The Rookie’s Guide to Long Term Care Insurance

By Mark Baron, CLTC

What are the concerns with Long Term Care?

Most of us will live a long life.  When you live a long life, you get old, and there is a high probability you could get ill and need care.  There are also a zillion things that can go wrong with you before you get old that cause the need for long term care.  When you need care, the consequences to your family and friends can be devastating, especially if it drags on for many years. 

Unfortunately, there isn’t a solid system within our government, health insurance industry, Medicaid, or Medicare that you can count on to pay for this ongoing day-in, day-out care wherever you want to receive it.  Typically, if you want to stay in your own home and receive daily ongoing long term care services, it will likely come out of your retirement savings.  And this usually means your principal, which is meant to provide the interest and dividend income you are counting on for a long secure retirement.

For most people, the purpose of your retirement savings is for retirement dreams, family, and legacy, not long term care costs.  Even if you have enough to pay for several years of care, your spouse could live on for several years with a reduced standard of living.  Your children could bear the brunt of this care while trying to juggle things with their own families and may live far away.  Long Term Care for one family member could mean a terrible quality of life for the rest of the family.

Long term care insurance doesn’t have to replace family, but it can sure help them provide care better and longer.  The insurance can be used exclusively, or just as a tool to subsidize family members who have other responsibilities.  A healthy spouse can become ill trying to provide all the care.   Most policies offer care coordination services to help put a plan of care together, find caregivers in the area, and oversee the process.  You can’t underestimate the importance of this feature, because a care manager can make the entire difference in how smoothly the process can work for a family.

How can I understand long term care insurance?

Long term care insurance can be simple, if you look at the big picture.  The big picture is that if your doctor or licensed medical practitioner certifies that you need care or stand-by assistance in two of six specifically-defined activities of daily living, or if you need help due to cognitive issues, such as Alzheimer’s, you will qualify for benefits.  The six main areas are: bathing, eating, dressing, transferring, toileting, and continence.  For Alzheimer’s and other similar cognitive issues, you don’t need to separately satisfy any of these six areas if your doctor thinks it is unsafe for you to be alone.  Benefits are triggered if it is determined that you will need help in these areas for more than 90 days.  If you are in poor health, it might be difficult to qualify for coverage.  However, conditions such as high blood pressure, asthma, depression, and even controlled diabetes are not automatic disqualifiers.  You may qualify if your height and weight is far less than perfect, but there is a limit how far off it can be.

So, how do the policies work? 

If you have qualified for benefits, virtually all plans sold today will pay for care at home, adult day care, assisted living, nursing homes, and in some other scenarios as well.  Among these plans, you have the choice to pick a plan that reimburses your expenses, or pays you a set amount of cash, regardless of how much care you receive.  They are called either reimbursement or indemnity plans.  There are a few different variations of these models, but there are common trends that most plans tend to follow.   

There is a waiting period to satisfy before claims are paid, but you can choose how long you want that to be.  A shorter period is more costly.  This time period is called the elimination period.  There are several different ways that these periods are satisfied, in addition to the actual number of days, and each company has variations.  You can even choose no waiting period, and there are even variations on that.

Reimbursement vs. Indemnity Plans

Reimbursement plans do just that.  They reimburse you for your expenses, up to your chosen benefit amount.  The indemnity models have appeal because even if you spend only $50 for care in a day, you will still receive the full benefit that your policy specifies.  So, if you purchased a policy that will pay $200 per day, you may have received $150 extra.  The only requirement is to show you received some care during a particular day, but you can toss the remaining receipts for that day.  Any extra payments are considered tax-free income up to $270 per day for the tax year 2008, unless you actually have receipts showing the cost of care received that day exceeded $270.  You should consult your tax advisor for more details.  This limit has been increasing each year. The main reasons why indemnity plans can be attractive are the following:

• You can hire unskilled caregivers and stretch your benefit dollars to do simple tasks such as shop for groceries, or shovel snow;
• A family member that is losing time at work to care for you can be reimbursed to offset lost pay; and
• You don’t have to worry whether a service is covered, or save all the receipts from that day for claims purposes.  Just save the first receipt for qualified care only and the full benefit will be sent; and
• Most reimbursement models won’t pay for both a private home health aide and the charges for an assisted living center at the same time, even if you have enough benefits limits to cover both.  Only if the assisted living center provides all the care with a package including a stepped-up level of service will reimbursement models cover the full charges, up to the benefit limit.  Indemnity pays the full benefit amount for either care, so you can hire whoever you want for the extra care that is needed; and
• You can bank the extra money and save it for a day when you have significant care needs; and
• A spouse who can’t qualify for coverage due to health reasons can tap into the extra funds from your policy if you are receiving services at the same time.

 Indemnity plans typically cost between 12-20% more than reimbursement plans, depending on the company.  There is also a luxury model of indemnity plan that will actually pay you the full benefits on a monthly basis, even if you don’t show receipts for any care.  These are sometimes called “cash” plans.  The cost for these plans can be significantly higher than traditional indemnity plans, and are not commonly purchased, due to the high cost.  However, they are popular with those who may plan to live overseas, since benefit payments are typically made in U.S. dollars without the need to show any proof of care.

How do you decide what company to consider?

First, you should decide whether you like the indemnity or the reimbursement model.  Since the reimbursement model costs a little less, some people choose to go with that plan and just buy pure insurance coverage, recognizing that claims will be a little more cumbersome, and that there will be no extra cash to work with. 

The next step is to understand that there are companies that are rated significantly higher financially as a group, and/or they may have a solid history in long term care insurance.  Within that group of companies, you may find a solid plan that is both competitively priced and covers your specific needs. 

Depending on your particular circumstances, one or two companies may become the obvious choice immediately.  The variables include marital status, age, health, and whether you want indemnity or reimbursement.  It’s important to consult an expert in long term care insurance to seek recommendations.  There are many little pitfalls that a specialist can guide you through to help you identify the best choice.

How is a plan designed?

There are many options, but only a few usually make sense to consider first.  Several options are almost never chosen, so those can be tabled until you have selected the main choices and have a good understanding on the plan you are considering. 

The main choices are:

• Indemnity or reimbursement;
• Benefit amount – usually chosen on a daily or monthly basis.  For example, $200 per day, or $6,000 per month; 
• Benefit period – usually anywhere from 3 years to unlimited lifetime; 
• Inflation option – choosing how fast your benefits will grow each year, e.g., 5%, 3%, etc. Age influences this choice; and
• Elimination period/waiting period – similar to a deductible period.  This is how long you will pay your own expenses.  90 days is the most common, but not always the best choice.  Most plans only require you satisfy this period once in your life.

Once these options are understood, you are 95% of the way there, but choosing the correct company that fits your specific needs can be tricky.  At this point, it makes sense to consult with a professional you trust to make recommendations and help guide you. Make sure this person is independent and is prepared to explain why the recommendation made is the best choice for you specifically.