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From the Publisher

2012-06-20 09:51:29

Long-term care is always a matter of risk management – series

A- Thank you for your question. I wrote this article 8 years ago. I am honored that you remembered it. I have updated the information. If you already have a condition that forecasts a high likelihood of needing long-term care, you’ve gone a long ways towards answering the question yourself. These conditions might include but not be limited to such things as high blood pressure, heart conditions, arthritis, cancer, memory impairment, etc. But what if you are in good health…how big is the threat then? My answer is…it is always a matter of risk management. Previously, we talked about three of the four ways to manage a risk. That of avoiding it, retaining it, or reducing it. Last month, we began discussing the fourth way of managing a risk…that of transferring the risk to an insurance company by buying a Long Term Care policy, and the different things to look for in the same. This month, we will continue. Q: Are the premiums for a Long Term Care insurance policy deductible? A: This again is dependent upon whether or not you have a ‘qualified’ or a ‘non-qualified’ policy as defined by The Health Insurance Portability and Accountability Act of 1996, also known as HIPA ‘96, or the JR 3103. You can no longer buy a ‘non-qualified’ policy in the state of Kansas, but I will address the issue anyway. This act separates Long Term Care insurance policies into two types… ‘qualified’ and ‘non-qualified’. A ‘qualified’ policy has a portion of its premium that is tax-deductible (in accordance with the act), and a ‘non-qualified’ policy does not. All policies purchased prior to December 31, 1996, have been grandfathered as ‘qualified’. Here is the way HIPA ‘96 was written originally. If a policy is ‘qualified’, it means that it meets the benefit criteria set forth by HIPA. For instance, if a policy is ‘qualified’, you can treat a portion of the premiums as medical expenses, and they will be tax-deductible according to the following schedule, if the total of all non-reimbursed medical expenses exceed 7 1/2% of your adjusted gross income. Here are the deductible amounts for the 2012 tax year: * The above amounts increase most years to the nearest multiple of $10, based upon the medical component of the Consumer Price Index. It may change, however, if inflation growth for long term care services is greater. The act goes on to address issues such as: Penalty free withdrawals to purchase Long Term Care insurance are not available from ‘qualified’ plans such as 401(K), 403(b), IRAs, 457s (government programs). Long Term Care policies cannot be included in a cafeteria plan under Section 125; nor can long term care services be reimbursed by a Flexible Spending Account. Long Term Care insurance premiums are, however, an acceptable expenditure for the new medical savings accounts that this law makes available to the self-employed people and small businesses under 50 employees. Integration features of the act if more than one policy is owned, and how they would be figured together for tax- deductibility purposes. and more... But what does it all mean? In most cases the 7 1/2% of adjusted gross income cap is going to be the biggest barrier in making this a relevant issue. Most people do not itemize. If they do, most do not have non-reimbursed medical expenses over the 7 1/2% cap. If you already have medical expenses at that point or beyond, qualifying for a Long Term Care insurance policy may be somewhat difficult. Remember, all policies are medically underwritten. The act, upon first glance, seemingly tends to favor non-indemnity policies. It does not. As you have been told all of your life, “it is better to make more income and pay the taxes, than to make less and pay less in taxes”. An indemnity policy indemnifies you in benefits against the premium you paid. You get what you paid for. A ‘qualified’ policy (one that is tax-deductible up to the limits stated above, which are now higher due to automatic adjustments, and after the 7 1/2% of adjusted gross income threshold is reached through non-reimbursed medical expenses), can only stay a ‘qualified’ policy if the following conditions are met: Medical Necessity cannot be a trigger for benefits under a ‘qualified’ policy. Medical necessity means your doctor has decided that due to whatever reason or reasons (may or may not be medically related), you are in need of long term care. Not having this as a ‘trigger’ for benefits is not in the best interest of the Insured, as it is the way most people qualify for benefits under a Long Term Care insurance policy. The second way most people qualify for benefits under a Long Term Care insurance policy is meeting the ADL test. ADLs (activities of daily living) are different for each policy; but in the case of ‘qualified’ plans, the ADLs are more stringent. The Insured must need assistance from another person, walker or wheelchair, to perform at least 2 of the following: eating, toileting, transferring to or from bed or chair, dressing and continence. Furthermore, a