Long-term care insurance is a hedge against uncertainty. While uncertainty means long-term care is a challenge, it is this uncertainty that makes planning for long-term care needs a priority. The key questions that need to be answered are as follows:
1. What is the likelihood that long-term care will be needed, and if so, for how long?
2. How inflation will impact the future daily cost of health care or custodial care?
3. Given the existing financial resources, how effectively will the client be able to absorb the future health care costs?
4. In view of the ongoing and impressive medical advances, how would the client’s life expectancy be extended?
5. What is the client’s mindset concerning the depletion of the estate’s assets?
6. Will there be any family care-givers in the picture?
The following section presents a five-step process for formulating a viable plan, notwithstanding the existence of various problems and uncertainties cited above.
Step 1: Understand Client’s Objectives and Situation. In preparation for quantify- ing long-term care benefits that might be needed, the following factors should be explicitly taken into account: the client’s current physical and mental health status, family physical and mental health history, current and projected future net worth, cash flows during retirement, risk tolerance, and the willingness to preserve or deplete the estate.
Step 2: Projecting the Benefit Needs. Assumptions on which the benefit needs should be projected include the following:
• Projected Per Diem Cost of Care. The average daily cost for nursing home in client’s state, adjusted for the average inflationary growth rate for health insurance, can be used as a starting point for projecting the future per-diem rates.
• Suitable Elimination Period. A longer elimination period produces a lower premium (holding all other factors equal); however, not all clients can absorb the cost of a prolonged waiting period. As a general rule, it is advisable to purchase a policy with the minimum elimination period that the client can afford.
• Length of Benefit Need. One should consider a minimum benefit period of five years, although the client’s inability to fund ongoing premiums for a five-year period might make it necessary to reduce the benefit period.
• Inflationary Pressure on Health Care. Inflation can have a devastating impact on health care needs 20 or 30 years in the future. For example, the inflation rate relating to long-term health care costs has been approximately 8 percent; this rate doubles per diem health care costs every nine years.
Therefore, purchasing a policy with inflation protection is high recommended.
• Home Health Care Coverage. Based on most people’s preference to remain in the family home, it is prudent to buy a policy that covers 100 percent of home health care.
• Client’s Net Worth and Future Cash Flow Situation. The availability of financial resources in the future (especially if held in illiquid form) and the client’s mindset toward eroding the gross estate, are important variables to consider when establishing the need for buying long-term health care.
• Project Longevity. Since females outlive males, it is important to con- sider this fact of life in choosing the need for long-term health care for a male or a female client.
• Existence of Other Health Care Coverage. The planner needs to be aware of the existence of other long-term health care policies owned by the client.
Step 3: Assess the Gap. Based on the collected data and the basic assumptions, the planner can calculate the asset-liability gap. The planner will first determine the annual cost of long-term care in the client’s state of residence. The planner can then subtract from that other available sources of retirement income, such as Social Security and annuity income. The potential gap, if any, can then be filled by purchasing a long-term care policy.
Step 4: Identify Best Insurance Companies. The first filter in finding an attractive long-term care policy is the quality of the insurer. Use the same principles as in
the selection of health care companies applies: financial stability of the com- pany, historical record for paying benefit claims, quality record for customer ser- vice, availability of desired covered services and riders, and competitive pricing.
Another important filter to use is the qualification for tax purposes under the HIPAA rules.
Step 5: Select the Best Viable Policy. Once data have been collected on the insur- ance companies that make the final list, services offered by those companies offering comparable features (such as, the same benefits, durations, elimina- tion period, and riders) can be compared before making the final selection.
The client’s ability to fund ongoing premiums, costs that should be expected to increase over time, is critical. If a policy selected by the planner appears expen- sive, then the planner should manipulate certain benefits to lower the cost.
Included are: the type of care selected, length of the elimination period, amount of daily benefit, duration of the benefits, and the selected riders. On the assump- tion that the client might not be able to use these services over a long period, the planner should select the best benefit package offered for a shorter dura- tion. That is provided the policy comes with an affordable price.
Who Should Buy Long-term Care?
Considering the potential total cost of long-term care and the range of uncon- trollable risk variables, everyone over 50 or 55 should consider buying a long- term care policy. This assumes that the person has the capacity to make ongoing premium payments. Most professionals advise buying such a policy around the age of 60. This is because at earlier ages, say at the age of 40, it is difficult to forecast how much long-term care coverage a person would need in life and what type of care would most likely be needed. Still, waiting for too long (say, age beyond 65) could make the policy cost prohibitive.
The United Seniors Health Council (USHC, now part of National Council on Aging), a nonprofit group, recommends that people buying long-term care insurance should meet a minimum threshold:2
• Own assets of at least $90,000 (excluding home and automobile)
• Have annual retirement income of at least $30,000—$42,000
• Can pay premiums without adversely affecting lifestyle
2 The original numbers generated by USHC survey have been adjusted for inflation for 2007 by the authors.
• Can pay possible premium increases without experiencing financial difficulty.
The reason for the above is that, if a person cannot afford the premium with ease, then, because of financial pressures, eventually the long-term care policy would likely be dropped.