Long Term Care Insurance Coverage

Insurance to Protect Retirement Assets

Many Americans do not plan ahead financially for their long term care. Others wrongly assume that Medicare, Medicaid supplemental policies or standard health insurance policies will cover the costs of long term care provided in settings such as nursing homes or assisted living facilities. Consequently, many Americans are needless impoverished each year by the ever rising cost of long term care.

Long term care insurance is an excellent way to protect yourself from these expenses, and this brochure will help you through the important process of understanding and comparing long term care insurance policies.

Medicare and Medicaid

There is considerable confusion surrounding the long term care service coverage of these two government programs.

Medicare is a complex government health insurance program for those 65 and over. It was not designed to provide extensive long term care coverage. Typically, Medicare will cover only the first 20 days of long term care in a skilled nursing facility and will partially pay for the next 80 days for a total benefit not to exceed 100 days. A three-day hospital stay is required as is rehabilitative services to qualify for this benefit.

Medicaid is a federally supported, state operated health care program for the poor and is a welfare program. Individuals must have low income and few assets to qualify for benefits. Recipients essentially become wards of the state and do not have freedom of choice like those who instead rely on long term care insurance.

Getting Started

Finding a good long term care policy will take some effort, but the effort will be worthwhile. To help you start, here are some steps to take when considering the purchase of long term care insurance:

§ Talk to a knowledgeable insurance agent about the advantages of long term care insurance in your particular situation.

§ Investigate resources on your own at various websites.

§ Call your state government Office on Aging or Insurance Department for information.

After you narrow your search to a few companies consider the following:

§ Check with insurance rating services to make sure the insurance company you are considering is financially secure.

§ Make sure the insurance company and agent are licensed to sell long term care insurance in your state.

§ Review all the details and options of the policies. Do not rely on the marketing materials or outlines of coverage.

§ Make sure you understand all the provisions before you purchase any policy.

§ Discuss policies with family members and others whose opinions you respect.

§ Don’t be pressured into making quick decisions.

Selecting the right long term care insurance policy will offer you and your family financial security, peace of mind and choice in future care settings.

When To Buy

Because long term care insurance premiums are based on your age at the time of purchase, the younger you are when you purchase a policy (40’s) the less expensive it will be. Premiums for most policies stay level after you purchase the coverage and are only increased if they are increased for all policyholders at once. If you buy a policy at age 50, a typical policy may cost $850 per year. However, if you wait until you are 65, the cost of the same policy could triple.

Selecting a Company

Approximately 120 companies offer long term care insurance products. Your state Insurance Commissioner’s office has a list of companies authorized to sell long term care insurance in your state. Statistics show 70% of all long term care insurance policies are sold by 7 major companies. Therefore, it is wise to investigate the financial health of any insurance company you are considering.

Look for ratings from insurance rating services: i.e., A. M. Best, Moody’s or Standard & Poor’s. The insurance company should be rated in one of the top two categories by at least two services and have no low ratings.

You can find these ratings in the reference section of your library, or contact:

§ A. M. Best at 908-439-2200 http://www.ambest.com/;

§ Moody’s at 212-553-0300 http://www.moodys.com/;

§ Standard & Poor’s at 212-438-2000 http://www.standardpoor.com/.

Selecting a Policy

Long term care insurance may be sold directly to individuals or through an employer group or other organization.

With group policies, while you do not generally have a choice of companies, the advantage is that your employer/organization likely searched for and selected an insurance company with a good rating and selected the policy coverage options to be offered to you (often a discounted premium applies).

There is a Policy Cost Analysis Form on page 5 of this brochure to help you determine which policy best meets your needs. One important factor in selecting a policy is the set of conditions required to qualify to actually receive benefits.

Normally there are two methods for qualifying for benefits:

1. Cognitive Impairment

People who are cognitively impaired typically have Alzheimer’s disease (intellectual deterioration) or other forms of senile dementia. A policy’s definition of cognitive impairment does not also require impairment in performing Activities of Daily Living (ADLs), since people with dementia usually can perform them. However, it is normal to have ADLs be an alternative way of qualifying for benefits.

