The cost of long term care is the monster in the closet.  To seriously evaluate the pros and cons of how to pay for long term care, it is best to understand the potential costs associated with long term care and understand the fact and the fiction of alternatives for financing those costs.

Above all, you require reliable information before you can make any decision and that is what this article intends to provide.  Then you need to evaluate long term care from a personal perspective.  How does it fit with your long term objectives and aspirations?  Decisions about long term care are very personal and, I believe, of great consequence.  If you need help in understanding and interpreting the information, my associates and I will be pleased to assist you.  But you must be the final judge of what makes the most sense for your circumstances.

THE COST OF LONG TERM CARE

Let's open the door.  The cost of long term care varies by both where you live when you receive the care and the level of care you require.  In Pennsylvania, for example, as of January 2003, the average cost of skilled nursing facility care is a little over $5,300 per month.  Skilled care is the highest degree of medical care, the patient is under the supervision of a physician, the care is provided 24 hours a day and the facility has a transfer arrangement with a hospital.  In New York State, the cost for similar care is much higher and in other states it is lower.  But, at $5,300 per month, the expense comes to nearly $64,000 a year.  That number comes from the Department of Public Welfare and is revised yearly.  I use it here to give an indication of the average cost of the most expensive level of long term care.

Please understand that your medical insurance, including Medicare and Medigap, doesn't begin to cover the cost for long term skilled nursing facility care and covers very little, if any, home health care.

Medicaid does provide long term care benefits, at a price.  The price is that you must qualify for welfare to qualify for Medicaid.  How you get there varies a little depending on the state in which you live, but the bottom line is that Medicaid requires you to spend down to the poverty level before you can receive long term care benefits from the government.  And that process may also have a significant impact on the financial well being of your spouse.

As a rule of thumb, some financial advisors say that, if you limit withdrawals from your retirement savings to no more than 4% a year, the odds are good that you will not outlive your savings.  Consider that rule in terms of a $64,000 average current annual cost for skilled long term care.  To be able to withdraw $64,000 a year at a 4% withdrawal rate without diminishing your savings, you would need $1,600,000.  Few of us have such resources!

Then again, the Centers for Medicare and Medicaid Services report that the average skilled care Medicare claim is about 24 days.

So what's the worry?  CMMS also reports that the average long term care claim lasts about 21/2 years or 30 months.    If the care delivered during those months is largely at a level less than skilled, it's reasonable to assume that the cost would be lower. Let's assume that your care costs $4,000 a month (my anecdotal estimate of the current average cost of custodial facility care in the Pittsburgh area).  And let's further assume that you only needed that care for 30 months.  To finance your care, you would need an initial savings of approximately $114,000 earning 4% on the declining balance.  After 30 months at $4,000 per month, you will have consumed your entire savings.

Before I go any further, please remember the words used in defining these costs . . . average and assume.  They create the danger.  The average cost of care may not represent the actual cost of care in a facility acceptable to you.  Most of us could handle several months of care in a crunch.  Could you handle the average of 30 months?  What if you guess wrong and the need continues?  What if the need doesn't arise for 15 or 20 years but the cost of care has grown from $4,000 a month to $8,500 a month?

Unfortunately, my crystal ball broke a long time ago and averages and estimates are all we have to go on to reasonably anticipate long term needs.  My point is that the financial consequences of failing to plan for long term care are substantial.

Let's look now at what I call the fact and fiction of what many of us regard as alternative resources for long term care.

MEDICARE AND MEDIGAP

Medicare simply does not pay for long term care.  Medicare will pay for skilled nursing facility care for 20 days if you are transferred into such a facility within 30 days of spending three days in the hospital for related care.  From the 21^st through the 100^th day, Medicare subjects you to a daily copay of $105 if you still require skilled nursing facility care.  From day 101 on, you are on your own.

Medicare may provide a limited home care benefit, which must be rehabilitative.  Once your condition plateaus, even if you have not recovered, the benefit ceases.

Medigap policies, Plan C or higher, will pay the Medicare skilled nursing facility copay of $105 a day.  However, it is most important that you realize that Medigap only pays for deductible and copay gaps in Medicare.

For further information on Medicare, I recommend Medicare & You published each year by the Centers for Medicare & Medicaid Services.  You'll find it at www.medicare.gov or, upon request, I'd be happy to provide you with a copy.  It is a very useful web site because it also includes links to other helpful government publications concerning health care benefits.

