Long-Term Care Insurance: Perennial Questions, Updated Answers

Public Citizen Health Letter

September 2008

In 2010 the Baby Boomers will reach ‘Golden Pond.’ Much has been written about what this means in terms of their needs, including their anticipated utilization of health care and projected health care expenditures. Increased longevity and rising health care costs magnify individual worries and collective concerns. Many wonder how they’ll get the care they need if they have a serious chronic condition, need help with everyday activities, or — more worrisome — are incapacitated mentally or physically and require care 24/7. Because Medicare covers only some nursing home care following hospitalization, and then only in certain facilities, you should not rely on Medicare to meet your long-term care needs. And so-called Medigap policies, which supplement services not covered by Medicare, do not cover long-term care costs.

Fears are heightened by the rising proportion of never-married and divorced and/or childless people who cannot count on spouses or other family members to take care of them. In addition, geographical mobility means that many people do not live near kin and friends who could oversee their health needs. Many of those at risk are rightfully worried that medical expenses could wipe them out financially, leaving them without coverage when they need it most. Long-term care insurance is designed to fill this gap and address this concern.

1. What is long-term care (LTC)?

Long-term care is defined as “the assistance provided when a person is unable to provide for himself or herself” and can range from episodic care for help with distinct tasks at home to a full array of skilled nursing services in a nursing home. Most often, it includes the following:

• Home health care, including help with activities of daily living (ADLs): bathing, continence, dressing, eating, toileting, and transferring
• Respite care
• Hospice care
• Adult day care
• Nursing home care
• Care in an assisted living facility
• Care management services (to coordinate and monitor the delivery of LTC services).

LTC can vary over time as well as from one person to another. It includes both medical and custodial services, and can have different intensities and price tags. LTC insurance seeks to cover the costs associated with the array of services that are comprised in LTC.

2. What’s the theory behind insurance companies offering LTC coverage?

Although LTC insurance is offered by a number of companies, long-term care fails to meet three of the conditions that make a risk insurable. The first of these is that the probability of a loss (“loss” being defined as the event to be averted, i.e., fire, flood, car crash, illness, etc.) be low. When this condition is met, the insurance premium can be very small in relation to the potential loss. As a result, there will be a broad pool of people who have an interest in protecting themselves against the loss. The second principle is that the potential loss should be definite; this avoids disputes over whether or not a loss actually occurred, and over whether or not it is covered by the terms of the insurance contract. The third principle is that the potential loss should be fortuitous, i.e., occurring accidentally or by chance and not within the control of the insured or of family members.

LTC insurance is at odds with each of these requirements. First, the probability of loss is high. It is estimated that about 60 percent of the population over age 65 will require at least some type of long-term care services during their lifetimes. In addition, the extent and severity of “loss” may be subject to dispute: there are degrees of incapacity, and benefits may not ‘kick in’ until you have reached a certain level of need. Moreover, there may be discrepancies regarding how many activities you need help with, and this can determine coverage. Finally, decisions about whether or not to seek LTC, and when and where to seek it, are often initiated by the insured or his/her family members.

Because they are dealing with risks that are not easily insurable, insurance companies seek to protect themselves against potential loss. They do this by hedging their bets in a climate of uncertainty. This means avoiding higher risks, restricting or delaying services, adding a “cushion” to their premiums to make sure they will make a profit, and employing an array of devices to avoid paying for costly care. Those facing denial of coverage or restrictions that become obvious only after they have paid for care may have no option other than to file a grievance and or initiate a lawsuit. And because is only when consumers have become physically, mentally, or emotionally disabled that they need the benefits of long-term care insurance, they are often unable to assert their rights. It is therefore not surprising that the market for LTC insurance has been described as one that “riddled with loopholes” and “ripe with the potential for fraud.”

