Advisor Today > > October 2000 Cover: The New Shapes of Long-Term Care

The New Shapes of Long-Term Care

Once upon a time,
in the mid-1980s,
LTC insurance coverages
were limited to
nursing homes or
home health care.
Not anymore.
Here's a close look at long-term care options.

By Carol J. Flemma, Director of Long-term Care Marketing, Northwestern Mutual Life

The most common reason people purchase long-term care insurance is personal experience. Anyone who has lived through either caring for a loved one or paying for a loved one's ongoing medical treatment understands the cost, time and stress associated with long-term care.

Caring for a loved one can have a negative impact on the caregiver's ability to work a regular schedule or even work at all. It also can cause stress in the family by limiting the quality time its members have together. There's also the financial burden of paying for care, whether in the home or at a nursing facility.

People buy long-term care insurance for the expected reasons-income and asset protection. Most people simply can't afford all the costs associated with long-term care, which can often drive people to drain their assets.

LTC insurance, however, can substantially ease the monetary pressures of caring for someone with a chronic medical condition. But, while it can help minimize the financial strain, no policy can eliminate all of the emotional stress.

Individuals who are 50 years old or older are usually the best prospects for LTC insurance, with good reason. Many are facing a loved one's health crisis or have already helped with an aging parent. Perhaps, they know someone who's been involved in a similar situation. As a result, the 50-plus age group is much more likely to understand the potential for the financial and emotional stress of long-term medical needs.

While there's little doubt that the dual responsibilies of parental and family care make LTC insurance attractive to the 50-plus market, that's no reason to discount younger people. Although people under 50 may have different priorities, such as life insurance, saving for retirement or putting their children through college, they are also more savvy about protecting their assets than previous generations. And, of course, chronic medical needs can occur at any age.

Think about celebrities like Michael J. Fox and Christopher Reeve. Because of them, people are more aware of the consequences of chronic diseases and catastrophic accidents than ever before. Even if Mr. Fox doesn't need long-term medical care now, he certainly could in the future.

And what about ongoing care in the case of a debilitating accident like the spinal cord injury to Mr. Reeve? Many families mistakenly assume their major medical insurance covers treatment, but medical insurance was never designed to accommodate chronic treatment. Imagine the heartache of a child seriously injured in an accident and the family's despair at realizing medical insurance won't cover long-term care.

Not long ago, LTC insurance contracts were usually limited to either nursing home or home health care. Now, LTC insurance covers a continuum including home health care, adult day care, alternate living facilities and-if needed-nursing home care. This brings LTC coverage more in tune with consumer needs, since historically only about 15% of long-term care has been provided in nursing facilities, according to the National Association of Home Care.

Although LIMRA International has estimated that the average cost of nursing home care ranges between $51,000 and $90,000 per year it's important to know the cost of care in the area where a client would potentially be receiving it. Researching local costs makes recommendations of a daily benefit amount more accurate. Other benefits, such as home health care, usually are sold as a percentage (up to 100%) of the daily benefit.

Most policies offer daily benefit amounts ranging from about $50 to $300. But few people purchase 100% coverage for the cost of care. Instead they choose to supplement policy payouts with their existing income to keep premiums lower. After all, the higher the daily benefit, the greater the premium will be.

Here's a look at some standard benefit options:

Nursing home care-This benefit reimburses either actual charges up to the daily benefit amount purchased or a set dollar amount per day (the indemnity approach). Policies often include coverage for the charges required to hold space in a nursing facility when someone is temporarily hospitalized. This bed reservation benefit is usually limited to a set number of days per calendar year.

Home health care-This benefit encompasses personal and professional home care services. Coverage is usually based on a percentage of the nursing home daily benefit selected, ranging from 50% to 100%. Again, the higher the percentage, the more the premium will cost.