MEDICAID

Medicaid long term care benefits are a God send for individuals who are otherwise uninsured and without assets to pay for their care.  Medicaid is, in fact, the only government program that provides long term facility care.  We would be happy to discuss the complicated Medicaid rules with you should Medicaid appear to be an appropriate consideration in your particular circumstances.

I am including this brief discussion of Medicaid to provide a very basic outline of the means tests which must be met to receive Medicaid long term care benefits.  By demonstrating the effective cost of qualifying for Medicaid, I hope to emphasize the importance of incorporating provisions for long term care in your planning.

To qualify for Medicaid in Pennsylvania, an individual who is single or widowed cannot have more than $2,400 in assets.  There are several exempt or non-countable assets, including the Medical Assistance applicant's primary residence so long as he or she is alive, but the bottom line is that you must be indigent to qualify for Medicaid long term care.

If you are married, the same rules apply except that you and your spouse can also shelter one half of your jointly owned assets with a minimum protected amount of $18,132 and a maximum of $90,660.  If your jointly owned assets total $200,000, you can shelter $90,660, not $100,000.  If your jointly owned assets total $1,000,000, you may shelter $90,660.  Your home is exempt so long as the healthy or "community" spouse maintains it as his or her primary residence.  Upon the death of the second to die, however, the Department of Public Welfare will recover from the proceeds of the sale of the house any Medicaid Assistance benefits paid for nursing facility services for an individual owner who was 55 or older at the time the benefits were paid.

Please understand that jointly owned assets in excess of the protected amount must be spent for your care before you can qualify for Medicaid benefits.  Furthermore, you must spend your pension benefits, if any, and your Social Security benefits for your care regardless of whether you are single, widowed or married.

If you give away countable assets, Medicaid will declare you ineligible for Medical Assistance benefits for a period of time running from the date you made the gifts.  That period is calculated by dividing the fair market value of the gifted assets by the Medicaid divisor, currently $5,313.18.  The resulting number is the number of months for which you are ineligible for benefits.  You must pay for your care during those months out of your own pocket.

LONG TERM CARE INSURANCE

LTC Underwriting.  Before I 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 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.  You'll have a better idea whether or not the process will be favorable to you or whether you should consider another insurer as well.

The booklet, A Shopper's Guide to Long Term Care Insurance, published by the National Association of Insurance Commissioners, provides a useful introduction to LTC insurance.  Insurance agents are required by regulation to provide you with a copy at the first meeting in which they discuss LTC insurance with you.

I have developed the review which you are now reading to provide greater depth and perspective on the complicated subject of governmental and privately insured long term care benefits, but I also encourage you to read the Shopper's Guide.

Qualified LTC Policies.  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" LTC policies issued prior to 1/1/97.  The policies are considered qualified so long as material changes aren't made to them after 12/31/96.  If you have an LTC policy issued prior to 1/1/97, be sure to let your advisor know.

One value of having a qualified LTC policy is that you may receive an income tax benefit for some or all of your premium.  More importantly, you are guaranteed that any benefit you receive from the policy will be exempt from federal income taxes.

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 assistance with two of six ADLs (eating, bathing, dressing, toileting, continence or transferring) in order to be eligible for benefits.  Thus non-qualified LTC policies appear to be somewhat more liberal in how you may become eligible for benefits.

I note that both types of policies also provide that you are eligible for benefits if you have cognitive impairment, the most common example of which is Alzheimer's Disease.

It is my 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 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.

Policy Provisions.  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 that appear in all policies.  But be warned, companies do differ in how even these provisions are applied.  I will note some of the variations.

1. The Elimination Period.  This is the time between the onset of your claim and when you are actually eligible to accrue policy benefits.  It is a built in delay between the time you need care and when they start to pay for it.  Prior to satisfying the elimination period requirement, you will be responsible for the cost of services. You select the elimination period at the time you apply for coverage.  Companies may offer a variety of choices such as 30, 50, 60, 90, 100, 180 days or even longer.
   
   For example, if you elect a 30-day elimination period when you buy your policy, the policy will not pay for expenses otherwise eligible for coverage between the onset of the claim (the day you first needed care) and the end of the 30^th day.
   