3. How much does long-term care cost?

Long-term care is expensive, and can vary greatly from one state to another. While the average hourly cost of home health care was $18 nationally in 2004, it ranged from a low of $13 (in Louisiana or Mississippi) to a high of $26 or $27 (in Rochester, Minnesota, and in Alaska, respectively). Similarly, the average monthly cost of assisted living care, which was $2517 for the nation as a whole, also varied more than twofold, from $1516 in Fargo, North Dakota to $3920 in the District of Columbia.

At present, a private room in a nursing home costs an average of $76,460/year, or $209/day. Again, this will vary on the nature of the care and the facility, and in the city or state in which it is located. In some cities, the average annual cost of a nursing home stay can exceed $100,000. And because these costs are rising, many think about protecting themselves by getting LTC insurance.

4. Who can get LTC insurance coverage? What is not covered?

Interestingly, someone as young as 18 can purchase LTC insurance. But, most often, it is people in their 50s or older who begin to give serious thought to needing long-term care. Because LTC insurance is sold to healthy individuals, some may opt to buy it at a younger age. Most typically, companies will sell LTC insurance to someone as young as 40. Most companies will enroll persons up to age 84; often, however, they provide only restricted benefits to those over 79. The older the buyer, the higher the premium.

Insurers are always on the lookout for “pre-existing conditions” for which you had symptoms or received care before applying for insurance. Lack of candor in providing this information to the insurance company can result in their not covering services related to that condition or even to their canceling the policy altogether. A pre-existing condition may not disqualify you from coverage; but the insurer may not cover care for that condition for a given period after the policy goes into effect.

Insurers may refuse to insure those who have already been diagnosed with certain chronic diseases, including Alzheimer’s disease. Some may decline to accept even healthy adults who have suffered a serious childhood disease, e.g., polio. If you are not accepted, you may appeal the decision by asking that your doctor be sent a detailed description of why you were denied. If the doctor can add information, or rectify information that may have been misconstrued, you may be able to reapply. Alternatively, if you decide to get LTC insurance, you may want to apply to a different insurer, because different companies have different standards and cut-off points for deciding whom they will insure.

Advances in genetics are presenting new challenges in this area. Most states prohibit or restrict the use of genetic information as criteria for some forms of health insurance, but only a minority of states has addressed the use of genetic information for LTC insurance coverage. This is an area that is in flux, so you should find out what the applicable laws are in your state.

Being able to get LTC insurance does not mean that you are necessarily covered for given benefits once you have insurance and need care. Most LTC insurance policies do not cover services for the following:

• Mental or nervous disorder or disease, other than Alzheimer’s disease or other dementia;
• Alcohol or drug addiction;
• Illness or injury caused by an act of war;
• Treatment the government has provided in a government facility or already paid for; or
• Attempted suicide or intention-ally self-inflicted injuries.

Some insurance policies also incorporate “gatekeeper” or “trigger” provisions for when and whether benefits begin. For example, some benefits are limited to those who are unable to perform at least two activities of daily living. The trigger for benefits is therefore not admission to a nursing home, but rather the inability to perform specific activities. In addition, most policies have an “elimination period” (also known as a deductible or waiting period) before services are covered. Thus, benefits can start 20, 30 or even 100 days after you begin using LTC or enter a LTC facility. Some policies have a zero-day elimination period, but these cost more.

5. How are LTC insurance rates set?

LTC insurance premiums depend on a number of factors, including the following:

• Your specific age and health status
• The scope of services covered, and where they are covered
• Length of coverage
• How benefits are paid (expense-incurred vs. indemnity vs. disability method). The former will pay benefits only when you receive eligible services. Under the indemnity method, the benefit is a set dollar amount, regardless of the care received or the expenses incurred. Under the disability method, once you meet the benefit eligibility criteria, you receive a daily benefit even if you are not receiving any LTC.
• “Triggers,” “elimination periods” and other similar restrictions on benefits (See #4 above)
• Whether coverage is individual vs. group
• Whether or not benefits are protected from inflation
• Whether inflation adjustment is “simple” (increasing by the same dollar amount each year) vs. “compounded” (increasing by a given rate of inflation each year, applied to a mounting ‘principal’)
• Whether or not you forfeit benefits if you discontinue the policy for any reason
• Whether or not the insurance is “tax-qualified” (for which you may be able to deduct all or part of your premiums) vs. non-tax qualified insurance
• Other options that determine the type of coverage you have after you have dipped into the benefits
• How you choose to pay (e.g., lump-sum, over a given number of years, higher premiums that end at a certain age).

