By Marc H. Miller
In Brief
A Whole Lot of Planning to Do
The aging of the baby boom generation and their parents is making it urgent to find affordable elder care options. Long-term care insurance is one effective planning tool to avoid having personal and family resources depleted by the rising costs of at-home care, nursing home care, and other expenses, which can easily amount to thousands of dollars each month. Medicare and Medicaid are often insufficient or have poverty-level eligibility requirements.
Gifting or spending down of assets is an effective way to lay the ground for eventual eligibility for Medicaid and other government-funded support, but insurance remains a valuable planning tool. The rules for eligibility, and the schedules and levels for payments, however, are constantly changing. To keep pace, the insurance options that can provide taxpayers with comfortable, secure golden years are also changing.
As Americans age, more middle-class families need to plan for long-term care in order to protect their assets from the catastrophic expense of nursing home care. With the modern reality that family generations live states apart, medical advances prolong life, and little political desire exists in Washington to fund long-term nursing care, mature Americans are realizing that they will have to take care of themselves in their golden years. One option for them is the purchase of long-term care (LTC) insurance.
Harsh Economic Reality
The economic reality is overwhelming. In 1997, 34 million Americans were over 65 years old. The fastest growing segments of the population are also the oldest: Actuaries project that by 2010, one-third of Americans will be senior citizens. More than 40% of those 65 year olds will ultimately need long-term care. Without proper financial planning, illness will derail the economic futures of many families.
Long-term care (LTC) describes custodial care--day-in, day-out assistance with the activities of life during a serious illness or when disability overwhelms the body. The care can be acute--physical therapy or help with administering medication--or purely custodial but extended--help with meals, bathing, or dressing.
Custodial care describes a continuum of programs ranging from community-based services (senior day care or Alzheimer's day care) to home services (companion care, home-care aides, or therapy visits) to assisted-living homes or life-care communities and finally, nursing homes.
Nursing care costs are steep. Nationally, nursing home costs averaged $110 per day in 1997. The average cost of nursing home care in the largest U.S. cities exceeds $5,000 monthly, and in the New York City metropolitan area, better nursing homes exceed $8,000 per month. Home health care aides in New York City cost $815 per hour.
The average nursing home stay is 2.5 years. Even in comfortable middle-class families, one spouse's nursing home expense can impoverish the healthy spouse. The economic and emotional costs of two institutionalized parents are too painful for families not to consider.
Middle-Class Options
Middle-class families can expect little assistance with the medical bills. Medicare and health insurance policies pay for less than 18% of all LTC costs. Medicare covers acute, short-term care, but only immediately after a hospital stay. The first 20 days are covered in full, and the next 80 days are covered with a $95 daily copayment. Medicare covers certain skilled care provided at home, but Medicare and Medigap policies specifically exclude long-term custodial care.
Medicaid and charity cover another 44% of the nation's custodial care bills, but families must be destitute before becoming eligible for Medicaid. Most bills for middle-class families are paid out of pocket or by LTC insurance--fully 38% of all national custodial costs. For most families, LTC insurance or impoverishment planning is the only alternative to hedge against the catastrophic expense of home care or nursing care.
LTC insurance policies promise to pay for custodial care after a specified waiting period. Most buyers choose to self-insure for 20365 days. The payment is usually triggered by a person's inability without assistance to perform two or three activities of daily living (ADL) from a specific list of six or seven ADLs (usually bathing, transferring, maintaining continence, feeding, dressing, using the bathroom, and taking medications). A diagnosis of Alzheimer's disease is an alternative trigger to collect benefits.
Most policies reimburse applicable expenses up to a daily or weekly maximum chosen by the insured. Policies can cover nursing home care specifically and solely, but most pay for the entire continuum of care, including home care, a feature sought by many. Most plans have a specific number of days of reimbursement (such as two years at $200 per day), but insureds can often "bank" unused daily benefits to extend the covered days.
A typical LTC insurance buyer has between $200,000 and $2.5 million of assets. Most consumers do not consider this coverage until after age 50, and higher premiums after age 75 tend to dissuade older purchasers.
