WHY YOU MAY NEED LONG-TERM CARE
You may picture a nursing home when you think about long-term care (LTC). But LTC doesn’t always mean institutional care. Instead, it’s primarily “custodial” care — personal, hands-on assistance to individuals who need help with the Activities of Daily Living (ADLs). ADLs include:
- Bathing
- Eating
- Toileting
- Dressing
- Continence
- Transferring
At least 70 percent of people over age 65 will need LTC services at some point and more than 40 percent will need care in a nursing home.1 In addition, there’s a 68 percent probability an individual over age 65 will become cognitively impaired, which could allow that person to qualify for LTC insurance.2 This isn’t only an older person’s need — 1 in 7 people living in nursing home facilities in the U.S. are under age 65.3
From 2009 to 2014 the average annual cost of a private room in a nursing home increased 20 percent from $79,935 to $95,706.4 A semi-private room wasn’t much cheaper, averaging $83,114 a year in the same survey. The study, commissioned by New York Life, found that in the 25 most expensive markets in the U.S., the annual cost of a private room in a nursing home ranged from $111,909 to $159,359.5
Neither health insurance nor Medicare offers solutions when it comes to paying for LTC. Contrary to popular opinion, Medicare only provides limited rehabilitation coverage for up to 100 days and only where the individual was previously hospitalized. Medicaid only pays for those who live at or below the poverty level after they’ve depleted their assets. The high cost of LTC is more likely to fall upon the individual. Individuals may have to tap into their savings, access benefits of an LTC insurance policy or both.
| MEDICARE LONG-TERM BENEFITS BY TIME | COST TO PATIENT6 |
| DAYS 1 – 20 | $0, AFTER THREE-DAY HOSPITAL STAY |
| DAYS 21 – 100 | $157.50/DAY X 80 DAYS = $12,600 (2015) |
| DAYS 101+ | ENTIRE COST OF CARE |
Although there’s no “one size fits all” LTC solution, there’s an array of different options you can choose from to address your circumstances, preferences and planning goals
TRADITIONAL LTC POLICIES
Traditional life insurance policies allow you to customize LTC coverage to fit your health and financial needs. Customizable preferences include:
- The daily/monthly benefit based on the average cost for your area
- The benefit period (from two years to lifetime)
- An elimination period (generally 30, 90 or 100 days) during which no benefits are payable
- The option for inflation protection (3 percent – 5 percent, simple or compound, or linking the benefit to an inflation index, such as the Consumer Price Index)
- A future purchase option
Some insurers offer a shared policy option that enables two people to link policy benefits. In the event that one person needs care and exhausts his or her benefits, the other person’s policy can be tapped to pay for care. If you or the person you share your policy with dies, the survivor’s total pool of benefits will increase by whatever benefits remained in the other’s policy. This approach uses a pool of benefits either spouse or partner can rely on.
Traditional LTC policies are designed to cover the risk of LTC whether the need arises or not. Ultimately the client faces a situation in which they either “use it or lose it.”
HYBRID/LINKED-BENEFIT LTC POLICIES
“Hybrid” or “linked-benefit” life insurance policies combine the benefits of a life insurance policy with those of a traditional LTC policy. These policies are usually purchased with a single premium that buys a smaller death benefit and a larger LTC benefit. The death benefit is typically around one-third the total LTC benefit.
Clients purchasing this type of contract are most concerned with the LTC aspect of the policy. The advantage to this type of policy is that if you only use a portion of the LTC benefit, any remaining benefit will be paid as a death benefit to your beneficiaries. Even if all of the LTC benefit is used, the majority of these policies pay out a “residual death benefit,” generally a predetermined percentage of the initial death benefit. Many of these contracts also offer a guaranteed return of premium and many similar features to those of a traditional LTC policy, such as an elimination period and inflation protection options.
One potential restriction of hybrid/linked policies is that they’re all “reimbursement plans,” meaning bills and receipts must be submitted monthly. Regardless of what the maximum LTC benefit is, this payment plan will never pay more than the total qualifying LTC expenses incurred by the insured.