The many factors that go into setting premiums for LTC insurance often befuddle consumers. Policies and prices vary a great deal, making it difficult to figure out what you are trading off when you look into different offers. Many seemingly-similar LTC insurance packages are difficult to compare. If rates vary greatly, the benefits you are likely to get will probably vary as well.

Nevertheless, price alone does not necessarily reflect a policy’s worth. The Government Accountability Office of the United States therefore warns consumers not to rely on the price of a policy as a measure of value.

Moreover, even comprehensive, broad benefits can be encumbered by a number of “triggers” and “elimination periods” that may result in exclusions when you need coverage. These provisions are the reason claims are denied, thereby undermining the protection you were expecting. And fighting a claim can entail a war of attrition between two unequal parties, which is why you need to know what you are getting from the outset.

6. What are the insurance companies betting on?

The insurance companies are betting on your having a long and healthy life, without any need for long-term care. In that case, they will not have to pay out any of the premiums they have collected. They are also betting that you insure yourself at a relatively young age, long before you need LTC. A 60-year old may not need benefits for 20 or more years, thereby providing the company a considerable ‘cushion’ against possible future payments. Over time, the average age of consumers buying individual LTC insurance policies has gone down from 68 years in 1990 to 61 in 2005.

The companies may also be betting that you will let your policy lapse after having made payments for a number of years without collecting any benefits. A proportion of the insured population allows their policy to lapse, thereby paying up but foregoing benefits. During the first year of purchase, 9 percent of buyers let their policy lapse.

This situation provides companies a large hedge against losses. In LTC insurance, the probability of loss is low in the early years and increases rapidly with age. If premiums reflected this, they would be low in the early years, increase with age, and be very high in the later years. But companies create more uniform premiums by overcharging in the early years and undercharging in the later ones. Those enrollees that drop out thus leave the insurance pool after having in effect ‘overpaid’ for their initial premiums.

7. How much will LTC insurance cost?

Premiums will vary according to the number of factors listed in #5 above. But there are ballpark figures that will give you an idea of current costs. AARP estimates that a 65-year old in good health can expect to pay between $2000 and $3000/year for a policy covering nursing-home and home care. Fidelity Investmentsestimates that a couple, both of whom are 65 in 2008, will need to spend $85,000 in premiums to insure against a lifetime of long-term care expenses. And no LTC insurance policy will cover all costs, so consumers should have additional resources to supplement what is uncovered.

8. How do I know if I can afford the premiums?

There is a rule-of-thumb to decide if you can afford LTC insurance: premiums should be less than 20 percent of your disposable income after all other essential bills are paid. But keep in mind that the premiums may increase, while your disposable income may remain the same or even decrease over time.

9. Should I buy LTC insurance?

LTC insurance makes sense only for a limited segment of the population. If you currently receive or may soon receive Medicaid benefits, you need not acquire insurance. Medicaid provides services for people in nursing facilities and for those who need nursing home care but can stay at home with special community care services. Additional services vary from one state to another, so make sure you know what is covered in the state you live in: some states are a lot more generous than others. Additionally, state laws differ in terms of eligibility. As a result, they have different requirements concerning how much money and assets you can keep and still be eligible for Medicaid coverage.

If you have limited assets and can’t afford premiums over the life of your policy, or if you depend solely on social security benefits or supplemental security income (SSI), then you should not purchase LTC insurance. LTC insurance is also not advisable if you often have trouble paying for utilities, food, medicine, rent, or other basic needs.