Single people who don't have a network of family and friends to rely on may find that in-home care isn't a viable option, especially if it's required for a long period of time. One reason is safety: It's not a good idea for someone who can't perform activities of daily living or who is cognitively impaired to be on his own. And, for most people, 24-hour-a-day home health care may be too expensive, even with insurance.

However, some wealthy clients may be able to afford around-the-clock home care. For them, 100% coverage makes perfect sense.

Married couples also should choose 100% of the maximum daily benefit available for home health care. The primary reason for this is to ensure the availability of quality long-term care in the home for one another.

There are other reasons, too. In many cases, the health of a spouse who becomes the sole provider of 24-hour care can deteriorate more quickly than the spouse receiving the care. This is mainly due to the increased physical and emotional stress. Also, spouses may be too old or frail to provide adequate care 24 hours a day.

Community care-This benefit pays for community-based care, such as adult day care. Coverage is usually equal to the amount of the home health care benefit.

Alternate living facility-This benefit provides coverage for the cost of care provided in places like assisted living facilities, Alzheimer's care facilities and community-based residential facilities. According to Kiplinger's Retirement Report, most alternate living facilities typically run about 65% of the cost of nursing facilities. Therefore, it's important to have coverage equal to at least 65% of the nursing home daily benefit.

Respite care-This benefit is designed to provide temporary relief for a caregiver. It includes, but isn't limited to, short-term placements in adult foster care, nursing facilities or rest homes. Coverage usually is based on a maximum number of days per calendar year and generally equals the amount of the home health care benefit.

Inflation protection-Since long-term care is a future benefit, it's likely that the actual cost of care will be more expensive than it is today. To compensate for the difference, companies offer several ways to increase benefits over time. The following shows some of the options available and the pros and cons of each:

Elimination periods-The elimination period is the amount of time that expenses will be paid by an individual before a policy pays benefits. It's similar to a deductible. Normally, elimination periods are based on 30, 60, 90 or 180 days.

For example, a person could decide to pay long-term care expenses out-of-pocket for 90 days before coverage begins. There are two things to keep in mind about the elimination period:

The shorter the elimination period, the higher the premium.

There are potential tax consequences. Although the majority of policies are written to provide nontaxable benefits, a doctor must certify that care was provided for at least 90 days for the tax-free status to apply to payouts.

Long-term care policies should also include provisions for:

Waiver of premium-With this provision, premium charges are dropped during claim periods.

Benefit periods-Most people purchase lifetime benefits, but contracts can be written for three-, six- and 10-year coverage.

Guaranteed renewable-The policy is guaranteed to stay in force as long as the premiums are paid. It can never be cancelled for any reason other than nonpayment. However, premiums may be changed on a class basis, but only with the approval of the state insurance department.

Spousal discount-Usually a percentage of the premium is discounted for both policies when a husband and wife purchase coverage.

Average LTC insurance premiums range from $1,500 per year to $2,305 for someone 65 years old, according to the Health Insurance Association of America. However, not all policies fall within this average. In reality, the price usually depends on four factors:

Where an individual lives: There are high-and low- cost areas in various parts of the country.

Age: The younger a person is, the less expensive the policy will be.

Health: Since underwriting is involved, the healthier a person is, the less the cost will be.

Benefits: Premiums vary based on the options selected and the amount purchased.

Although contract provisions and premium costs vary by state, the differences tend to be minor in most cases. Some may require contract mandates either in language or benefits, but, overall, the states are more similar than dissimilar in their approach to LTC insurance products.

While we've looked at many of the bells and whistles featured in LTC insurance the number one consideration should be the financial strength and health of the company providing coverage and its ability to provide benefits and services years from now. No matter what type of insurance, a policy is only as good as the company behind it. Over time, this offers by far the strongest degree of protection.

Carol J. Flemma is director of long-term care marketing for Northwestern Mutual Life, Milwaukee, Wis. She is responsible for developing marketing material and training support for the insurer's LTC insurance products. Her address: 720 E. Wisconsin Ave., Milwaukee, WI 53202.

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