LTC AND CHRONIC ILLNESS RIDERS
A life insurance policy with either an LTC or chronic illness rider added may be more appropriate for the client where LTC coverage is a secondary need to death benefit protection but is still a concern.
A rider is a life insurance policy provision purchased separately from the base policy that provides additional benefits at an additional cost. An LTC or chronic illness rider allows the insured to accelerate the life insurance policy’s death benefit on a tax-free basis to pay for qualifying expenses as defined in the policy. Any amount paid out reduces the policy’s death benefit. Once acceleration begins, the death benefit is generally reduced “dollar for dollar” and the cash value is reduced proportionately. Insurers may have different methods of adjusting the death benefit and cash value. The benefit amount is typically based on a pre-determined amount (in most cases the full death benefit amount) and is usually paid out as a percentage of the death benefit each month.
These riders tend to offer more flexibility than traditional LTC policies and linked/hybrid policies because they’re available on a variety of life insurance products fitting multiple life insurance needs. Many of these riders offer payment in the form of “indemnity.” Indemnity plans differ from reimbursement plans in that they pay out the maximum benefit stipulated in the policy regardless of actual expenses incurred. No bills or receipts are needed to justify the payout of the benefit to the insured. Keep in mind that not all riders offer an indemnity option. Some riders use the reimbursement model.
*Understanding LTC Riders
To qualify for LTC rider benefits, the insured must meet the basic definition of chronic illness. This requires certification by a physician or other licensed health care practitioner that the insured is either unable to perform at least two ADLs or requires substantial supervision due to severe cognitive impairment.
An LTC rider is available at an additional fee. Its total benefit is determined when it’s issued. Some carriers also offer an extension of benefit rider that, when added to the LTC rider, provides coverage for an extended period of time after the initially determined LTC benefit is depleted. LTC riders are available either as indemnity or reimbursement plans, depending on the model the insurer selects.
*Understanding Chronic Illness Riders
The process to qualify for a chronic illness rider benefit is similar to the process for an LTC rider benefit: the insured must be certified by a licensed health care practitioner as unable to perform two ADLs or suffering from severe cognitive impairment.
Chronic illness riders are available either for an additional charge added to the total policy premiums or via a “discounted acceleration” option. With the discounted acceleration option, the client can add the rider to the base life insurance policy at no additional cost. Once the benefit is needed, the total benefit “pool” (i.e., death benefit) is reduced or discounted based on several factors, including the client’s age, gender and risk class, along with interest rates and policy cash values at the time the claim is made. For this reason, the total benefit amount cannot be determined until benefits are needed and a claim is made. The “discounted acceleration” option spares the client from paying the rider charges unless the rider is needed, but depending on when the claim is made, this could significantly reduce the total available benefit pool.
*The Fine Print
At first glance these two rider options seem similar. The key difference is the qualifying length of chronic illness. With an LTC rider, the qualifying condition may be fully recoverable; it doesn’t have to be a permanent chronic illness. This allows the insured to receive LTC benefits for a temporarily disabling condition. With a chronic illness rider, the chronic illness must be certified as permanent, meaning it’s a non-recoverable condition that will more than likely last the rest of the insured’s life.
THE BOTTOM LINE
There’s no “one size fits all” LTC solution, but there are a lot of options you can choose from and customize to address your unique circumstances and preferences and achieve your planning goals. Understanding the full scope of LTC options will help you better meet your needs.
1 U.S. Department of Health and Human Services. September 2008.
2 AARP. “Beyond 50: A Report to the Nation on Independent Living and Disability.” 2003.
3 Centers for Medicare & Medicaid Services. “Nursing Home Data Compendium 2010 Edition.” www.cms.gov.
4 New York Life. “Cost of Care Survey.” Univita. February 2014.
5 Ibid.
6 Medicare.gov. “Your Medicare Coverage.” www.medicare.gov/coverage/skilled-nursing-facility-care.html. December 2014.