   Companies, however, can differ in how they credit the days required to fulfill the elimination period.  Some policies credit one day of care for one day toward satisfying your elimination period. Other policies may credit one week (seven days) toward the elimination period if you require otherwise covered services during just one day of a given week.  Still other policies may vary the theme crediting seven days if you require otherwise covered services on three days during a given calendar week.
   
   The more liberal the crediting of days toward the elimination period, the sooner you will receive coverage for expenses you incur because of health care services you require.
   
   "One time only" is also an important point to keep in mind.  Many policies today provide that you need only satisfy the elimination period once in your lifetime.  You may have surgery that requires several weeks of rehab.  If, for example, you need assistance with bathing and dressing during that rehab period, you may earn days in permanent satisfaction of the elimination period which could be most important later on if you develop a truly long term health care need.  Your policy benefits will be available to you sooner.
   
   The elimination period will have an impact on your premium.  A policy with a 30 day elimination period will have a higher premium than one with a 60 or 90 day period.  Remember that the insurance company will not pay benefits for expenses you incur during the elimination period.  Be sure to compare the premium you save against the potentially higher out of pocket expense you will incur should you have a long term care claim.
   
   Don't count on Medicare to help pay expenses during the elimination period.  Remember that Medicare only pays for skilled nursing facility care and then only under certain conditions and Medicare benefits are subject to a $105 a day co-pay after the first 20 days.
   
   However, days covered by Medicare may count toward satisfying the elimination period - another reason to check out specimen policies before you buy.

2. 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.
   
   You select a maximum daily benefit when you apply for a policy.  I think that today a $150 daily or a $4,500 monthly benefit is a reasonable starting point.  Remember the $5,313.18 "Medicaid divisor" to which I referred earlier?  That's the current average cost of skilled nursing facility care in Pennsylvania according to the Department of Public Welfare.  It works out to about $177 a day.
   
   The statistics suggest that most long term care claims, with the emphasis on long, don't require constant skilled nursing care.  You'll often see $100 a day referred to in media articles on long term care.  In my experience, that number, at least in Pennsylvania, is an underestimate even for quality custodial care.  Your needs and resources will be the ultimate arbiter of the basic benefit appropriate for you, but I recommend that your competitive evaluation require $150 a day as a constant for each insurer's quote.
   
   Note the word basic.  Every company offers riders, extra benefits for extra costs, which can enhance your coverage.  When comparing costs, be careful to first examine the basic, no frills, benefit cost of each insurer you want to consider.
   
   One more basic 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, however, 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.
    
3. 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 typically offer 2, 3, 4, 5, 6 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.
   
   As I mentioned above, if you have a limited benefit period 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 policies 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 policies, however, are structured on a reimbursement basis and pay, up to your policy maximum, only to the extent you actually incur covered expenses.
   
   Your premium cost is affected by the length of elimination period and  by the benefit period you select.  Because the average long term care claim is about two and one-half years, I encourage you to consider at least a three-year benefit period. For greater planning flexibility, I think that a four-year benefit period is a prudent minimum.  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.
   
    
4. Shared Benefits.  This is a relatively new concept in LTC benefits and may take the form of a rider added to a policy or of an entirely separate type of policy.  The benefit can work in two very different ways.
   
   Typically a shared benefit provision is a rider that you elect to add to your policy at the time you apply for coverage.  The 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 person uses up his or her 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 usually 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.
   
   An alternative and, I believe, more favorable shared benefit 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 such a rider is clear where a limited duration benefit is purchased.  You could effectively double the maximum number of years for which benefits would be payable for one of two individuals or substantially increase the benefit duration for both persons depending on how the future unfolds.
   
   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 for which you are most concerned.
   
    

5. 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 increases can vary in at least three ways; they can be simple or compound or they can be by a varying dollar amount based on an index (often called a COLI rider).  The cost of the benefit increase may be included in the cost of the rider itself or it may be a charge based on your age at the time you exercise an option over and above the cost of the option rider.  No one said this subject is simple!
   
   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 my opinion, if you are younger than age 70 at the time you apply for a policy, you should elect an automatic annual compound benefit increase provision.  If you are 70 or more senior, you should consider a simple benefit increase rider or, at least, the COLI rider.
   
   An inflation rider is likely the single most expensive additional benefit you can include in a long term care policy.  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.  An annual benefit increase of 5% compounded will double the policy benefit in about 15 years.  A 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.
   