licensed health care practitioner must certify that the Insured will be unable to perform these ADLs for at least 90 continuous days. This again is not in the best interest of the Insured, as the Insured may have purchased a ‘qualified’ plan, but when he/she is in need of care, it is very possible the care may not be needed for 90 days. An example of this would be hip or knee replacement surgery where, following surgery, the Insured needs some assistance at home or in a nursing home for a few days or weeks, but not necessarily for 90 days. Even if the Insured purchased a zero-day elimination policy (to be discussed in more detail later), no benefits would be payable under the policy, unless 90 days of care are needed and certified by the practitioner. The third way most people qualify for benefits under a policy is through a diagnosed cognitive impairment. A ‘non-qualified’ plan allows for the doctor to prescribe long term care based upon his or her findings. This ‘trigger’ under a ‘qualified’ plan is much more severe, in that the cognitive impairment must be measured by clinical evidence and standardized tests... again, potentially making it much more difficult to qualify for benefits. Q: Why don’t I just buy a Home Health Care policy, since I do not want to go to a nursing home anyway? A: For the very simple reason that you, or your loved ones, cannot predict the illness, affliction or injury that will necessitate long term care. If you do need skilled or heavy care, the present day cost of that care in the home could be as high as $8,000 to $15,000 a month, or more. The reason why the cost of this care in the nursing home is less is because the charges are spread over several residents requiring the same level of care. It is always better to buy a nursing home policy that also pays benefits in the home, than to buy a home health care policy that will not pay any benefits in the nursing home. Q: What is the difference between the levels of care provided i n a nursing home? A: All nursing homes are licensed for one or more levels of care by their respective states. The basic difference between these levels of care is the amount of time a registered (or licensed) nurse must be present while the care is given. You will find these levels of care fall under one of three categories: Simple Care... also known as Personal or Custodial Care, or Assisted Living with medication monitoring, does not require the presence of a registered nurse. Most of the work is performed by CNAs (Certified Nurses’ Assistants) or CMAs (Certified Medical Assistants). The current, average daily cost for this care in this area is approximately $160 or more per day. Supervised Care... also known as Intermediate Care, requires the care be administered in the presence of a registered nurse at least 8 hours a day, 5 days a week. The current average daily cost for this care in this area is approximately $180 or more per day. Skilled Care... also known as Heavy Care or Critical Care, requires the care be administered in the presence of a registered nurse 24 hours a day, 7 days a week. The current average, daily cost for this care, in this area is $210 or more per day. Q: How many dollars in daily benefits should I buy? A: That depends upon the answer to several questions. For instance... what is your guaranteed monthly income, not counting earnings on investments? How much of your income, assets and/or estate are you trying to protect? Are you married? If so, how much money would the non-confined spouse need each month if the other spouse was confined in a nursing home? How old are you... your spouse? How does inflation enter into the equation? For instance, if you are in your 60’s, it may be 20 to 25 years before you need this type of care (actuarially speaking). If inflation averages 3 ½% per year, rates will double every 20 years. Buying a policy that only pays benefits equal to today’s costs may only be enough to pay half of the total bill when you need it. It would therefore make much more sense to buy an inflation rider. If on the other hand you are in your mid to late 70’s or older, buying a flat amount of benefits equal to or a more than present day costs may be the best for you. Q: How long of a benefit period should I buy? A: Some agents recommend a defined period of time, say for 2 or 3 years (meaning once you begin receiving care in the nursing home or at home, the policy will only pay benefits for 2 or 3 years). I do not understand why. If you can qualify for a Long Term Care insurance policy, how does anyone know what the illness, affliction or injury that is going to take place will require in a long term care confinement? You are buying the policy to preserve and protect your income, assets, peace of mind and independence, as well as those and that of your family. Why would you only want to protect it all for 2 or 3 years, then still risk losing everything and going on Medicaid? Most all of us know people who have been in a nursing home for several years. If one can afford the relatively small difference in premiums between a defined benefit period (i.e. 2 or 3 years) and lifetime