April 2000

Planning Ahead: The Challenge
of Long-Term Care

by Michael Meyers

The chance of an average individual spending at least some time in a nursing home is higher than one might think. MSBA members who have an elder law practice can likely attest to this reality.

The government estimates that one out of three Americans who are currently age 65 will spend on average two to three years in a nursing home.1

With life expectancy increasing and our population of people age 65 and over growing, the risk of needing long-term care also rises.

Today, the average annual cost of a nursing home stay is $47,000, according to the Health Care Financing Administration. As one can well imagine, that figure can skyrocket in major cities. But nursing homes are not the only option. For a variety of reasons, more and more people are taking advantage of assisted-living facilities, senior housing with services, adult foster care, home health care, and other innovative forms of long-term care. Of course, the cost of these services can add up quickly, also!

Most attorneys would never dream of going without life, auto, homeowners and medical insurance for their families. However many Americans regularly overlook other equally important personal insurance protections like long-term care coverage.

In spite of our aging population’s increasing need for long-term care and the financial impact its costs can have on the assets they’ve worked so hard to build up, people are reluctant to consider long-term care insurance. They often believe that a nursing home represents a loss of independence, that it is the only form of long-term care available, and that long-term care insurance is too expensive.

Paying between $25,000 and $75,000 out of one’s own pocket for a single year of long-term care is a lot more expensive, however, than the cost of long-term care insurance. It is difficult to feel very independent while worrying about depleting life savings to pay for needed long-term care.

In addition, without private insurance to pick up the cost, there is the very real risk of spending assets -- whether on a nursing home, home health care, or another form of long-term care -- that had been set aside as an inheritance for children and grandchildren.

Another consideration is that the person receiving long-term care, even if it is in the home, may not be the only one financially or emotionally drained. A child who ends up being responsible for a parent or grandparent may also be faced with both the emotional and financial strain of caring for an aging relative and struggling to find the money to pay for it.

Long-term care insurance can benefit more people than one might expect, even those whose assets could easily withstand a costly nursing home stay. The knowledge that their long-term care is provided for could enable individuals to begin making annual gifts to children and grandchildren in order to reduce estate taxes down the road for their heirs. In addition, knowing that their long-term care is provided for can allow retirees to feel more comfortable spending money on travel and other activities they have been waiting a lifetime to enjoy.

The younger a person is when he or she purchases long-term care insurance, the lower the premiums. Many people buy the coverage when they reach their 50s, or 60s. It is clearly ill-advised to wait too long to apply because there is a greater likelihood of developing an illness that prevents getting approved for coverage.

Younger people -- those in their 30s and 40s -- face the real risk of their parents or grandparents turning to them for financial assistance for care in a nursing home, their own home, or some alternative setting. Today, more and more people are buying long-term care insurance for parents, parents-in-law, and grandparents as a means of preserving their own assets in case expensive care is needed down the road.

Regardless of one’s ability to pay for nursing home or home health care out-of-pocket, consideration of long-term care insurance should be part of every attorney’s financial planning. The decision to purchase or not purchase coverage is not one that should be made solely by using a calculator. There are clearly important emotional components to consider, such as an individual’s personal situation, retirement plans, family relationships, and so forth.

Michael Meyers is a freelance writer who has written extensively within the insurance industry and prepared this article under contract to Seabury & Smith. He currently resides in Charlottesville, Virginia.

"One out of three Americans who are currently age 65 will spend on average two to three years in a nursing home."

Term of Coverage. Given the statistics on the length of nursing home stays, you could shop for a long-term care policy that covers from two to four years of care. Since care often begins at home long before nursing home care is necessary, your need for care could last for many years. For this reason you should evaluate the unlimited option.

Daily Benefit Amount. Research the costs of nursing home care where you live, keeping in mind that it is likely you will need to pay a nursing home more than the basic rate each month because of added charges for drugs and special services. One approach is to select a daily benefit equal to the published rate for the nursing home and plan to pay out of your own pocket for extra services. You may also want to take into account your projected discretionary income and how much you will be able to afford to pay out of your pocket.

"Out of Pocket" Expense. Even with this insurance, remember, you will have to pay some costs yourself. First, you must meet a deductible (elimination period). Then, some plans pay a fixed amount for each day you are in a nursing home, regardless of how much your nursing home care costs, while other plans pay actual charges up to a fixed amount. (How a plan pays its benefits will influence how large a benefit you select, so factor this into your decision.)

