Long Term Care Insurance

To Protect Your Retirement Nest Egg

Reprinted with permission of Michigan Lawyers Weekly


By John E. Mayer

Long-term care protection is critical in estate planning and retirement planning.  Without it, your savings and retirement nest egg remain at risk when long-term care needs arise.  The stock market is not the only risk your retirement nest egg will be subjected to over time.


 “Many are becoming concerned about impoverishment and institutionalization in old age and are beginning to look for new ways to ensure their retirement security,” states an ACLI research report. “Without long-term care coverage too many Americans will lose the right as they age to remain independent and continue living in their own home.”


“One of the biggest challenges facing America in the 21st century will be the aging of the baby boomers,” says Janemarie Mulvey, Ph.D.  Mulvey and Barbara Stucki, Ph.D. have authored the ACLI study, “Can Aging Baby Boomers Avoid the Nursing Home?  Long-Term Care Insurance for ‘Aging in Place.’”  Both authors were long-term care analysts with AARP prior to joining ACLI.  They have done an excellent job addressing concerns of aging baby boomers who want to age in place.


Transferring the Risk


Most of us transfer the risks associated with health, auto and homeowners insurance to an insurance company.  Risks associated with long-term care protection can also be transferred to an insurance company. The insurance company then shoulders the burden of paying for long-term care costs.  This gives seniors the opportunity to continue living in their own home without depleting their savings.


As life expectancy and the risk of impairment increases, outliving one’s retirement resources becomes a key consideration. What are the odds of requiring long-term care?  At age 75 the odds are 3 out of 5!   A significant claim can dramatically impact one’s net worth. 


With homeowner’s coverage, one has a 1/1200 chance of a significant claim being made during his or her lifetime. Auto insurance comes with a 1/240 chance of a major claim being made. With health insurance, we have a 1/10 chance of a significant claim of $30,000 or greater.  Would it be reasonable to drop health or homeowners coverage?  Is it reasonable to avoid purchasing long-term care protection?


Making the decision not to purchase long-term care coverage puts you in a position of having to insure yourself.  This is called self-insuring the risk.  Let’s assume that long-term care costs are $150,000 for each spouse over the average 2.8 years of care.  Three hundred thousand dollars needs to be set aside to self-insure this future claim - plus all future earning on it.


Suppose you earn 5% on this $300,000 fund you set aside.  The cost to you would be $15,000 annually.  Long-term care protection costs only a fraction of that.  In addition, you retain your principle of $300,000 to live on and eventually pass on to your children.


Planning for Health Changes


“I’ll have my health and be able to care for myself right up to the day of my death at age 100 when I will die in my sleep.” Many people believe this.  However, more that 60 percent of the U.S. population will require help with personal care and other daily functional tasks for some period during their lifetime.


Many operate under the fallacy that they can save money by waiting to purchase long-term protection. Nothing could be further from the truth.  A couple in their mid-fifties recently bought a $200 daily benefit long-term care policy with lifetime benefits and 5% compounded inflation protection with a premium in the range of $400 monthly.  A break-even analysis shows that after having this protection for 20 years, a claim of 104 days is enough to recover the premiums paid in full.  As a point of reference, the daily benefit in 20 years with the 5% compounded inflation benefit will move the current daily benefit from $200 to over $500 a day. 


If this couple had waited until age 60 to make their purchase the premium would go up by over $1,500 a year.  Assuming a life expectancy of 85 years, an additional premium of almost $40,000 would be required!  Waiting can be very expensive.


Suppose you are still in your earning years.  You may find yourself unable to devote the same amount of time and energy to making money if your spouse or a parent becomes incapacitated and requires attention by a caregiver.  What would it cost in lost wages if you had to give up 20 to 30 hours each week to care for a family member? 


Remember this.  There is a premium paid either way.  In this case, it is either the investment in a long-term policy or the extensive personal time one must devote to carrying for a loved one. The real issue is which premium best solves the problem.


Access to long-term care services profoundly affects the quality of life of the person with the chronic health condition as well as family caregivers.  Indeed, increased stress on the caregiver may result in his or her development of chronic medical conditions, which will also need to be addressed.  The beauty of long-term care protection is that it allows the informal caregiver to enjoy more quality time with a loved one and less time attending to routine daily activities.