2. Physical Impairment

People who have a physical impairment need substantial assistance with the ADLs, such as bathing, toileting, transferring (e.g., out of bed to a chair), dressing, continence and eating. Policies differ in the number of impairments a person must have before they qualify for benefits, but at least two is typical.

Another important factor is who decides whether or not you qualify for benefits. This entity is often called a “gatekeeper.” Most policies require a licensed health care practitioner to certify that you are unable to care for yourself. Some insurance companies offer a care (or case) manager to determine if you qualify or continue to qualify for benefits; others simply require your doctor, a registered nurse, or a licensed social worker to so certify.

How Much Insurance To Buy

Long term care insurance policies pay a maximum daily amount for covered services. When you buy a policy, you decide the value of the daily maximum amount and the length of time your benefits will run. For example, if you buy a policy that pays up to $130 per day for four years, the policy’s value is $189,800, lifetime maximum.

Reminder: No policy guarantees to cover all costs of long term care without a limit, even those that have “unlimited” coverage (as you are still limited to the maximum daily benefit you select).

Because most retirement income is fixed and may not keep pace with inflation, your ability to afford premiums may diminish. Buying too much insurance may mean you will not be able to afford to pay the premium later. However, most companies will allow you to reduce coverage rather than be forced to cancel.

Knowing the following four components will help you determine how much insurance to buy:

Benefit Amount – This is the daily maximum amount that a policy will pay each day for the different types of long term care.

Inflation Adjustment – This is the increase of the benefit amount to cover the impact of inflation. Generally, companies offer a 5% inflation protection (simple or compound – compound is better, but more costly).

Benefit Period – This is the time the policy will pay for covered services, (usually expressed in days).

Deductible Period – This is the number of days of covered services before the policy pays (also called “elimination period”). The greater the number of days you pay expenses yourself, the less the annual premium.

Covered Services

A long term care policy should cover all levels of care in nursing facilities and other residential care settings, such as assisted living facilities.

Under home care, most policies include the community services of adult care, respite care (temporary overnight care to relieve routine family caregivers) and hospice care. Policies should also cover professional home care (RN’s, Licensed Therapists, etc.).

Assisted Living Facilities (residential services) are either covered under the home care category, alternate care or may be a separate policy benefit. Some policies cover assisted living facilities under nursing facility benefits. If you are interested in assisted living coverage, make sure you know the policy includes this type of care.

Services Not Covered

Like all insurance, long term care insurance policies contain limitations and exclusions. In general, long term care will not be covered if resulting from the following conditions:

§ Alcohol and drug addiction;

§ Wounds resulting from intentionally self-inflicted injury, such as attempted suicide;

§ Treatment already paid for by the government.

All other conditions are generally covered after the policy is issued, but be sure to note if there are other limitations, i.e., where you can receive treatment (for example only care in the U. S.) and if acts of war will also be excluded.

The Cost

The cost of a long term care insurance policy depends on your age and the level of benefit purchased. The older you are when you purchase a policy, the higher your premium. For example, a typical premium for a 50-year old person for a policy that covers a $130 daily benefit, four years of coverage and includes a 5% compounded inflation protection, is about $850 annually. This same policy for a 65-year-old is about $2,500 annually; for a person aged 79, the cost is about $9,300 annually. You can control premium costs by controlling the policy amount and options you purchase. Higher daily benefits and optional features, such as inflation protection and nonforfeiture benefits, increase your premium.

Studies of the cost of different long term care insurance policies show a three-fold difference from a low-option policy to a high-option policy in every age category.

The cost of long term care varies by the level of care needed, the setting and geographic location. Check your state’s average costs.

Some companies may not write long term care insurance policies for persons over 85. Others will typically write coverage to age 99, but limit the duration and require minimum elimination periods on all coverage. To make the coverage more affordable it is likely one at this older age would select 5% simple inflation protection (or no inflation protection), but the cost could still be $5,000 or more annually.

