The Long Haul: Part Three
August 11, 2006
In the first two parts of this series, we looked at what long-term care involves and assessing your need for insurance to cover it. Now let's look at some of the specific factors involved in purchasing coverage.
Most of the parents of people approaching retirement today didn't have long-term care insurance. Most didn't need it. When family members lived closer together and weren't as busy, they stepped in when Mom got a little forgetful or Granddad needed assistance getting around. But people are living longer now, and there's a big difference between being a little forgetful and needing help with activities of daily living such as eating, using the toilet and bathing. This new kind of long-term care is more than most families have bargained for and more than one person can handle.
One way to prepare for this need is to purchase a long-term care insurance policy while in good health and insurable. This involves understanding the factors that will influence the price. You will want to buy as much insurance as you can afford, since whatever you buy probably will not be enough to cover all of your costs if you need care. The cost of nursing home care ranges from $120 a day in Little Rock, Ark., to $473 a day in Anchorage, Alaska. And it's increasing faster than the rate of inflation. (To check the cost of long-term care in your area, use this calculator.)
Here are some of the factors in long-term care policies that can have an impact on price.
Federal Plan vs. Others
Age of applicant. The younger you are when you purchase a policy, the lower the cost. For example, in the Federal Long Term Care Insurance Program, Joan, a 40-year-old, can buy a $150-per-day unlimited comprehensive policy for $109.20 per month. Sam, a 55-year-old, will pay $190.49 per month for the same policy. If both use their policy at age 85, Joan will have paid premiums totaling $58,968 and Sam will have paid $68,576. Even though Sam paid for 15 years less than Joan, his total premium was almost $10,000 more.
There are some arguments for waiting. First of all, if you die relatively young, you will have paid for insurance that you never needed. Second, at younger ages, you may be less able to afford a policy since your income may be obligated to life insurance, raising a family and a mortgage. Finally, the policy you bought at age 40 may not be adequate 30 years later. What if the policy becomes obsolete? What if the insurance company is less financially secure? (One of the benefits of federal long-term care insurance is that the Office of Personnel Management oversees the program. The contract for the provider -- currently Long Term Care Partners -- is reviewed every five years.) On the other hand, one argument for buying a policy at a younger age is that it is easier to qualify to get the insurance.
Benefit period. Policies under the Federal Long Term Care Insurance Program can provide daily benefits for three years, five years or an unlimited period. Some policies that are sold outside of the federal program may offer different benefit periods. In some cases, you may not need the full daily benefit and your insurance can last longer than the benefit period. For example, if you need in-home care for four hours per day and you pay $25 an hour for care, you would use less than your daily benefit if you had coverage that provides more than $100 a day in benefits. Of federal policies sold through June 2006, 49 percent have a three-year benefit period, 31 percent have a five-year benefit period and 20 percent offer unlimited coverage.
Comprehensive coverage vs. facilities-only care. Facilities-only plans cover assisted living, nursing home, hospice and respite services provided in a facility. The comprehensive plan provides everything in the facilities plan plus home care, adult day care, respite services at home and home hospice services. Nearly 90 percent of federal policies sold through June 2006 have comprehensive coverage.
Daily benefit amount. In the federal plan, you can choose daily benefit amounts from $50 per day up to $300 per day, in increments of $25. The plan will reimburse care received in the home up to 75 percent of the daily benefit amount. For example, if John's policy provides $100 per day worth of coverage, and he receives in-home services that cost $80 a day, he will be reimbursed at only $75 per day. But if he enters a facility to receive care after a year, he will be reimbursed at the full $100 a day. And his benefit period will have about three months of extra coverage available, since he only used $75 each day for the 365 days he received care in his home.
Future purchase option and automatic compound inflation. The future purchase option in the federal plan is essentially an offer of an inflation increase every two years. The premium for your additional coverage will be based on your age at the time the increase takes effect. If you decline the increase three times, the offers will stop and your benefit and premium will remain the same for the life of the policy.
The automatic compound inflation feature provides a yearly 5 percent compounded benefit increase. Your benefits increase year after year without causing an increase in your premiums even while you are eligible for benefits. Suppose, for example, that Genevieve bought a $150 daily benefit at age 50 with automatic compound inflation. When she is 65, she will have more than $300 a day in coverage, and when she is 80, her benefits will be worth over $600 a day. Her premiums will stay the same as when she purchased the policy.
Waiting period. The number of days you have to wait to be eligible for benefits and receiving services before your benefits start can vary. The federal plan offers a 30-day waiting period and a 90-day period. Other plans may offer a 120-day wait. Waiting periods don't have a major impact on the cost of policies, but in general, the longer the waiting period, the lower the premium.
Should you buy coverage through the Federal Long Term Care Insurance program, or is it worth it to shop the private market for other policies?
Here are some of the benefits of the federal plan:
Other long-term care policies outside the federal plan could offer the following benefits:
- It's big. The federal plan accounts for more than 15 percent of the total employer group long-term care insurance market. As of June 30, there were almost 213,000 enrollees in the program. This is significant, because the success of insurance is based on a large population of enrollees compared to the number of people making claims on the benefit.
- The program uses National Association of Insurance Commissioners pricing guidelines to keep premiums stable over time.
- It is the only long-term care insurance program with OPM oversight and sponsorship.
- It features consumer-oriented care coordination and counseling services, available not only to enrollees but to qualified relatives of enrollees (spouses, parents, in-laws and unmarried children over 18 of federal employees, and spouses of retirees).
- The federal plan bases its benefit reimbursement on the actual cost of an enrollee's care, instead of reimbursing at "usual, customary and reasonable" rates.
- The two companies that make up Long Term Care Partners, John Hancock and MetLife, are the nation's two largest carriers of group long-term care insurance and earn top ratings for financial strength from the major ratings agencies.
- Caregivers do not have to be licensed providers. Family members, neighbors and friends can receive reimbursement for care giving.
Unfortunately, not everyone will be eligible for long-term care insurance. Certain illnesses and conditions will result in not being approved for coverage. If this happens, then you must plan for long-term care without the benefit of having insurance to pay for it. Be prepared to spend your savings if necessary to provide for personal care if family members or friends are not available to provide assistance.
- Lower prices. The federal plan does not discount the price for multiple family members who purchase a policy. There is no government subsidy in the premium of the government plan; the enrollees pay the full group rate. But be wary of a policy that is significantly less expensive than the federal plan. Be sure the company is highly rated and the benefits offered are equivalent.
- Adjusted benefit amounts depending on cost of care in your area.
- Joint policies that may be shared by spouses.
- 100 percent coverage for in-home benefits. The federal plan reimburses at only 75 percent of the daily benefit amount.
- Coverage for those who have been turned down for federal long-term care insurance. There are differences in the medical underwriting requirements of the various long-term care insurers.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
- Take a field trip in your community to visit a long-term care facility. Check out the differences between nursing homes and assisted living facilities.
- Evaluate your resources to determine how much you can spend on longterm care and insurance. Remember that you will only stop paying premiums when you are receiving benefits.
- Set up an appointment with a long-term care insurance agent to find out the cost of a policy. Compare these benefits with the federal plan.
August 11, 2006