Insurance companies usually offer a discounted premium to healthy purchasers and married couples that apply together. Additional discounts or liberalized underwriting may be available through a membership association or employer group. Conversely, persons with chronic health problems such as diabetes or arthritis often desperately want coverage. The insurance companies are fearful of applicants with these problems and often decline coverage or set higher premiums.
Inflation Planning
Because policies are often purchased 10 or 20 years before benefits are payable, cost-of-living protection is vital. A $150 daily benefit purchased today by a younger person may have little value when it is needed.
Most insurance companies offer several inflation options: no inflation protection, a rider to purchase a small additional benefit for the first few years, a simple inflation increase every policy anniversary, and a compound inflation increase each policy anniversary. If family members need the insurance, they undoubtedly need the compound inflation protection.
Purchasing a plan with a longer waiting period is a sensible way to reduce the premium, with the savings earmarked toward the best inflation rider available. For younger individuals, it may be sensible to consider a smaller initial daily benefit if this frees up enough premium to pay for compound inflation protection. Even with a lower initial limit, the ultimate daily benefit will probably be higher than a plan without inflation protection.
Minimizing Out-of-Pocket Costs
Policy benefits are available up to about $350 per day. Most agents suggest purchasing a daily benefit of no less than 7580% of the anticipated daily expense, which, in a large city, is probably $200250 per day. Residents in rural areas may be comfortable with smaller benefit limits. Purchasers may also find plans with split policy limits, such as $100 per day for home health care and $200 per day for nursing home care.
The goal, in the simplest of terms, is to get the most insurance protection with the lowest out-of-pocket costs. Two distinct strategies provide adequate but reasonably priced coverage:
* Medicaid supplement planning and
* Upper income catastrophic coverage.
Because most states' Medicaid programs pay for LTC costs after a family is impoverished, many middle-class elders artificially impoverish themselves to become eligible. A family that could become Medicaid-eligible might consider the "Medicaid supplement planning" strategy to coordinate insurance benefits with eventual government benefits.
Consulting with an elder care attorney or elder care social worker is important in understanding the difficult Medicaid rules and application process. In New York, an individual with less than $4,500 in assets is Medicaid eligible. A spouse can retain about $80,000 in assets and may be able to retain a home and monthly income of approximately $2,000. A planned impoverishment strategy would include making gifts to children or grandchildren to reduce the estate to the poverty level.
However, New York "looks back" at gifts made during the 3660 months prior to a Medicaid application and refuses to pay for LTC costs during this time. A planned impoverishment strategy therefore requires the purchase of an LTC insurance plan with a three- to five-year benefit period to coincide with the benefits lost during the "look back" period.
For example, assume an individual with $200,000 to $1 million of assets and little guaranteed pension income becomes disabled. Purchasing an LTC insurance plan with a three- or four-year benefit period and a moderate deductible ensures that the insurance company will pay for the first years of nursing care. Near the beginning of the disability, the disabled person makes sufficient gifts to become Medicaid-eligible. The insurance policy pays for the care during the penalty period, and the state pays the subsequent LTC costs should an extended disability occur.
This strategy provides for full catastrophic coverage, from either insurance or state benefits, while saving considerable premium dollars as compared to a lifetime benefit plan. Children or grandchildren retain some of the assets that might otherwise have paid for nursing care. Counsel is recommended, however, because states are required by Federal mandate to recover Medicaid costs if assets or income are available after the start of Medicaid eligibility.
Families at the upper limit of the income and asset scale might choose the "upper income catastrophic coverage" strategy. These families can easily afford to self-insure the first 612 months of nursing care costs. Because insurance ought to be about catastrophes that cannot comfortably be handled, this strategy involves purchasing insurance to cover only the catastrophic portion of the care.
Assume a husband and wife with $2 million of assets and a comfortable income. Each spouse could purchase a plan with a one-year waiting period and lifetime benefits. The first self-insured year is a financial annoyance but won't significantly impact the family's finances. A 10-year or more disability, a financial catastrophe even to an upper-middle-class family, would be fully insured. This strategy is sensible because families at this end of the asset scale may not be able to impoverish themselves sufficiently for Medicaid eligibility. Additionally, the lifetime benefits provide flexibility for a healthy spouse to retain a comfortable nest egg and are often worth the additional premium.