Comparing Policies - Policy Cost Analysis Form

Policy A B

Benefit Amount:

Nursing Facility $ ________________ $_________________

Assisted Living $_________________ $_________________

Home Care $_________________ $_________________

Inflation Adjustment:

Annual Percent _________________% _________________%

Simple/Compound _________________% _________________%

Benefit Period (# of days)

Nursing Facility _________________ _________________

Assisted Living _________________ _________________

Home Care _________________ _________________

Deductible Period: _________________ _________________

(elimination days)

Annual Premiums: $_________________ $_________________

Company Insurance Ratings: __________________ __________________

Special Features:_________________________________________________________

_________________________________________________________

_________________________________________________________

Long Term Care Includes

Home Care Services: includes skilled nursing; therapies, (e.g., speech, physical or occupational therapy); or home health aides. Sometimes family members, or “caregivers,” provide most of the care with the help of home aides and skilled professionals. Home care, if needed daily for long periods of time can exceed most individual’s retirement budgets.

Adult Day Care: is available in many communities, providing personal care, skilled care and recreational services.

Assisted Living Facilities or Residential Care: provides 24-hour general supervision, (housekeeping services, medication assistance, some health care services and planned social, recreational and spiritual activities). Costs vary dramatically from $900 to $3,000 or more per month, depending on amenities, services, etc. Most of the nation’s assisted living services are paid for with private funds.

Nursing Facilities: are for people who require custodial care, rehabilitative care (such as physical, occupational or speech therapies) or specialized care for Alzheimer’s.

Policy Features

Premium Increases

Typically, an insurance company can only raise premium rates for an entire group of insureds in the same class by obtaining permission from the state insurance department.

Rate Guarantee

Some companies offer a guarantee that premiums will not be increased for a certain period of time. This feature allows the insured to plan their coverage knowing exactly what the cost will be for some definite period of time extending into the future. Often coverage increases (when inflation protection is purchased) while the rates remain the same.

Policy Cancellation

A “guaranteed renewable” policy means the insurance company cannot cancel the policy for any reason, except if you do not pay the premium.

Lapse Protection

Some policies provide “lapse protection” for individuals who develop dementia or other chronic illness. If a person who has regularly paid premiums for years develops Alzheimer’s or some other chronic health condition, and neglects to pay the premium, coverage will not simply be canceled. Companies will notify a pre-designated third party if a premium is not paid, so that coverage can be paid to current, by the designated person.

Health Status

Most insurance companies ask questions regarding your current health status and you should fully disclose your medical conditions. Medical records and often a phone interview or face-to-face visit may be required prior to approval of new policy coverage.

Additional Pointers

§ Most companies target their policies to people who are reasonably healthy and at a relatively low risk of needing long term care in the near future. A good company asks detailed medical questions up front. This “quality underwriting” decreases the companies exposure to claims and lowers premiums for those who qualify for coverage.

§ Some companies are reluctant to sell to a person over 85, or may only sell a lower benefit policy and/or fewer years of coverage.

Policy Review & Change

You should review coverage carefully before buying. Your agent will leave an “outline of coverage” for your review. After you buy, you usually have the right to review the policy for 30 days with an option to cancel with a full refund.

There might also be situations in which canceling an existing policy to buy a new one makes sense. As a rule policies purchased before 1997 should be kept, as the IRS has grandfathered those policies and the features generally provided cannot be duplicated today at a similar premium rate.

Remember your premium is based on your age at the time you initially purchased your policy. Insurance companies introduce new products every few years. Be sure to ask your agent about the company’s practices regarding policy upgrades. If you decide to purchase more coverage later, it will generally be based on your older age and you run the risk that rates will have increased for added coverage or you might not medically qualify for more coverage.

Tax Initiatives

Since January 1, 1997, individuals have been able to include out-of-pocket expenses for long term care insurance premiums with their other itemized medical expenses on their annual federal income tax returns. Long term care and other medical expenses are deductible to the extent that they exceed 7.5 percent of adjusted gross income.

However, the amount of long term care insurance premium that may be treated as an annual medical expense for federal income tax purposes was limited in 2001 to the following table (indexed annually):

Age Limitation

40 or less $ 230

41 - 50 $ 430

51 – 60 $ 860

61 – 70 $ 2,290

71 and over $ 2,860

Some states (Colorado) give tax credits and other incentives to residents who have purchased long term care insurance. If the policy you purchase is “tax qualified” the insurance benefits you receive from a claim are usually not taxable income.

