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From the Publisher

2012-08-02 09:08:06

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

A- I am always glad to be asked. A couple of months ago I took a break from other topics I have written about over the past few months, and wrote about a subject that I have spent much time in the past and even more time recently, counseling users and influencers of users, in regard to their possible need for long-term care and how to manage this risk. Long-term care is the type of care one receives outside of a hospital. You have your health insurance or Medicare to pay for doctors and hospitals, but once you leave the hospital, you are like most people and probably have very little coverage from your health insurance or Medicare if you need extended care in a senior care residence or at home. If you require skilled care, which is the same kind of care you receive in the hospital…that care that is performed under the supervision of a registered nurse, 24 hours a day…you may have some benefits under Medicare and your Medicare supplement, but not for long. Most senior care however is the type of care that is less than skilled, such as assisted living, memory care and care provided by CNAs and CMAs. Whatever you lack in coverage will be at your expense. When you no longer have the ability to pay, Medicaid can take over, but lots of things in your life will change. Here is a question I recently received and my answer. Q- Several years ago you wrote an article on long-term care. At that time, it wasn’t something pressing for my wife and I so we didn’t do anything. Now we’re in our late 60s. We just recently went through a long-term care confinement for her Dad of four years and my Mom for 7 years. Neither of them had any type of insurance to pay for the care. We couldn’t believe the costs. We went through everything my Mom had and most everything of what her Dad had. We are considering whether or not we need to get a long-term care policy. Would you reprint that article? 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 your question yourself. Some of these conditions might include but not be limited to such things as high blood pressure, heart conditions, arthritis, cancer, memory impairment, etc. Since you have to be medically underwritten for a Long Term Care policy, if you already have one of these conditions, you may not be able to qualify for a policy…but you need to know if you can qualify and what to do if you can’t. If you are now in good health…how big is the threat then? My answer is…as the title of this series says…it’s always a matter of risk management. In the earlier issues in this series, we talked about three of the four ways to manage the risk. That of avoiding it, retaining it and reducing it. Last month we began discussing the fourth way of managing the risk…that of transferring it to an insurance company by buying a Long Term Care policy, and the different things to look for in these types of policies. This month we will talk more about these and their premiums. Q- What does a Long Term Care insurance policy cost? A- With all due respect I often give two answers. The first answer is “A Long Term Care insurance policy doesn’t cost… it pays.” The second answer is “It depends upon lots of things such as age, condition of health at time of application, and how much of your income and assets you want to protect. But suffice it to say, if you have something to protect…such as income…assets…independence…peace of mind…or those and that of your family…at the very least…you will want to find out.” Younger adults (40 to 60) can buy a lot of long-term care protection for a relatively small amount of premium. My wife and I were in our mid 40’s when we took out our policies. Our combined premium was less than $140 per month. Because of the tremendous increase in utilization of these types of policies by all people over recent years, the premiums have increased substantially. Today’s policy premiums are higher, and particularly higher the older you are when you apply, but you will not have paid in as long as those who bought their policies at a younger age, so it all works out about the same. But policies today are different than the policies we bought back then, as you learned in the previous articles in this series. Let me give you an example of a policy today for a couple that would be in their late 60s and the premium for the same. You buy a long-term care policy by buying so many dollars worth of benefits payable per day. Let’s use $125 per day, with a 5% inflation rider, which means the benefits go up each year, at the rate of 5%, compounded annually. The average age the “window” begins to open for needing long-term care is 83. If both the man and wife were 69, it would be an average of 14 years before they would “actuarially” experience the need for long-term care. Please keep in mind, it could be much earlier, or later…as 83 is just the average age of those beginning to need long-term care. While $125 per day would not be enough in benefits to even cover today’s cost, in 14 years, $125 per day in benefits turns into $247 per day, when compounded at the rate of 5% annually, which is more than $7,500 per month. This amount would come a lot closer to covering the cost of care in the future than $125 per day will today. If this joint policy was taken out with a zero day elimination period (which means benefits will be payable immediately), with comprehensive benefits (for home, nursing home or assisted living), and the benefits payable for life for both the husband and the wife (which is considered to be one of the best policies as no one ever knows how long someone will need benefits), the premium for both would be around $14,000 to $17,000 per year. I know, that’s a bunch…but don’t quit reading yet. Let’s get our arms around some bigger numbers. What causes a long-term care