Tax Qualified and Nonqualified Plans
In addition to choosing a long or short benefit period, purchasers must now also choose between "tax qualified" (TQ) and "nonqualified" (NQ) plans.
TQ plans, a new concept in LTC insurance, were created by Congress through the Health Insurance Portability and Accountability Act of 1996 (HIPA). The act mandates that TQ plan benefits will not be taxable income when collected (while not addressing the tax status of NQ policy benefits). Some individuals may also receive an income tax benefit on the purchase of TQ plans. A portion of each policy premium can be counted as a medical expense for individuals that itemize. An IRS table details the maximum deduction, which increases with age.
The most attractive TQ plan feature benefits business owners and self-employed taxpayers: The entire premium is considered health insurance for deductible business expense purposes and is not treated as income to employees. A C corporation can deduct the full cost of any LTC premiums, even when the payments are only for owners or managers and their spouses. Sole proprietors, partners, and S corporation owners receive fractional deductions for owner benefits and full deductions for employee premiums, as with any other health insurance.
TQ plans have a downside, however: HIPA requires a physician to certify that the custodial care is "medically necessary." Insurance companies estimate that about 5% of claims paid on NQ plans would not qualify on TQ plans. Still, the tax benefits may outweigh the small risk of claim denial, especially to business owners.
The 'Partnership Plan'
Residents of certain states, including New York, can become Medicaid-eligible without gifting away personal wealth. New York, New Jersey, Florida, Indiana, Connecticut, and California residents can purchase "partnership plan" insurance, so called because the cost of custodial care is split between personal assets and state payments.
A partnership policy adds a twist to the Medicaid supplement strategy described earlier. The insurance policy pays the nursing home costs of a protected person for three years, after which the state pays the ongoing costs, even though the family has not gifted away or spent down assets. Partnership policies are required to provide high minimum daily benefits and extensive inflation protection.
Although partnership policies make sense, the plans have not caught on yet because
1) agents hesitate to present the rather large premiums,
2) the plans are not portable for those retiring in another state, and
3) the policies protect assets, but not income earned after the three-year period.
Keeping Up with Changing Needs
Insurance plans are becoming more robust. New policy benefits are constantly being created, offering increased opportunities to better match family needs and insurance features. For example, a husband and wife may now purchase policies that offer an extra pool of benefits for either spouse. Both buy policies with a five-year benefit period. Riders offer an additional five-year benefit to be shared. Each spouse gets at least five years of benefit, and they split the remaining 60 months as needed. The premium is attractive compared to two lifetime policies.
Using another new concept, family members or friends become paid care providers. Insurance companies will only pay certified caregivers, but not every family wants an outsider to provide care. Newer policies will pay to train the friend or relative, then pay them a reasonable salary.
Another new policy feature reimburses home care bills based on a weekly rather than daily maximum. Some patients receive many services one or two days each week and fewer services the other days. A weekly maximum averages those expenses for higher reimbursement.
Guaranteed Renewable Policies
LTC policies are "guaranteed renewable," meaning that the insurance company cannot cancel a policy as long as the premiums are paid. Some carriers have begun to guarantee premiums for a few years, but premiums can, and undoubtedly will, increase. Cautious consumers will expect costs to rise by at least the rate of inflation. This means that lower-priced plans from insurance companies without underwriting experience are likely a fleeting illusion.
Some policy features are to be avoided. For instance, inferior policies require a hospitalization prior to paying custodial benefits. Other poor policies pay "prevailing" expenses instead of actual incurred expenses.
Due diligence in choosing an LTC policy is extremely important--especially in light of the constantly evolving nature of insurance options and tax laws. Waiting to make plans until a crisis occurs inevitably means making decisions under pressure. Therefore, any option considered now is likely to be better than none at all. *
Marc H. Miller, CLU, ChFC, is a representative for Strategies for Wealth Creation and Protection, a New York City agency of The Guardian Life Insurance Co. He can be reached at marc_miller@glic.com.
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