    

6. Premiums.  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.  However, I believe that you should first determine the most appropriate basic benefit structure for your needs before you shop.  If you heed the 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 from a number of well established long term care insurers for the benefits important to you.
   
   Most LTC insurers do not guarantee that the premium will not change.  What is guaranteed is that the policy cannot be cancelled by the insurer so long as you pay the premium.  Neither can an insurer single you out for a premium increase.  The company must apply to the insurance commissioner for permission to change the rates charged for a class of insureds and show cause why the rate change is needed.
   
   There are, however, a few companies today who do offer a guarantee that their premiums will not change for a number of years.  You should make it a point to discuss with your broker quotes for the benefits you need including quotes in which the premium is guaranteed for a period of years.  The cost may be higher than for an equally strong company and product without a premium guarantee.  The point is to examine the options.
   
   You should also examine the history of the insurer in terms of rate increases.  In Pennsylvania and a number of other states, companies are now required to disclose to you whether they have raised the rates in the past on the policy for which you are applying or on any similar policy.
   
   I have prepared a cost/benefit matrix.  The Matrix offers a perspective on how premiums can vary depending on your age at the time you purchase coverage, on the duration of the benefit period you select for your coverage, and depending 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 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.
   
   The matrix assumes for each issue age a benefit of $150 a day and, with the exception of issue ages 75 and 80, the cost of a 5% compound automatic annual increase in the benefit is included in the premium.  The benefit is 100% available for care wherever it is delivered to you, whether in a skilled nursing or assisted living or adult day care facility or at your home.
   
   I think that the matrix also provides a perspective on value 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, I submit that the value of the insured benefit is in the fact that it frees those dollars for family or charitable purposes.  $64,000 or more a year today, $128,000 or more in just fifteen years - those are dollars which could mean a great deal to a charitable organization and create a tax benefit to boot for the insured while he or she receives tax free benefits from the 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.  Elder law attorneys, CPAs and financial advisors often tell me about how the cost of caring for an uninsured spouse left the otherwise healthy spouse near poverty after the death of their loved one.
   
   If you would like a copy of my cost/benefit matrix, please call.
   
    

7. Extras.  Most companies offer a selection of enhancements that you can add to your policy at the time of application.  My 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, if so, 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 the basic policy which fits you best.
   
    

8. 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.
   
   These policies may be appropriate for the individual who has significant liquid assets, who needs additional life insurance, and who needs 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 riders.  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 policies.
   
   The question I 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 (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 but be sure to do so in comparison to stand-alone LTC contracts so that you understand the benefits offered by each approach.
   
    

9. Financials.  Financials are fundamental.  You should require the broker to provide the financial ratings of each insurer under your consideration.  I 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, and Weiss Ratings.

CONCLUSION

I hope that this article provides you with a basic understanding of the realities of long term care benefits, both governmental and those available through private insurance.

The consequences of failing to incorporate long term care in your planning, at least as you approach retirement, can be financially catastrophic.  I encourage you to discuss your needs, concerns and resources with a qualified LTC broker so that appropriate measures can be taken to reasonably protect you and your family as the future unfolds.

© 2003 by Thomas M. Lilly, JD CLU
All rights reserved.

 Jim's Lange's Comments

I hope you found Tom's discussion of long term care options useful in your own decision making process.  There is no person I trust more than Tom to provide appropriate advice and service in the long term health care area.  As I mentioned at the beginning, I urge you to stop procrastinating and address the long term care issue one way or the other.  

Tom is President of Futurecare Associates, Inc, a long term care brokerage firm located in the Shadyside district of Pittsburgh, PA.  Tom represents a large number of LTC insurers, which facilitates matching the appropriate long term care insurance solution with an individual's long term care needs.  Tom is licensed to practice in Pennsylvania, New York, Massachusetts, Ohio, Kentucky, Virginia, Washington D.C., Nevada and California.  If you are a resident of a different state, Tom can easily become licensed in your state to serve you.  As many of my out of town clients have found with my services, it is often more important to have a true expert do the work remotely than to take a chance with a local practitioner who might not have Tom's expertise, education, judgment or experience in the long term health care area. 

Tom is offering consultations to readers interested in long term care insurance issues and can be reach by calling toll free 1-877-687-4700, locally at 412-687-4700, or by e-mail at tom_lilly@msn.com.