By 2030, the ACLI study estimates, “the number of individuals receiving nursing home care is expected to double, to 5.3 million – while the average annual cost will climb from $50,000 today to more than $190,000.”   It projects total national expenditures for home and community-based long-term care will more than quadruple, spiraling from $41 billion today to $193 billion.   During that same period of time, nursing home care expenditures could reach $330 billion.  This is equal to today’s entire Social Security budget.


A survey of 700 long-term care policyholders who are currently receiving home care benefits indicates that most wish they had bought more coverage.  The federal government hopes more individuals will become aware of the need for long-term care and accept personal responsibility for planning and paying for those needs.  Findings show that 43% of all claims for long-term care are for those under 65.


The risk of a long-term care claim depends on age, sex, marital status and other factors.  Frequently we find a wife caring for her husband when the need arises in the couple’s home.  Since women, as a rule, generally live longer than men, the question becomes who will care for her when her husband passes on?  What if one spouse needs to be moved into a nursing home while the other remains at home?


Chronic Medical Conditions


“There are currently 125 million Americans living with at least one chronic medical condition,” reports a study sponsored by Partnership for Solutions.  Partnership for Solutions is an initiative led by John Hopkins University and The Robert Wood Johnson Foundation for the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and LifePlans, Inc.  This study predicts that nearly half of all Americans will be living with at least one chronic medical condition by 2020.


These chronic medical conditions run the gambit from Alzheimer’s disease, mental health problems, HIV/AIDS, high blood pressure, diabetes, back problems, severe arthritis, kidney disorder, strokes and heart problems, paralysis, etc.  Living with a chronic medical condition like high blood pressure does not mean one needs to depend on others to function.  It does mean that as Americans live longer there is an increased risk of disability.


Activities of Daily Living


What chronic health issues trigger payment under most long-term care policies?  Most companies require an inability to do two or more of six activities of daily living (ADL) for a period of 90 days or a cognitive impairment that requires substantial supervision.  ADLs include eating, dressing, bathing, toileting, transferring (moving into bed or out of), and continence (control of bowel or bladder function).


A problem arises here because the first signs of ‘loss of independence’ are normally associated with what we call instrumental activities of daily living (IADL).  IADL include completing housework, using the telephone, managing money, shopping, driving, preparing meals, etc.  Generally, a chronic health condition progresses from being merely a nuisance to a hindrance to one’s independence, from IADL to ADL. 


The first ADL area for which help is typically needed is bathing and dressing.  A family member can bathe and dress a disabled family member in the morning and go off to work.  Once an individual requires assistance with toileting, however, the situation changes dramatically.  Toileting cannot be scheduled.  It must be performed on demand.


Long-Term Care Protection Choices


Basic coverage provided by a long-term care policy can be broken down into the following three areas: daily benefit amount, elimination period and benefit period.  In addition, a host of other issues available in today’s long-term care policies need to be considered.  Some of these are:  inflation protection, waiver of premium, restoration of benefits, guaranteed renewability, nonforfeiture benefits, discounts for spouse and preferred health, plan of care coordination, and bed reservation.  Other items of concern include prescription drug benefit, wellness benefit, respite care benefit, medical technology benefit, survivor premium waiver, return of premium upon death rider, premium guarantees, discounts, informal caregiver benefit, coverage available outside of country, tax qualification, etc.


Over 200 companies offer long-term care policies today. AIG, Allianz, Bankers United, CNA, GE Capital, Golden Rule, John Hancock, Lincoln Benefit, Transamerica, and Unum are among the most popular.  Each offers its own version of coverage with a myriad of features and benefits.  Which company is right for you depends on a multitude of issues such as health, claims paying ability, personal preferences, etc.


If traditional long-term care policies are not an option because of health issues, there are viable alternatives today.  No one should compromise on quality of care.  It is important to explore all options.  In Cat on a Hot Tin Roof, Maggie delivers the line, “You can be young without money but you can’t be old without it.”


There are a myriad of reasons to purchase long-term care protection.  The best one may be the peace of mind it brings. 




John E. Mayer is president of BFA Family Wealth Planners, a registered investment advisor firm with offices in Livonia, West Bloomfield, Ann Arbor and Naples, Fla. With more than 25 years’ experience in estate and financial planning, the firm specializes in counseling closely-held business owners and high net-worth individuals in various tax strategies. He can be reached at (800) 452-4983 or e-mail; jemayer@logos4me.com, website; www.logos4me.com.