indemnity policy, part of the benefit may be subject to federal income tax even though you bought a HIPAA qualified policy. Such a consequence would happen if the daily benefit paid to you exceeds the maximum tax free daily benefit amount ($250 daily for 2006) and the actual cost of care paid by you is less than the cash benefit paid to you.

Should your anticipated future financial circumstances be such that the best fit for you excludes the cost of a compound or simple inflation rider, be sure to consider an insurer, all other aspects of the coverage you need being reasonably equal in substance and cost, who provides a built-in guaranteed future purchase option. Circumstances can change and such an option could prove to be valuable.

Premiums. Two points must be understood at the outset of your LTCI planning: Currently no LTC insurer guarantees that the premiums for a policy will not increase. There can be a significant difference between the premiums charged by one LTC insurer compared to another for very similar benefits.
It does pay to shop

We believe that you should first determine the most appropriate basic benefit structure for your needs before you shop. If you heed our advice to work with a broker who is not the agent of just one or two companies, that individual should be able to provide you with competitive quotes for the benefits important to you and based on your health history from a number of well established and well rated long term care insurers.

Insurance Premium Increases

Consider this hypothetical. A 55 year old individual in good health purchases a $150 a day HIPAA qualified LTCI policy with an indemnity benefit, an automatic 5% annual benefit increase, a 100 day elimination period and a 5 year benefit period for a premium of $1,418 a year including a spousal discount.

Assume that the premium increase at a rate of 10% a year every five years. At the end of 20 years, the daily benefit would have grown from $150 to $398 and the premium would have grown from $1,418 to $2,076 a year. The individual would have paid $32,905 in premiums (disregarding any tax benefits).

Assume that the individual has a claim at the end of the 20th year. In 183 days (counting the 100 day elimination period during which benefits were not payable), the individual would have recovered in benefits free of federal income tax every dollar paid in premiums over those 20 years. Assuming the claim continued, the insured would receive $398 a day for the remaining 4 years, 282 days of the benefit period or $693,316.

HIPAA mandates that a qualified long term care insurance contract be guaranteed renewable. HIPAA does not, however, prevent an insurer from applying to the insurance commissioners of one or more states to raise rates for a class of policyholders. For that reason, a periodic compound premium increase of 10% every 5 years was included in the above hypothetical.

No major current LTC insurer has to date had such a history of premium increases on existing insureds, but a consideration of the possibility is an important aspect of evaluating the financial suitability of an LTCI policy for an individual. One major but now inactive insurer has requested rate increases, and several other, an appropriate adjective escapes us, LTC insurers have increased premiums on existing policyholders.

The NAIC promulgated Long-Term Care Insurance Model Act and Regulation, which Pennsylvania and a number of other states have adopted, requires LTC insurers to provide new policyowners with a “contingent benefit upon lapse” provision. “This means that when your premiums increase to a certain level (based on a table of increases), the ‘contingent benefit upon lapse’ will take effect. For example, if you bought the policy at age 70 and did not accept the insurance company’s offer of a nonforfeiture benefit [discussed below], if the premium rises to 40% more than the original premium you will be offered the opportunity to accept one of the ‘contingent benefits upon lapse.’ The benefits offered are: 1) a reduction in the benefits provided by the current policy so that the premium costs stay the same; or 2) a conversion of the policy to paid-up status with a shorter benefit period. You may also choose to keep your policy and continue to pay the higher premium.” A Shopper’s Guide to Long-Term Care Insurance, p 24,Rev. 2005, NAIC.

The March 2004 issue brief, Consumer protection and long-term care insurance: Predictability of premiums, Mila Kofman and Lee Thompson, Georgetown University Long-Term Care Financing Project, provides an excellent commentary on this important subject. www.ltc.georgetown.edu

The Time Value of Money

The flip side of the coin is the time value of those premium dollars if the risk does not occur. If the individual does not buy the insurance, what would the dollars saved in premium expense grow to at the end of 20 years? Picking a net interest rate for the savings calculation over the next 20 years is about as uncertain today as assuming an every 5 year premium increase of 10%, but let’s assume that the individual receives 5% net each year on the dollars not spent for insurance. At the end of the 20th year, the savings fund will grow to $56,280.

The LTCI industry has developed something of an answer to the time value of money concern, the return of premium at death rider, which we will discuss below. The point, for the sake of our hypothetical, is that the tradeoff over 20 years, given the stated assumptions, could be $56,280 saved against an out-of-pocket expense of $32,905 and a potential indemnity benefit of nearly $700,000.
Return of Premium at Death Riders.Not all LTC insurers offer this optional rider and the rider may take different forms depending on the insurer. The cost of the rider can also vary significantly. Whether adding the rider at the time of application is appropriate will depend on the circumstances of the individual insured, both financially (because of the additional cost) and personally (the estate will receive any returned premiums).
The rider basically provides that, upon the death of the insured, all premiums paid less claims paid on the policy will be returned to the estate of the insured. The question arises, what if the premium payor was other than the insured—for example, a relative or an employer? Would the payment under a Return of Premium at Death rider be made to the premium payor? The major insurers who offer this benefit and to whom we have asked the question have indicated that the payment is made to the estate of the insured. Stay tuned.