confinement? Many things can cause a long-term care confinement, such as strokes, cardiovascular disorders, cancer, kidney related impairments, memory impairment such as Alzheimer’s and dementia, and a host of other illnesses, afflictions and injuries. While the average length of stay for a long-term care need is approximately 4 years, it could be longer…much longer…and of course it could be shorter too. Costs for long-term care have increased at the rate of approximately 3% per year for the past 30 years. It is not out of the ordinary to see costs as high as $60,000 to $100,000 per year or more today…per spouse, and of course much more than this in the future. If the need for care is 4 to 5 years, that could be a half million dollars…for each spouse. If the need for care is longer, it could be a million dollars or more for each spouse. Here is what I mean about getting our arms around bigger numbers. Let’s say you buy a joint policy for the two of you and pay for it for 15 years before you need it, and the premium for this joint policy is $17,000 per year. This means you will have paid a total of $250,000 or thereabouts for a policy that will cover each of you for your lifetime, should either of you or both of you need the care. One of many benefits of a Long Term Care policy is the 90 day waiver of premium. This means that once benefits have been payable under the policy for 90 days, you no longer have to pay the premium on the spouse who is receiving the benefits. Some policies have a joint waiver or premium, meaning you don’t have to pay either premium on either spouse, once one spouse is receiving benefits, after 90 days of benefits being payable under the policy. These are exceptionally nice. You pay for the policy until you need it, then it pays for your care and you don’t pay for it as long as you are receiving benefits. In order for long-term care insurance to be insurance, like any insurance, the loss must be uncertain to occur. This is why you have to be medically underwritten for a policy. If you already have cancer or haven’t been cancer free for 5 years, have had a recent stroke with residual paralysis, have debilitating arthritis, or have any condition that requires or will soon require long-term care, you can’t qualify for a policy. Again, go back to the first articles in this series. The risk is the half million to a million dollars or more per spouse per year that a need for long term care may cost. Buying a policy is one of the four ways one manages this risk. You trade a small certain loss, which is the premium, to the insurance company, so they will pay the large uncertain loss, which could be a huge amount. You may be able to plan for and handle a premium of $1,000 to $1,100 per month. But getting hit with a monthly bill for long-term care for $5,000 to $10,000 or more, or double that if you were both confined, would be tough for anyone to plan for…and survive financially for very long. Couples sometime look at buying a Long Term Care policy as pre-paying for the cost of their care, at a greatly discounted rate. In the above example, the $250,000 that was paid for the joint policy may only equate to 6 months of care for one spouse in 15 years. A joint policy with lifetime benefits could pay several hundred thousand dollars, or even several million dollars, as there is no limit. Quite often I work with couples who have several hundred thousand dollars or more in fairly liquid net worth. Sometimes they are earning pretty good rates in a CD, mutual fund, or an annuity that was taken out a few years ago. Quite often they don’t need the earnings, so they reinvest these earnings back into the principal. If they experienced a need for long-term care, their entire investment could go pretty quick. I say to them, “Maybe it makes sense to take the earnings off your investment, or most of the earnings, and buy a Long Term Care policy that will insure your investment would not have to liquidated, in the event of a need for long-term care. Annual earnings on most CDs, annuities or mutual funds would only pay for a few weeks of long-term care, but these earnings, or a portion of these earnings could easily purchase a Long Term Care insurance policy that would protect everything… or most everything…from now on. Generally speaking, unless you have more money than you could burn, you will never find a better use for interest and earnings on an investment than by buying a Long Term Care insurance policy that protects it all, or at least…most of it.” Let me give you an example. Suppose a couple has $500,000 invested in a CD, mutual fund or an annuity that was taken out several years ago. Let’s assume it is earning 4%. Rather than take the earnings, the couple has chosen to put the money back into the principal. It may be a qualified plan where there are no taxes on the earnings and these earnings are growing tax-deferred; or it may not be a qualified plan and these taxes must be paid now; or maybe these earnings are tax-free. For the sake of this example, let’s not consider the tax ramifications of the earnings. So the 4% return on the $500,000 of $20,000 is being put back into the principal. Now, the coming year, the new principal amount of $520,000 earns 4%. Is this the most prudent use of the $20,000, or the new amount of $20,800? Or, would it make more sense to take the earnings and buy a Long Term Care policy for both of you? If one or both of you had a need for long-term care, the principal may not last very long. By taking the earnings and buying a policy, you much better protect the investment. Next month, God willing, my final article in this series, I will talk more about the process I suggest using when seeing if you can qualify for a Long Term Care policy. I also hope to make some comments on what is going on politically in our country and some things I think that need to be done between now and the November elections.