benefits, lifetime benefits will always make the most sense. A Long Term Care insurance policy is supposed to reduce stress. Stress will not be reduced when you know the benefits of your policy or your spouse’s will end after 2 or 3 years. Q: Should I buy a policy with an elimination period? A: I advise against it because it is not a given that Medicare and your Medicare supplement will pay for the first 100 days in a nursing home. As was stated earlier, if you need care other than Skilled or Heavy Care, you have no benefits at all from Medicare and your Medicare supplement... and remember, over 75% of all people receiving care are receiving a care less than Skilled, Heavy or Critical Care. I adamantly advise against an elimination period if the elimination period is not a lifetime elimination period. For instance, if you purchased a policy with a 100-day elimination period, and you had to meet this elimination period every time you entered a nursing home, it would mean the cost for the first 100 days of every confinement would be the responsibility of the Insured. You would not be too happy if you had paid on a Long Term Care insurance policy for several years, and then found that you had to pay the first several thousand dollars before that policy would pay a dime. The difference in premiums between a zero-day elimination period (which pays the daily benefits the very first day and what I recommend), and a 90 or a 100 day elimination period is a few percentage points higher, but most insignificant if you would have to pay the costs for that first 100-day period, especially if you would have to pay them every time you entered a nursing home and on each spouse. You will never realize enough in premium savings to justify the expense for the first 90 to 100 days, even with only one confinement in a lifetime, let alone more than one. Q: Should I buy a policy that has an ‘automatic-daily benefit-increase for inflation’ rider? A: Again, what you need to consider is the same as the answer to the earlier question... “How many dollars in daily benefits should I buy?” We know the majority of people (using today’s numbers) do not enter a nursing home until their mid to late 80’s and early 90’s. If you are 78 and buying a nursing home policy, it may be a better idea for you to buy a flat rate amount of daily benefits that you can afford, rather than a lesser amount of daily benefits with an inflation rider. If on the other hand you are 63, it will probably make a lot more sense for you to purchase an inflation rider, as nursing home costs could easily double present day costs by the time you are ready to enter a nursing home. Some of the same questions asked in the daily benefits question would be good to ask about buying an inflation rider, only from the posture of you being the age you will be at the time you most probably will enter a nursing home. There are two types of inflation riders... simple and compound increases. Some companies offer both. Most all policies use the rate of 5%. The difference between the two can be appreciable. A simple increase of 5% on a $150 a day policy means that the daily benefits will go up each year by a flat $7.50 a day. A compound increase of 5% on the same $150 a day policy would be a 5% increase on each previous year’s amount. Q: What does ‘90 day waiver of premium’ mean? A: Most all of the better policies have this provision. It means that after benefits have been payable under the policy for 90 continuous days, the premium is waived. A handful of companies waive both premiums for the husband and the wife, as soon as one of them begins receiving benefits. Most companies only waive the premium on the confined spouse. Some companies only waive the premium for a nursing home or assisted living confinement. Some of these companies also waive the premium for a home health care confinement. Q: What about benefits such as ‘bed reservation’, ‘ambulance’, ‘prescription drugs’, etc... should I buy a policy based upon these things? A: No. They are a lot like a car dealer throwing in floor mats or undercoating on a new car you just purchased. These of course are nice to have, but of very little importance in the overall policy. Sometimes, these are the benefits some agents talk the most about. Again, there are many things much more important, as you can see from the detail provided in several areas. Q: I have heard about a benefit called a ‘paid-up survivor’ benefit. What does it mean? A: A paid-up survivor benefit is a most attractive benefit, yet seldom found in most other types of policies. It means that after a certain period of time of owning the policy, generally 4 or 5 years, if one spouse should die, the premiums are paid-up for the life of the surviving spouse. This benefit is included in a couple of the better comprehensive policies without any additional cost. In most policies, there is a charge. This benefit is particularly valuable when there is a disparity of age between spouses, or when the monthly guaranteed income would be significantly reduced if one spouse died. Next month, we will talk about the costs of a long-term care policy.