Variations on the rider may be the full return of premium regardless of claims paid, a limitation of the benefit based on when death occurs (e.g., no payment if death occurs after age 64 unless an additional enhancement is also purchased deleting the age limitation), or a requirement that the rider be in force for a number of years (e.g., 10) before it is effective.

Assuming that the basic benefit structure appropriate for the individual’s needs has been decided upon and is affordable, the addition of a return of premium rider may be a worthwhile benefit for the sake of a surviving spouse or to at least provide funding to reimburse a third party premium payor.

See, however, Long-Term Care Insurance Advanced Tax Issues, Lawrence T. Jones, JD, Journal of Financial Service Professionals, September 2004, for a discussion of premium refund benefits and the tax benefit rule (applied to the deduction of qualified eligible premiums) which “provides that when an item deducted in one year is subsequently recovered, that recovery must be included in income except to the extent that no tax benefit resulted from the prior deduction. In other words, the recovery of a prior year’s tax benefit is includible in income.” ibid, p 53.
Extras. As noted earlier, most companies offer a selection of enhancements that you can add to your policy at the time of application. Our purpose in this discussion has been to help you sort out the basics so that you can reasonably decide whether insured LTC coverage is appropriate for you and to provide you with some guidelines on how you can objectively evaluate the underwriting practices, fundamental benefits and costs of various insurers.

Don’t get caught up in extras until you reach a sound decision on your needs and on the basic policy structure which fits you best.
Combo policies. The long term care insurance marketplace offers not only “stand-alone” LTC policies but also policies in which long term care benefits are coupled with universal life, whole life and even variable life policies as riders to those life policies.

These policies may be appropriate for the individual who has significant liquid assets and who both needs additional life insurance and who wants insured long term care protection. You should understand that they are not primarily marketed as long term care contracts. Rather, basic long term care benefits can be added to them by rider or they are described as incorporating the option to access a limited long term care benefit should the need arise. Typically, however, the use of the long term care benefit directly impacts the life insurance benefit and the investment value of the product.

You should also know that, at least in the current state of their development, the LTC benefits offered by these products are not as comprehensive as you will find in stand-alone LTCI policies.

The question we think you need to ask yourself, if you are presented with such a policy, is why, if you need life insurance, would you place value on a rider or an option (an LTC benefit) which, by using it in a long term care claim, would potentially reduce your death benefit to a nominal amount?

At least part of the answer to that question is in the willingness of some individuals to hedge the LTC risk if they can accomplish other purposes at the same time such as the conservative growth of a portion of their assets or the provision of some additional death benefit. If you fit that profile, you may want to consider such products. Be sure to do so in comparison to stand-alone LTC contracts (as well, for that matter, conventional life insurance products and various conservative investment products) so that you understand the benefits offered by each approach. Then ask yourself whether or not, for you, the combo product offers acceptable solutions to your long term care, life, and investment needs.

10. Financials. Financials are fundamental. You should require the broker to provide the financial ratings of each insurer under your consideration. We strongly recommend that you only consider insurers with financial ratings of “A” or higher from at least two of the following five rating firms: A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, or Weiss Ratings.

In Pennsylvania long term care insurance policies fall under the jurisdiction of the Pennsylvania Department of Insurance. The Department offers An Overview of Long-Term Care Insurance booklet and a list of long term care insurers licensed to sell policies in Pennsylvania. This information is available at www.insurance.state.pa.us. The Department also maintains a consumer information resource line at 1-877-881-6388.

Long term care insurance is subject to statutes found at 40 P.S. 991.1101 to 991.1115 and to some 29 sections of regulations to be found at 31 Pa. Code 89a.101 et seq.

The role of the Department of Insurance in regulating long term care insurance is governed by 71 P.S. 411 et seq.

Article XVII found at 40 P.S. 991.1701 et seq. created the Pennsylvania Life and Health Insurance Guaranty Association Act in 1978. The Act was revised in 1992. The Act provides, with substantial limitations and exclusions, protection of benefits and provisions for continued coverage in the event of the impairment or insolvency of a member insurer. Coverage for health insurance contracts, under which category long term care insurance falls for purposes of the Act, is limited to a maximum of $100,000. Further information is available from the Association at 1-610-975-0572 or from the Pennsylvania Insurance Department at 1-717-787-2317.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes an additional layer of federal standards and created the terms which a policy must meet to constitute a qualified long term care insurance contract. See IRC Sec. 7702B.

The decision to buy long term care insurance is highly personal. The commitment to the expense is itself long term. The potential financial risk against which such coverage insures is substantial, both in dollars and in the simple fact that it is not covered by any other health insurance, including Medicare and medigap.

