One need only do a search on Google or read a newspaper to see that long-term care is becoming an increasingly important topic due to the benefits of improved health care, longer life expectation and the demographics of a generation of retiring Baby Boomers. Furthermore, long-term care is no longer an elders-only issue. Many middle-aged professionals find themselves on the inside looking out as they take care of their aging parents and look at the prospects of their own retirement.
Since long-term care applies to the care required if one is no longer able to perform everyday tasks (activities of daily living) due to chronic illness, injury, disability, or aging, most companies position long-term care as a lifestyle choice of how and where one may receive needed care in their twilight years: at home, in an adult day care or assisted living facility, in hospice care or, yes, even a nursing home. Never the less, long-term care most often boils down to a matter of affordability and this is especially true for those living here in the Golden State.
The High Cost of Care in California
The statistics often cited for the average cost of long-term care in America can be daunting. And for California residents, the numbers are even more intimidating. Based on the Mature Market Institute’s 2007 study of nursing home costs, the average Los Angeles area private nursing home costs $215 per day—more than $78,000 per year. In 20 years, if costs grow at 5 percent, the same facilities will cost more than $208,000 per year! And these are only averages; top-shelf care can cost as much as 40 percent more, while prices for other California cities, including San Diego and San Francisco, are even higher. Furthermore, home health care – where most long-term care is received – can be just as costly at average hourly rates of $20/hour.
With good reason, long-term care is an increasing concern for financial planners. “Long-term care is one of the six common retirement liabilities that a comprehensive retirement plan should factor in,” says Richard Tassiello, President of Retirement Strategies Group. “Flip a coin and you’ll understand the potential for risk long-term care poses to your retirement nest egg.”
When people think about threats to their retirement savings, they often think of untimely market losses. Never the less, no amount of asset allocation or investment diversification can mitigate the risk of a long-term care incident. For many, long-term care insurance serves as portfolio protection for their retirement plan.
As the public is becoming more aware of the long-term care risk, so is Uncle Sam. In fact, recent changes made in government policy encourage private solutions to this dilemma by providing favorable tax treatment to those buying long-term care insurance.
Changes in Government Policy
In February 2006, President Bush signed the Deficit Reduction Act of 2005. Key provisions highlight the need for estate planning and the part that long-term care insurance plays in protecting ones assets. Among other things, the Act:
- Extends the look-back period for all asset transfers from three to five years. An even longer look-back period now makes it even more difficult to transfer funds out of one’s estate to qualify for welfare and long-term care benefits.
- Makes ineligible for Medi-Cal (Medicaid in the rest of the country) any individual with home equity above $500,000 (a limit that states can raise as high as $750,000, which California is expected to do). Previously the value of an individual’s home was not included when determining eligibility for Medi-Cal. The implications for those living in the Golden State, where home values have seen unprecedented appreciation over the past decade, are obvious.
- Requires Medi-Cal applications with annuities to name the state as remainder beneficiary. No longer can annuities be used as a loophole to shield assets.
The end result of these policy changes is that most Californians, and particularly those with substantial assets, can now depend even less on the government for their long-term care needs.
The inherent risks to a long-term care incident are many, but there are only a few solutions that answer the questions of who provides and who pays for the requisite care. These include:
- Self-insure – A great solution if you’re lucky enough to have inexhaustible assets. Otherwise, this means liquidating savings and assets to pay for care.
- Family - The most common solution, which puts the weight of responsibility and cost on the shoulders of loved ones. This option, however, disproportionately affects women, wives or daughters, who are the typical family caregivers.
- Government assistance – Generally speaking, government assistance is a non-solution; neither Medicare nor Medicaid cover long-term care. Although Medicare may cover a small amount of skilled nursing care under very specific circumstances (averaging only 21 days), it does not pay for the ongoing custodial care that many elderly, ill, or injured need. Medi-Cal is welfare that’s only available after one’s assets are spent down to a nominal point and Medicaid, the federal program that provides health-care coverage to lower-income Americans, only pays benefits for those meeting federal poverty guidelines or after nursing home residents exhaust their savings and become eligible.
- Long-term care insurance – Transferring one’s long-term care risk from one’s estate, family or the government to a financially stable insurer.
Given the limited solutions available, more are now choosing to transfer their long-term risk to a deep-pocketed insurer.
What to Consider When Purchasing LTC Insurance
Although individual features and benefits will differ between long-term care policies, there are several key factors to consider when reviewing coverage.
How much coverage is necessary? The monthly or daily benefit selected is the maximum dollar amount that the insurance company must pay for covered long term care expenses on a given day. Some policies pay a daily benefit out as a weekly or monthly benefit which allows reception of benefits for expenses on specific days that are greater than the daily benefit. The higher the benefit, the higher your premium. Location and the individual’s risk profile have a big impact on deciding this amount.