At present, 70 percent of single people and 50 percent of married couples who wind up being in need of LTC spend down their assets and become impoverished within one year, thus becoming eligible for Medicaid. As a result, Medicaid now pays for 43 percent of all LTC expenses and for half of all nursing home costs. Medicaid is therefore the main payer of LTC in the US.

If you have assets and income that place you in the top echelons of the economic scale, it is probably reasonable for you to assume the risk of needing long-term care and not pay premiums for an indefinite period of time. Those with assets of over $1.5 million should have the economic security to allow them to take this risk.

The Insurance Forum, an independent entity, points out that LTC insurance is not the only way to finance long-term care. One alternative is to find out the cost of a comprehensive policy and, instead of buying that policy, placing that amount in an earmarked savings program. In order to take inflation into account, the amount saved can be increased by a given percentage each year. Then, when the need for LTC arises, the cost can be covered by making withdrawals from that account. If such a need does not arise, the savings become part of the individual’s estate.

These calculations suggest that those with assets between $200,000 and $1.5 million are the most appropriate clients for LTC insurance. In 2005, the typical purchaser of LTC insurance was age 61 and was relatively well-off. Nearly half (49 percent) of purchasers had incomes exceeding $75,000 per year and more than three-fourths (76 percent) had liquid assets of more than $100,000.

The National Association of Insurance Commissioners advises that you should consider buying LTC insurance if:

• You have significant assets and income
• You want to protect your assets and income
• You can pay premiums, and possible premium increases, without financial difficulty
• You want to stay independent of the support of others
• You want to have the flexibility of choosing care in the setting that you prefer or will be most comfortable in.

10. How do I make sure that my benefits keep up with inflation?

With health care costs rising steeply, many consumers are understandably concerned that the premiums they have paid will not be sufficient to cover the benefits they need. Most LTC insurance policies offer a provision that, for an additional premium, increases the benefit by typically 5 percent per year. This is often billed as “inflation protection,” but the phrase is inaccurate: costs can rise at a faster rate than the benefit escalator, and therefore protect only partially against inflation. Nevertheless, even with this caveat, most consumers are willing to pay extra for this contingency. The most recent data on who buys LTC insurance show that more than three-quarters of consumers choose this benefit.

11. How do I go about comparing different LTC insurance policies?

Because of the variations listed in #5 above, LTC policies are difficult to compare. The National Association of Insurance Commissioners (NAIC), however, has devised a series of worksheets that facilitates the process. These sheets also guide you in reading the policies carefully, and help you make explicit what you are trying to accomplish through LTC insurance. These worksheets are part of the NAIC’s A Shopper’s Guide to Long-Term Care Insurance, which is available online at www.ltcfeds.com/documents/files/NAIC_Shoppers_Guide.pdf

12. What happens if I decide to discontinue coverage?

That depends on the policy you have. Some policyholders can retain a partial benefit if they let their policy lapse for any reason, includinginability to pay. In that case, the policy is said to have a “nonforfeiture” benefit and the policyholder will receive some value for what he/she has paid. Policies with a nonforfeiture benefit are considerably more expensive than those lacking this benefit. The difference can range between 10 percent to 100 percent. In other cases, policyholders lose all benefits and forfeit all entitlements. It is important to know what kind of policy you have from the beginning, so that you will know what you are giving up.

13. How do I protect myself against premiums increasing beyond what is affordable for me?

It is important that you have a built-in hedge when you budget for premiums. If you can barely afford to pay the premiums when you first acquire LTC insurance, you will be unable to keep up your payments as other costs rise and your disposable income decreases. Moreover, premiums can increase over time.

While a company cannot raise its rates based on your specific age or health status, it can raise the rates for an entire class of policies (e.g., policies for those over a certain age). If your policy falls within that class, you may be subject to a premium raise. Some states therefore prohibit companies from describing their LTC insurance premiums as “level,” because this may mislead consumers. Premiums may go up, and companies have to be up-front about this. Each state regulates rate increases, and you may want to check how your state does this before committing to an indefinite, open-ended expenditure.

If the premiums rise to the point where you can no longer afford them, you may want to consider the options discussed in #14 below.

