Understanding Long Term Care Insurance
Friday, November 17, 2017 | Leave a comment
Estimated reading time: 78 minute(s)
Understanding Long Term Care Insurance
Thanks for joining me. This is Matthew Jackson with Solid Wealth Advisors and today’s topic is Understanding Long Term Care Insurance. Today I am going to be sharing with you the power point presentation that I have been using for the better part of a decade to help people understand long term care insurance and if it’s even something for them. I want to start by saying that long term care insurance, in my opinion, is probably one the easiest types of insurance to understand regarding how to protect your assets.
There’s a lot of miscommunication out there that long-term care insurance is very difficult to understand and that it is very complicated. Trust me, after spending a half hour with me today you’re going to have the 100% skinny on how you can buy long term care insurance rather than be sold long term care insurance.
Let’s get started! There are a few things that really put our industry on equal playing field when we are talking about carriers. You will see from today’s presentation that really all of the plans are almost exactly the same. There are just a few choices that you’re going to be asked to make decisions on from any of the carriers that are offered out there in the marketplace. What I am sharing with you today, you can use in all 50 states in the United States and it will be applicable to you. Even though, I am located in Colorado you can use this information for your benefit.
Tax Qualified Long-Term Care Insurance
Let’s jump right into it! The first congruency that puts all the carriers on an equal playing field is how you qualify to get paid. Today, I am talking about tax qualified long-term care insurance and that is significant for you because as a tax qualified long-term care insurance plan or policyholder any of the benefits that you would receive from the insurance carrier are non-taxable as income.
This is a big deal for you! It helps you to leverage all of the money that you may receive if you need long-term health care rather than having to pay tax on it and reduce it anywhere from fifteen up to thirty three percent. The government is turning a blind eye to this being a taxable event. The IRS stated, well over a decade ago that they are going to be the entity whom sets the standards for how everybody who has a tax qualified long-term care insurance plan qualifies to receive benefits.
Miscommunications About Long-Term Care Insurance
Before, I review this with you, I want you to think of one of the common miscommunications about long-term care insurance, which is long-term care insurance is too hard to qualify for and that it doesn’t pay. This is simply not true and the reason why is because as I said we are going to review the two qualifications that you would be required to satisfy per the IRS and that’s all you have to do. In the past when I have read articles through consumer reports or some other magazines where people have complained about not receiving their payment or not receiving them on time it’s really because they haven’t certified that they need help with one or two of these qualifications that we are going to talk about.
Having been in the long-term care insurance planning space since 2003. I will tell you that the carriers have paid over ninety-eight and a half percent of all claims that have ever been filed and if you have your stuff in order the average claim turnaround time for many of the carriers is less than 30 days. You just need to remember that you need to play by the rules and the rules are very simple.
How Do You Qualify?
The way that you qualify to get paid and this is in every single corporate brochure is really quite simple. All you need to do is have a licensed health care professional certify that you need help with one of two things for at least 90 days. Your doctor, not the insurance companies, would be certifying this and they would be certifying that he or she feels that you’ll need help for at least 90 days with the following.
Two out of six activities of daily living which would be bathing, eating, dressing, using the restroom, transferring or continence. It’s pretty simple. Anything that requires mobility. The other thing that your physician would be certifying is that they believe that you will need continual supervision within arm’s reach due to Alzheimer’s, dementia, senility, stroke or any other type of cognitive impairment or a spinal cord injury. It’s one or the other. If you need help because of mobility problems or you need help because of a cognitive impairment.
Let’s think about number one first, which is needing help with activities of daily living. I am going to give you a real-life example because a lot of people assume that these policies can only be used if you get old, sick or frail and that is not the case. You can use these plans for accidents, as well as illnesses. I’ll give you a good example. Years ago, I was working with a gentleman who loves to ski in the mountains of Colorado.
He was enjoying a great day. He stopped on one of the catwalks to have a sip of water, enjoy the view and got blindsided by a young person on a snowboard. This horrible accident shattered his femur and broke his hip and he had to have extensive surgeries. His physician felt that even though the surgery would be successful he certified that he thought that this gentleman would need help for at least 90 days with at least two out of six activities of daily living throughout his recovery. When his physician did that he was able to file a claim and his long-term care policy paid for his home healthcare aide while he was recovering.
Myth number one that we are dispelling today, is that you can only use long-term care insurance for when you get old, sick or frail. Number two is that long-term care policies are a use it or lose it plan and that you can only use the plan once in your entire lifetime. Now you know that’s not the truth. You can turn these plans on or off again throughout your entire lifetime and remember it’s your physician certifying that you need help and not the insurance companies. I hope that I have done a good job explaining this because it’s really that simple and what I just shared with you is in every single corporate brochure that you will look at.
What Services Are Covered?
The second thing that is congruent with long-term care insurance is what services are covered. All the carriers out there, as a standard feature, cover home health care, adult day care, assisted living care, nursing care, hospice care, and even respite care. I don’t know about you, but I can’t think of anywhere else that you could go in order to receive long-term health care and here’s the really great thing, you are in control. You and your physician get to decide where you would like to be when you receive your care. 
The carriers cannot tell you that you have to go to a facility. They cannot tell you that you have to go to assisted living care facility or even receive home health care and quite frankly the carriers do not care and I’ll tell you why in just a moment. It’s simple to understand. You get to choose where you receive your care and it covers pretty much anywhere under the sun.