You can generally exclude from gross income benefits you receive under a per day type qualified long term care insurance contract, subject to a limit of $200 a day ($73,000 a year) for 2001. The $200 is indexed for inflation. Check IRS Publication 502 for the most current information on this topic.

Employer Deductions

Employers have the option of deducting as a business expense, the cost of providing company-paid long term care insurance for employees. Employers can select, by category of employee, for whom they will purchase coverage. Additionally, the employer can provide a group discount to other employees who are willing to purchase their own coverage.

Consumer Protections

Long term care policies sold after 1996 must meet consumer protection standards in order to qualify for favorable tax treatment. Some of these protections include:

Ø Early in the sales process, customers must receive a description of the policy’s benefits as well as an explanation of the limitations of the policy, referred to as the “outline of coverage”.

Ø Companies selling policies are prohibited from sales practices that mislead and pressure customers.

Ø Insurance companies must offer each purchaser the option of adding inflation protection to their long term care insurance policy.

In general, once issued, policies may not limit coverage based on medical conditions, accidents or types of treatment. However, some exclusions may apply, such as, alcoholism, drug addiction or nervous disorders. Following policy approval, Alzheimer’s and other forms of senile dementia will, of course, be covered.

Note: A policy cannot exclude coverage for pre-existing conditions for claims submitted more than six months after the date of initial coverage, unless the insured’s application misrepresented that condition.

Conclusion

Long term care insurance can protect retirement funds, other assets, and preserve inheritances for your family; give you greater choice in selecting long term care settings; and provide you and your family with financial security. Remember to carefully consider how much insurance to buy and the options you need. There is no one best policy. However, with some research and discussion with your long term care agent and family, you will find a policy that affordably fits your present lifestyle and future needs.

Glossary of Terms

Cognitive Impairment – A diminished mental capacity, such as difficulty with short-term memory.

Case Management – A system in which an individual helps the insured and his or her family determine and coordinate necessary services and select the best setting for those services.

Custodial Care – Board, room and other personal assistance services (including assistance with ADLs, taking medicine and other similar personal needs) that may not include a skilled nursing care component.

Deductible – Also called “elimination period”, the number of days you pay for covered services before the policy pays. The longer the elimination period, the lower the premium.

Free-Look Period – After receiving a policy, you have 30 days to review it. You may cancel the policy for a full refund of premium during this time.

Hospice – Hospice care enhances the quality of life for the dying person and is often provided in the home by health professionals. Today there are many nursing facilities that also offer hospice services. Hospice care, typically for the last six months of life, emphasizes comfort measures and counseling to provide social, spiritual and physical support to the dying patient and his or her family.

Inflation Protection – A policy option at additional cost which increases daily benefits over time to account for inflation.

Lapse – Allowing insurance coverage to expire by not paying premiums

Medi-Gap – Private insurance that supplements Medicare. While Medi-gap policies typically cover Medicare’s deductibles and coinsurance amounts, they do not provide benefits for long term care. Like Medicare, Medi-Gap policies primarily cover hospital and doctor bills.

Outline of Coverage – A description of policy benefits, exclusions and provisions that makes it easier to understand a particular policy and compare it with others.

Pre-existing Conditions – Medical conditions that existed, were diagnosed or were under treatment before your policy effective date. Long term care insurance policies may limit the benefits payable for such conditions.

Post Claims Underwriting – A practice whereby a claim is denied on the basis of the individual’s health at the time the policy was purchased. Most reputable companies do medical underwriting at the time a policy is applied for, rather than at the time a claim is submitted.

Rate Increase – Uniform raising of premium rates for an entire class of insureds with approval of the State Insurance Commissioner

Skilled Nursing Care – Nursing and rehabilitative care that is performed by, or under the supervision of licensed, skilled medical personnel.

Tax Qualified – Policies which meet the federal standards for determining eligibility for benefits resulting in the amounts paid for benefits being nontaxable income.

Contact Us at: info@insuranceandwellness.com

Long Term Care Quote Request:http://www.insuranceandwellness.com/forms/Surveyform.htm

Phone: 303-649-1922 OR 800-888-9084

Copyright 2002

Provided by Insurance & Wellness in the Rockies.