Key Considerations. When you purchase long-term care insurance, you should look for several key benefits:

• The Company Behind the Coverage. Don’t shop for a "store brand" or "generic equivalent." A company’s financial stability and its experience providing long-term care insurance are the first things to consider in selecting a plan. You want assurance that the company will be around in 10, 15 or 30 years if you need to apply for benefits. A. M. Best, Moody’s, or Standard & Poor’s rating systems can help you judge.
• Type of Coverage Provided. You will probably want to look for a plan that covers skilled, intermediate and custodial nursing home care, but perhaps more importantly, be sure to evaluate the policy language for assisted living facilities.
• Home Health Care. Most people would prefer staying in their own home if possible, so you’ll most likely prefer a plan that offers home health care as an option or as one of its regular benefits for situations where nursing home care is not necessary.
• Definition of a Covered Stay. A good plan should cover your nursing home stay not only if you are injured or sick, but also if you need continual help with two "activities of daily living" (ADLs), or supervision because of cognitive impairments like Alzheimer’s Disease. ADLs include dressing, bathing, toileting, continence, transferring, and feeding.
• Choice, Choice, Choice. Different people will have different needs based on their income and assets, nursing home costs where they live, and how much they can or want to "self-insure." You’ll most likely be more comfortable selecting a plan that gives you a choice of daily benefit options, elimination periods (deductibles), and benefit limits. That way you can build a plan to meet your individual needs.
• Inflation Protection. Because you are purchasing insurance today to meet tomorrow’s costs, you will probably want to elect inflation protection. If you tell yourself that you will apply for more benefits down the road, consider the risks of forgetting to act until you become too ill to get approved for additional coverage. There are two types of inflation protection available: one automatically increases your benefit level by an equal percentage each year; the other compounds the benefit increases.
• Guaranteed Renewable. This means that you can always renew your coverage as long as you pay your premiums on time, even if your health condition worsens. In most cases, however, the insurer will reserve the right to change premiums for all persons in a given class or state.
• Waiver of Premium. This allows you to continue coverage without cost after you have been receiving benefits for a certain period of time, such as 90 days.
• Premium Payment Options. The traditional methods of payment are annual, semi-quarterly, quarterly, or monthly for life. Some policies may be paid up in ten years or by age 65.

If you are shopping for your parents or grandparents, you should take into account the same important considerations. 

Providing for long-term care recently became more affordable. Federal tax incentives for purchasing this kind of insurance coverage were instituted in 1997. Since that time, an individual may include qualified long-term care insurance premiums, in whole or in part, as medical expense deductions for federal tax purposes, subject to certain limits. In addition, you may deduct the unreimbursed costs of qualified long-term care services and exclude from taxable income the benefits received from a qualified long-term care plan.

In general, long-term care policies issued prior to 1997 qualify for these tax breaks. However, if you purchase a policy today (or you significantly change an existing policy on or after January 1, 1997), your long-term care plan must meet federal guidelines to be assured these tax benefits.

A unique feature of the benefit is that as an employer you are allowed to select which employees receive this benefit. Employers can also pay premiums for an employee and/or spouse and deduct them as a business expense. Solo practitioners or attorneys in a partnership, including S corporations, may deduct premiums to the same extent as health insurance.

Minnesota has further encouraged the purchase of long-term care insurance by offering a $100 tax credit, per person if your plan meets minimum standards. With all of these incentives it is clear that the government is encouraging us to take financial responsibility for this risk.

If you need additional information about long-term care insurance, contact the National Association of Insurance Commissioners for a copy of the Shoppers Guide to Long-Term Care. Phone (816) 374-7259 or write: National Association of Insurance Commissioners, 120 West 12th Street, Suite 1100, Kansas City, MO 64105, Attn.: Publications.

(Editor’s Note: A useful worksheet for comparing the costs of long-term care insurance versus self-insuring can be found in "A Health Care Safety Net," Personal Fortune, October 14, 1996. For other perspectives, see Richard Alexander’s article, "Avoiding Fraud When Buying Long-Term Care Insurance," on the Web at http://alexanderinjury.com/library/library_fraud_1.html, and the Long-Term Care Insurance Page at http://members.aol.com/elderltc/)

The MSBA Group Insurance Program offers a long-term care plan underwritten by UNUM Life Insurance Company of America. To learn more about this insurance coverage, call 1-800-501-5776.

1. Susan E. Kuhn, "A Health Care Safety Net," Personal Fortune, October 14, 1996.