When will coverage begin?
The elimination period (often thought of as a deductible) is the length of time before the insurance policy begins to pay benefits. The available choices range widely from zero to 100 days to as long as one or two years. The longer the elimination period, the lower the premium.
How long will the coverage last?
The benefit period (usually expressed in years) is the minimum amount of time one receives benefits and can range anywhere from one year to five years to as long as lifetime unlimited coverage.
Including inflation protection for your policy is of paramount importance since health care costs continue to rise (not to mention the results of the increasing supply and demand the Baby Boomer population will produce). To guarantee that daily benefits keep pace with inflation, a 5 percent compound inflation rider is recommended (for those up to 70 and 5 percent simple thereafter).
Something more to consider is one’s family history. If longevity or chronic disease runs in one’s family (especially dementia related diseases), one may be more likely to need long-term care. Further more, women live longer than men on average and are 50% more likely to need nursing home or extended care after age 65.
Saving Money on Long-Term Care Insurance
Individuals, couples, the self-employed and businesses can all save money when paying for long-term care insurance by:
- Funding the policy with pre-tax dollars
- Taking advantage of lower costs when one is younger and healthier
- Buying “short and fat” versus “long and thin”
- Buying for two or more
- Availing oneself of association member discounts
Funding LTC Insurance Premiums with Pre-tax Dollars
For individuals itemizing their taxes, tax-qualified long-term care premiums (for themselves, their spouse or any tax dependent such as parents) are considered a personal medical expense and may be deductible, subject to IRS age-based limitations and the 7.5 percent threshold based on the filer’s adjusted gross income.
For employees whose employers offer a health savings account, eligible long-term care premiums may be paid with these pre-tax dollars.
The self-employed may deduct tax qualified long-term care premiums as a business expense similar to health insurance, according to the IRS age-based limits.
And when a business purchases a tax-qualified policy for its employees (including their spouses and dependents), the corporation is entitled to take a 100 percent deduction as a business expense on the total premium paid by the business. In addition, businesses are not subject to any non-discrimination rules, so they may be selective in the classification of employees they elect to cover. This flexibility gives business owners the ability to use this benefit to recruit, reward and retain key employees.
Buying Sooner Than Later
Since long-term care premiums are age-based, it’s better to buy when one is younger and more likely to qualify for coverage and lock in a preferred health discount. According to Janie DeCelles, a long-term care consultant in Southern California, “When I analyze the option of buying at 45 versus waiting until age 50 or 55, it’s always a better decision to do it at a younger age because I build inflation protection into the plan. A fair analysis of the cumulative premiums paid to age 85 always shows that the most economical decision is to purchase the coverage at a younger age.”
Buying “Short & Fat” versus “Long and Thin”
Since most long-term care incidents last less than five years and average between two to three, one strategy to save on long-term care insurance is to buy coverage with a shorter benefit period (three years vs. unlimited lifetime coverage) and higher (fatter) daily benefit ($200/day vs. $150/day). Deciding on this coverage in this way could yield 25 percent in savings and is therefore a great strategy in purchasing long-term care coverage while saving on annual premiums.
Buying for Two or More
For those interested in purchasing long-term care for both themselves and their spouses, new optional enhancements such as “shared care” policy riders allow spouses to share each other’s benefit pools. And for small businesses, new multi-life programs make it possible to offer long-term care insurance as an attractive employee benefit at discounted rates of 5 to 10 percent that may even include simplified underwriting.
Something important to remember is that individuals must undergo medical underwriting to be eligible for coverage and there may be discounts for those in excellent health. Underwriting for long-term care insurance is different than for life or health insurance since different criteria apply.
Discounts Available
Perhaps the easiest way to save money on long-term care insurance is to pay less for it to begin with! Many associations and professional organizations offer discounts from some of the nation’s top insurance carriers, so be sure to take advantage of these valuable discounts when ever possible.
After considering the need and the cost of long-term care, perhaps the best advice in buying coverage is to find competent guidance from an experienced long-term care consultant. Since policy features differ so greatly and do not compare apples-to-apples, obtaining guidance and direction in the purchasing process is of paramount importance.
As the American population continues to grow older (the group over 85 is now the fastest-growing segment of the population) and more Baby Boomers move into retirement, the growing need for long-term care will continue as a topic of interest for decades to come. Educating oneself and planning for this reality should be an integral part of the retirement planning process. And given the need for long-term care can occur at any time, doing your research and planning now, before the need arises, can save you time—and possibly money.
PUBLISHED IN THE MAY 2008 CALCPA MAGAZINE AND BIOCOM BIOCOMMUNIQUE
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