Will I Need Long Term Care?
By Philip J. Beavers, CFP,
WEAC's Member Benefits Specialist
March 1998
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Planning Seminars
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Long term care policies are right for some, not all
What is long term care?
When a person is unable to perform certain activities or thought processes,
he/she is considered a candidate for long-term care. Such care could be
home care, adult day care, as well as nursing home care. Long-term care
insurance is private insurance, sold by insurance companies, and designed
specifically to pay for LTC services. Typically, LTC policies are indemnity
policies which pay for a certain dollar amount of covered services per
day.
1996 law change
| At a minimum, a good long term care policy should include the following: - AAA rating from Standard & Poors and Moody’s.
- Coverage for home care and adult day care, as well as care in
an intermediate and custodial nursing home facility.
- Benefit triggers based on mental and functional impairments,
as well as medical necessity, without a prior stay in a hospital
or skilled care facility.
- Benefits that keep up with inflation.
- Guaranteed renewable for life.
- Level premiums which do not increase with the age of the insured.
- Waiver of premium during the period of care.
|
The Health Insurance Portability and Accountability Act of 1996, which
became effective January 1, 1997, is designed to encourage LTC insurance
through the use of income tax incentives as well as to provide a model
or standard against which to measure proposed coverage. If you itemize
deductions, the premiums you pay for a qualified LTC policy may be deductible
to the extent that premiums, plus other medical expenses, exceed 7.5%
of your adjusted gross income. The law also makes payments from qualified
policies tax exempt.
Who needs long-term care insurance?
A discussion on needs should center on three issues: the statistical
need, the affordability, and the size of financial assets.
Statistical need: What is the likelihood that you will need long-term
care insurance? The National Association of Insurance Commissioners suggests
that 25% of people over age 65 will spend at least one year in a nursing
home. Only 9% will need facility care for more than five years. In Wisconsin,
approximately 3% of all people age 65-84 need nursing home care. However,
in the 85-94 age group, 24% need nursing home care.
Affordability: Purchasing a LTC insurance policy is a long-term
commitment. Do not consider such a policy if it will result in financial
hardship. You should have enough income in retirement to comfortably pay
premiums without dipping into assets or affecting your standard of living.
Premiums should come out of excess income that would otherwise be added
to savings. The cost should be no more than 4% to 6% of your after-tax
income.
Size of financial assets: Individ-uals purchase LTC policies primarily
to avoid dependence, guarantee affordability of services, and to protect
assets. It would seem therefore that individuals with very little in financial
assets should not consider purchasing long-term care insurance. USHC recommends
that you have at least $40,000 in eligible assets over the amount protected
by the spousal impoverishment legislation before considering the purchase
of LTC policies. For 1998 the at-home spouse can protect the greater of
$50,000 or one-half of the joint resources up to $80,760. This would imply
needing financial assets in excess of $120,000, excluding home, car, and
personal property.
At the other end of the financial spectrum, many financial planners suggest
that individuals with $1 million or more in financial assets forego purchasing
LTC and self insure. I would suggest that if you could more than cover
the cost for LTC expenses through your pension, Social Security, and dividend/interest
income without touching principal, you could protect assets and avoid
dependence without buying an LTC policy. A couple with a full WRS pension
might be self-insured with approximately $500,000 in financial assets.
To determine if you have sufficient financial assets to self insure, project
your after-tax income potential from all sources against the cost of long-term
care in your area. If you come up short of income, consider buying insurance
to cover the spread.
Cost
Covering 100% of LTC costs through insurance is expensive. Couples may
need LTC more than singles since the cost of a nursing home could affect
the assets needed by the at-home spouse.
Consider a couple that has a projected monthly after-tax income of $5,000
from all sources without consuming any principal from their financial
assets. Assuming their standard of living requires $3,000 per month, and
the monthly cost of LTC in their area is $3,200 per month, they have a
projected shortfall of approximately $1,200 a month or $40 per day.
They might consider purchasing a qualified LTC policy with the following
benefits: $60 per day with inflation protection, a 90-100 day elimination
period with a 4-6 year benefit. A shorter elimination period and/or a
longer benefit period would substantially increase the cost of the policy.
Keep in mind that most members should be able to afford a three-month
stay in a care facility and only 9% will need facility care for more than
five years. The average stay, according to the Wisconsin Bureau of Health
Care Financing is 1.3 years.
The best time to buy a LTC insurance policy is in your late 50s or early
60s. If you wait until after age 65, premiums will be significantly higher.
For policy buyers in their 60s, each year’s delay might translate
into a premium jump of about 8% to 10%.
Members might consider using the WEAC Member Benefit Trust policy as
a benchmark in comparing other policies. For information, call 1-800-279-4010
or Midwest Benefit Advisors at 1-800-232-6632.
Posted March 6, 1998