14. What happens if I discontinue paying the premiums?

As #10 above indicates, this depends on your policy. Some states require insurers to offer “non-forfeiture benefits.” These benefits may take different forms. In some cases, the insurance company may give you a “paid-up policy,” under which you are still eligible for reduced benefits without owing any more premiums. Under the “paid up” option, you may have the same benefit period but lower daily benefits, or the same daily benefit but with a shorter benefit period. The level of benefits depends on the premiums you paid and how long you paid them.

Another option offered by some insurers is a “return of premium” non-forfeiture benefit. This will pay you all or part of the premiums you have paid if you’ve had your policy a certain number of years. Policies which offer this option are considerably more expensive than those that do not have it.

Some states require insurers to provide a “contingent benefit upon lapse” which takes effect when the premiums increase to a certain level. If you are a resident of one of those states, bought the policy at age 70, did not accept the insurer’s offer of a nonforfeiture benefit, and are now facing a premium rise that is more than 40 percent of the original premium, you have to be offered one of the “contingent benefits upon lapse.” These are: reduced benefits at the same premium, or a shift to “paid up” status with a shorter benefit period.

15. What if I need more coverage than I anticipated?

Insurance agents may switch jobs and go to other companies. When this happens to your agent, he/she may try to entice you to switch plans. This is not a good enough reason to make a change. If you feel that you need more coverage than you bought initially, you should first look into the possibility of upgrading the coverage in your current policy. This is probably simpler and less costly. Alternatively, you may choose a policy that provides more benefits. In order for any change to be as seamless as possible, and to avoid a period of being uncovered, make sure your new policy has been approved and issued before you make the change.

Any switch is likely to have a price, and you should be aware of this. If you cancel the policy in the middle of its term, you may forfeit what you have already paid. And the new policy may have new restrictions on pre-existing conditions, which means that you may not be covered for treatment related to given illnesses.

16. What if I get “buyer’s remorse” after I have bought LTC insurance?

Because you are making a long-term commitment, you need to be sure about your decision. Take time to think things through, and do not make a choice under pressure or in a hurry. Talk to people, ask questions, learn the jargon, and consult the sources included in the box at the end of this article.

Most companies allow you to cancel the policy within after a set period; if you act within this “free-look” period, you can get your money back. States regulate this “free look” period, and its length can vary from state to state. Some states require that insurers tell policy-holders about the “free look” period on the cover page of the policy. There are requirements that must be followed to get reimbursed, so find these out and retain all information related to your policy and the cancellation transaction.

17. What other things should I be wary about?

Because of the complexity of most LTC insurance policies, you have to be attentive to much of the fine print that describes what you are actually buying, and the conditions under which you are covered. Regardless of what the sales representative tells you and what the brochures promise, you and the insurer are bound only by the printed contract, so make sure you study and understand it before signing anything. And because of the variety of ways through which you may be paying for LTC insurance, you need to have a clear picture of what your total financial status is and is likely to be in the future. The National Association of Insurance Commissioners recommends that you discuss LTC with a financial advisor. The NAIC has also come up with a list of questions that consumers should have when looking into LTC insurance. These questions are included in the NAIC source listed at the end of this article. Additionally, you need to steer clear of the traps indicated in the sidebar to this article.

18. How can I find out if the company I’m buying a policy from is solid?

Insurer rating services analyze the financial strength of insurance companies. Different services use different criteria to assess companies, but check the relative rankings of the companies you are considering. The rating agencies include the following:

AM Best Company http://www.ambest.com
Moody’s Investor Service, Inc. http://moodys.com
Standard & Poor’s Insurance Rating Services http://standardandpoors.com

Another source of information is the office of your State Insurance Commissioner. Regulators in each state monitor consumer complaints and look into company practices to ensure that companies are complying with standards. Ask about the company’s track record, records of complaint, and overall experience.

All states have insurance counseling programs which are partially funded by the federal government. Your state agency on aging can provide help in deciphering long-term care insurance.