The long term care insurance industry is in a state of evolution with the advent of HIPAA qualified long term care policies and the aging of the baby boomer generation and its potential impact on the demand for services, private and government provided. Consolidation is occurring among insurers. Several major LTC insurers have exited the market. Others have withdrawn existing policies from sale while introducing new products at higher costs and with arguably new benefit provisions. Some state insurance commissioners approve policies for sale in their jurisdictions while others decide not to approve particular policy provisions.

The federal government has instituted a voluntary long term care insurance program through which its employees may purchase coverage. Several states have implemented “Partnership programs” providing that an individual who purchases a specified limited benefit period long term care policy is assured that he or she will not be subject to Medicaid spend-down provisions if they develop a need for long term care and first exhaust their partnership policy benefits.

The Congress has been asked in each recent session to approve legislation allowing an individual “above the line” deduction for a limited dollar amount of individually purchased long term care insurance premiums, a remarkably simple incentive to encourage people to provide in some part for their own care so that Medicaid can be that much more protected for those truly in need.

LTC insurers now offer HIPAA qualified products marketed as voluntary worksite benefits and as employer sponsored and portable benefits with, in some cases, simplified underwriting and discounted premiums.

In this new world of elder care, long term care insurance is emerging as an important voluntary personal and asset protection component of personal planning. The decision to purchase it should be made with the same deliberation, consideration of your risk tolerance, personally and financially, and with a comparison of the benefits and costs offered by a number of well-rated insurers as you would bring to other aspects of your long range planning.

The focus of this article has been on threshold issues related to the need for long term care insurance, purchased in the marketplace or qualified for through medical assistance. We have discussed the probabilities for needing such care and, hopefully, have made the point that statistics are not a crystal ball. But taken with the knowledge of an individual’s personal and family health histories, and recognizing that the application for LTCI is subject to health underwriting, statistics may be useful as a guide as a person evaluates his or her current and likely future financial circumstances, risk tolerance, and personal concerns against the current and possible future costs of long term care.

While individual LTCI involves an out-of-pocket cost for a benefit that may not finally be needed, a number of LTC insurers now offer a means to recoup at the death of the insured the premiums paid for benefits not used. Medicaid does not involve a current out-of-pocket cost but has rigorous financial qualification rules before its benefits may be available, rules which may substantially impact the financial well-being of the Community Spouse.

It is essential that you and your clients understand what might be called the good, the bad and the ugly of both long term care resources. The optimal decision is one made while the individual is in good health and with knowledge of the options and their consequences.

We hope that this information contributes to your ability to serve both your own planning needs and those of your clients.

We developed a cost/benefit matrix, attached as an addendum to this article, to give you a perspective on how premiums can vary depending on your age at the time your purchase coverage, on the duration of the benefit period you select for your coverage, and on whether or not you are in really good health (receive the best rate offered by the insurer) or good health (receive the standard rate for the coverage you request.)

The matrix also addresses in part the “time value of money” issue – what if I didn’t buy the insurance and, instead, saved the premium dollars for, let’s say, 20 years. How long would my savings cover my expenses if I had a claim that started in 20 years? You may be surprised at the answer.

We say “in part” because companies may and likely will request increases in the future on in-force policies. The matrix assumes that the premium today is fixed. In fact, premiums are not guaranteed. The variable of premium increases in not included in the calculations because, at this point in the growth of the LTCI industry, there simply isn’t a sufficient history of premium increase on in-force policies by major long term care insurers on which to base a guesstimate of the rate of future increases.

Since this article was written, the Cost/Benefit Matrix has been updated to reflect 7/06 costs. Please see 7/06 Cost/Benefit Matrix Update.

As we discussed earlier, companies offer supplemental benefits which you can optionally add to your policy at the time you apply for coverage. Not all companies offer the same riders. Examples of some of these optional benefits are return of premium at death, restoration of benefits, provision for sharing benefits between spouses, surviving spouse paid up benefit, and monthly benefit payments. Each of these riders adds to the cost of a policy.

Because a fundamental goal of the matrix is to provide you with a basic planning tool and because those supplemental benefits are not offered by every company and may not be appropriate for meeting your needs, the cost of them is not included in the matrix.

We think that the matrix also provides a useful perspective for individuals who may, because they do have substantial assets, be thinking about self-insuring against long term care. Since the premium outlay wouldn’t be a significant budget issue for such an individual, we submit that the value of the insured benefit is in fact that it frees those dollars for family or charitable purposes and assures the insured of tax free benefits from a qualified LTC policy.

Finally, while the matrix focuses on what you may receive in dollar benefits for what you pay, don’t forget the human side of the equation. The greatest protection afforded by LTC insurance is for the community spouse, the healthy spouse. Attorneys, CPAs, and financial advisors often tell us about how the cost of caring for an uninsured spouse left an otherwise healthy spouse near poverty after the death of their loved one. Appropriately planned long term care insurance is an important financial and estate planning resource for avoiding such a tragic consequence.

Please do feel free to call us toll-free at 1-877-687-4700 or to contact us by e-mail at info@futurecareassociates.com.