Do You Need Long Term Care Insurance? (Complete article)

Do You Need Long Term Care Insurance?

You don’t want to think about the day you may need help getting dressed or bathing, but according to America’s Health Insurance Plans about 19% of Americans 65 years of age and older presently deal with some degree of chronic physical impairment.  Among those aged 85 and older, 55% could benefit from long term care.  By the year 2020, it’s projected some 12 million older Americans will need long term care.1

To be clear, LTC goes beyond the regular medical care you receive at your doctor’s office.  Specifically, LTC refers to the help you receive for a chronic illness, disability, or cognitive impairment that leaves you unable to care for yourself for an extended period of time.  LTC can be provided in a nursing home, assisted-living facility, or in your own home.

Long term care typically is not covered by your health insurance and, because it involves one-on-one, customized care, it can be expensive.  For example, according to a 2008 study by Genworth Financial Survey, Trends & Findings for the Portland area, a home health aide cost $72 per visit, moving to an assisted living facility runs $ 2,797 per month, and a stay in a nursing home costs between $6,106 and $6,737 per month based on whether you have a semi-private or private room.2  Of course, these expenses vary considerably by region.

Because LTC has the potential to be your second biggest purchase after your home, you may want to cover those costs completely, or in part, by purchasing LTC insurance.  Policy benefits typically are expressed in daily amounts, with a lifetime maximum.  Some policies pay half as much per day for at-home care as for nursing home care.  Others have a pool of benefits that can be used as needed.

But who should buy the coverage and when?  Many experts use net worth has a purchasing guideline.  On one end of the spectrum, individuals with lower net worth will quickly exhaust their assets when funding LTC and qualify for Medicaid, a government program that pays for medical and LTC expenses for those who can’t pay for themselves.  At the other extreme, if you have liquid assets in excess of $2 million, you may be able to pay for any potential LTC costs yourself.  Of course, keep in mind that “self-insuring” requires investing a portion of your assets in a conservative fashion to cover possible LTC expenses.

If you fall in between these two categories, it’s worth weighing the trade-offs between the peace of mind a LTC policy might bring you and the premiums you will pay.  Most experts suggest beginning this analysis around age 50.  If you wait until your 70s, it may be too late to purchase insurance as some LTC insurance companies place restriction on the age and health status of buyers.

In fact, a recent AALTCI (American Association for Long-Term Care Insurance) report underscores the benefits of considering purchasing LTC insurance sooner rather than later.  The AALTCI’s analysis of data provided by eight leading LTC insurers, representing some 80% of new individual policies sold in the U.S., found that individuals who are in good health qualify for discounts that reduce the cost of LTC insurance by 10 to 20% each year.  Specifically, 66.5% of those under age 30 qualified for a “good health discount” compared to just 44.2% of those between the ages of 50 and 59.  Of those between the ages of 70 and 79, 18.8% qualified for the discount, while just 11.2% of those aged 80 and over qualified.3

Possible income tax deductions and tax credits are another consideration involved in the purchase of LTC insurance. To the extent that premiums, combined with other qualified medical expenses, exceed 7.5% of AGI, the premiums may be a deductible expense for Federal income tax calculations. In Oregon, a tax credit of 15% of premiums or $500 (whichever is less) may be available.  Further Federal tax benefits are being proposed as we go to press. Consult with your tax professional to see if you can take advantage of these programs.
A recent development in Oregon known as a Qualified Partnership Policy (QPP) allows for a significant level of asset protection in the case of ‘spend down’ of personal assets.  Even after receiving LTC insurance payments, some people have to apply for Medicaid. If you purchase a QPP, you may qualify for Medicaid and keep more assets than other Medicaid clients. Assets include money in the bank, investments, and real property. Generally, people qualify for Medicaid when they have assets of $2,000 or less. A QPP allows you to keep assets equal to the amount of LTC insurance benefits you received. Also, a QPP protects your inheritance in the same amount. For example, if your QPP paid $50,000 for your LTC before you applied for Medicaid, you would get to keep both $2,000 and $50,000 and still be eligible for Medicaid. Medicaid would collect $50,000 less from your estate, if that amount is still in your estate when you die.

In summary, while net worth and age are factors to consider in your evaluation of LTC insurance, in the end, the reasons individuals purchase the coverage cut across net worth and tax considerations.  For example, someone with a lower net worth may feel so strongly that he not become a burden to family members that he makes cuts elsewhere in his budget to afford the long term care insurance premiums.  Alternatively, someone worth $10 million who easily could pay long term care bills herself may decide that she wishes to protect her assets for her heirs and transfer all her health risks to an insurance company.

To learn more about LTC insurance, you can visit The Insurance Information Institute at www.iii.org or Long Term Care Planning Month at www.ltcmonth.com.  Remember, LTC can be an emotional issue, but it’s best to evaluate the product as a risk management tool, like your homeowners, life, and auto insurance.  Finally, because policy language can be ambiguous and insurance companies seem to introduce new riders on a daily basis, it’s wise to consult with your financial advisor before purchasing long term can insurance.  Your advisor can ensure you are dealing with a reputable insurance company and help you select appropriate policy features.

1 http://www.ahip.org/content/default.aspx?bc=41|329|450
2 Genworth Financial 2008 Survey, Trends & Findings
3 http://www.aaltci.org/subpages/media_room/story_pages/facts022206.html