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What features do you need and how do
they affect costs?
- Benefit rate.
The choice of benefit level will be major factor in cost. A good
rule of thumb is to select a daily benefit at least as high as
the current usual cost of nursing home care in your area; $100
a day is a common benefit amount and it may not be adequate. You
will have some income to offset costs, but there will also be
costs of care in addition to what is included in the basic rate.
- Term
of Coverage. 90% of nursing home
residents between 65 and 95 will stay
in a facility less than four years;
the average stay is a little over two.
Very few will experience stays of five
years of more. Alabama Medicaid allows
those with long term coverage for at
least three years to shield resources
in an amount equal to that paid for
care by insurance and still qualify
for public assistance. Lifetime coverage
may be expensive.
- Type of care covered and
at what rate. You should probably get a policy that will
cover assisted living facility as well as nursing home care. There
may be restrictions on qualifying assisted living facilities and
the benefit may be less, although some assisted living facilities,
including those with dementia units, are nearly as expensive as
nursing homes. There will certainly be restrictions on covered
home care. Care at home is likely to cost more and the policy
will pay less, probably much less than would be needed for twenty-four
hour care or even waking-hours care. Many polices pay half the
daily benefit rate for home care; some will not allow family care,
others allow it but reimburse at half of the reduced daily benefit.
If the rate is $100 a day the resulting $50 home rate would pay
for an aide for four or five hours; a family member, if permissible,
might make $25 for the same period, or less than minimum wage.
The policy may require that home care be provided by a home health
agency, the most expensive source. Most of us would prefer to
be cared for at home but few people realize how expensive and
difficult it is.
Pool of money option.
A few companies offer this option. You
choose the benefit rate, type and length
of coverage; for example, comprehensive
coverage (including home care) of $100
a day for four years. You can use the
$146,000 maximum that the policy would
pay for any care you choose, but the
amount you use for one type of care
is deducted from the pool left for other
types. There would probably still be
restrictions on who could provide the
care, but it is possible this option
would provide greater flexibility.
- Inflation
coverage. This is expensive but
vital. The rate of increase in costs
of nursing home care has far exceeded
the rate of inflation in general and
that seems likely to continue. Over
the last ten years the average cost
of a semi-private nursing home bed nationwide
has been about 8% per year; in Alabama
the cost increased at about 10% per
year over the past eight years; it has
more than doubled in less than a decade.
Some insurance salesmen do not like to talk about inflation coverage
because it can increase premiums by 70%. Without inflation protection,
however, there is almost no point in buying a policy. If nursing
home costs continue to increase at the same rate, in eight more
years the bed that costs $100 a day today will cost $234 a day;
in 16 years, when our 65-year-old policy-holder needs it, that
bed will cost $455 a day. The original $100 a day/ $3,000 per
month benefit will cover less than a fourth of the $13,650 a month
nursing home bill.
The best inflation protection offered
is 5% per year, compounded. It will
probably not cover the whole need but
it is the most realistic protection
available. It may increase the basic
premium by as much as 70%. Insurance
salespersons may offer other options
that sound good but are poor choices.
An agent may suggest buying a higher
daily benefit to begin with; say, $150
a day instead of $100. But without some
other provision, that $150 will still
be in place 15 years later when a bed
costs $455.
Another suggestion may be an option
to periodically increase coverage. The
early years’ premiums are less
this way than they would be with inflation
protection. But premiums increase with
age, so the costs of increasing the
daily benefits in later years will therefore
be much higher. Ultimately you will
be paying far more for a benefit comparable
to what you would have had with a reasonable
daily benefit plus good inflation protection
at the outset.
Another option is to buy inflation coverage
at 5% a year but not compounded. That
is, a 5% increase is added to the original
benefit each year, rather than to the
previous year’s benefit. That might
be enough if the insured is, say, 75,
and may need benefits in a relatively
short period. It is almost surely inadequate
if the buyer is only 65 or less. Get
exact figures for the difference between
simple and compound inflation protection.
A premium difference of $300 a year
($4,500 over 15 years) is insignificant
in the face of a possible $9,000 monthly
increase in nursing home costs.
- When
coverage begins. All long term
insurance has a deductible or elimination
period; that is the initial waiting
period for coverage to kick in. This
can be as little as 20 days or as much
as 100 days. The shorter the waiting
period the higher the premium, but remember
that you will have to pay for your care
during that period; consider whether
you will be able to pay for your care
for 60, 90 or 100 days at future high
rates. If not, the higher premium for
a 20 or 30 day waiting period may be
well worth it. Tax-qualified policies
have 90-day elimination periods.
If you opt for a longer waiting period,
consider a Medigap supplemental policy
that will cover the co-pay for the 21st
through 100th day in a nursing home.
If the cost is not much higher than
a less comprehensive supplemental policy
it may be a good gamble, although most
people do not go to nursing homes from
a hospital but from home.
- What
triggers benefits? Determining
what is required to qualify for coverage
is one of the thorniest aspects of comparing
policies. Generally, to determine if
you are sufficiently disabled to need
long term care, the policy measures
your inability to perform one of the
activities of daily living (“ADLs”).
These are eating, walking, transferring
from bed to chair, dressing, bathing,
toileting and remaining continent.
The longer the list of activities included
as “ADLs” and the fewer you
must fail, the easier it is to qualify
for coverage. Some policies require
that you be unable to perform three
of the seven named above. Others cut
the list to five or six and require
that you be unable to perform two or
three. It is important that bathing
be included in the list of ADLs, as
that is the usually the first thing
a frail elderly person needs help with.
It can be important how “inability
to perform” is measured; does inability
to eat mean needing someone to supervise,
or being actively fed by someone else?
Another way to qualify is to be cognitively
impaired, as with late stage Alzheimer‘s
or other dementia. With non-tax-qualified
plans, still another way to qualify
is through medical necessity, such as
having congestive heart failure or some
other condition that makes you too frail
to care for yourself even though you
might be able to perform most of the
ADLs.
- Tax-qualified policies.
With much lobbying by the insurance industry, Congress
recently passed provisions allowing some tax deductions for certain
kinds of policies. The cost of premiums may be deducted on your
income tax return, but only if your total medical costs exceed
7.5% of your income. If you are healthy enough to qualify for
coverage and affluent enough to pay for it, you probably will
not have that many medical expenses. The deductions are also limited;
very limited in the early years when you would most welcome them.
(There has been some talk of changing the deduction rules.)
The real benefit to tax qualified policies
is that benefits are not taxed. What
is not clear is whether benefits from
non-qualified policies would be offset
by medical expenses. Other health insurance
benefits are not treated and taxed as
ordinary income, and it would seem inconsistent
for the IRS to take the position that
long term benefits, used to pay for
medical care, would be.
But the IRS has thus far not given a
definitive answer on this. Unfortunately,
“tax-qualified” policies include
some provisions that are likely to make
it harder for the insured to collect.
The company may choose any of six ADLs,
for instance; and bathing may be the
one left out. There are other restrictions;
a licensed professional must certify
that you have been unable to perform
at least two of six ADLs. In order to
qualify as cognitively impaired you
must require “substantial supervision”,
which may be defined in different ways.
It is not possible to qualify because
of “medical necessity” as
is possible with a non-tax-qualified
policy. And there is a 90-day exclusion
or waiting period.
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