Long-Term Care Insurance Premiums
The next thing that is congruent with all the carriers is your long-term care insurance premiums. Long-term care insurance premiums in our industry typically remain the same or level, as we say in our industry, while the value of your policy grows over time. Now, I’ll tell you the truth, which is there is not one single carrier in our industry that has a squeaky-clean track record of never having rate increases and quite honestly, I cannot think of and I am sure you can’t think of any item, good or services that hasn’t gone up in price over time. It’s interesting to me how this industry and these plans got this kind connotation that when you buy a long-term care insurance policy that the prices will never increase. That doesn’t happen with our auto insurance, our health insurance or our homeowner’s insurance and it is the same way with long-term care insurance.
It is important for you to understand that the carrier’s try as hard as they possible can to keep the rates as stable as possible because they know there’s a small competition for business in this space meaning there’s not a lot of carriers to choose from. The pricing is very close with all the carriers and they do not want to hinder their ability to attract new clients. The carriers try to keep their rates as stable as possible. I will tell you that if you are a policyholder you should bank on a rate increase every 7 to 10 years. It may happen sooner, but this is sort of a general rule, that I share with my clients and I have helped hundreds and hundreds of people with their long-term care insurance plans. I hope this makes sense. There is no guarantees, but the carriers do a really good job at trying to keep the premiums as stable as possible. This is a very good reason to pay attention as I continue to go forward and how to design a plan that avoids over insuring you and gives you the right dosage per your specific goals and needs.
Long-Term Care Insurance Plan Design
The next thing that is congruent with all the carriers is how you design a policy for you and your family. This is super simple, the carriers are going to ask you four things to choose from.
- What type of policy do want?How much in benefits do you want to receive, on a monthly-basis?
- How long do you want to receive benefits, which is measured in years?
- Do you want to protect your policy against inflation?
Protecting your policy against inflation is a no-brainer. You need to do it and you will understand why in just a minute.
Long-Term Care Policy Options
Individual Long–Term Care Insurance Plan
You can either purchase an individual or shared long-term care insurance policy. The difference is husband and wife, same-sex couple or common-law married people can choose to have a shared plan. Here is the analogy that I am going to give you, if my wife and I were riding horses in the mountains of Colorado and the horse that I am on get nervous while crossing the creek and I get bucked off, fall in the creek, and break my back and now I need long-term health care. My policy with benefits would pay for my care, but if I outlast the benefits inside my policy, meaning I’ve exhausted all the benefits that are due to me under my contract, but I still need care. With an individual plan, I have no choice, but to try and qualify for Medicaid or spend my own money, which is not the greatest position to be in with my family.
Shared Long-Term Care Insurance Plan
However, if I had a long-term care shared plan and I fall off the back of a horse, laying in the river with a broken back and now I need long-term care and I have exhausted all of the benefits my policy allows, but I still require care, my wife can gift the policy benefits out of her policy to me. In effect doubling my coverage, which brings up the question, what will you wife do? Trust me if you were receiving seven, eight, nine or even ten thousand dollars a month in long-term care insurance benefits, she would understand the benefits of buying another policy, if she can, to protect herself even more.
Here is the other scenario that you need to be aware of, this works in death, as well. We are riding in the back country of Colorado on horses, you fall off the horse and break your back or your neck and you die right there on the spot. With an individual policy, your policy would simple go away and your spouse can continue to carry her policy and she is only responsible to pay her premiums. With a shared plan the benefits are much better because if you pre-decrease your spouse all of the policy benefits are now gifted to your spouse, in effect doubling her coverage and you still only have to pay one premium, not both. To be honest, ever single couple that I have worked with since 2003 have a shared long-term care policy and you need to have one as well, if you are in a relationship.
How Much Coverage Should You Get?
The next thing that the long-term care insurance carriers are going to ask you choose is how much do you want to get paid on a monthly basis and your choices are, you can receive as little as fifteen hundred dollars per month, all the way up to fifteen thousand dollars per month. 
This is where people go completely wrong and they have no idea where to start or what type of benefit to choose for their situation. I have a really unique strategy to help you understand how to make those choices and that is to utilize the idea of co-insurance. If the actual cost in your area is seven thousand dollars per month for a private room in a nursing care facility, which that number is about average nationwide. You want to make sure that you research what the costs are in your area, so that you can plan appropriately. Here is an example, if you live in New York City and you plan on retiring in Mississippi the cost for long-term care are completely different. If, you are in New York City the cost for care could be over three hundred and thirty dollars per day. If, you are in Mississippi the cost for care could be one hundred twenty dollars per day. If you plan on moving or living somewhere else in retirement you want to try and plan your long-term care insurance plan for the needs of where you will probably be living.
Co-Insurance, Is It A Good Option?
Let’s go back and talk about the idea of utilizing co-insurance. Let’s say your long-term care costs $7000 per month. I am not the type of person that recommends to anyone, even my wealthy clients who could afford to self-insure, to do this out of their own pocket. I advise them to NOT to fully insure this plan, it’s very expensive and it doesn’t make sense. However, maybe it makes more sense for you to have a plan that cover 90% of the cost or maybe even less. If, we were to look at that the scenario, your policy would pay 90% or sixty-three hundred dollars and you would be responsible for the difference that month of seven hundred dollars, which would be your out of pocket expense. Most people that are considering long-term health care insurance can afford to utilize that type of co-insurance, but let’s roll it out a little bit more.
You can also have a plan that pays 80% or 70% or even 50% of what the cost is for long-term care in your area. I’ll give you quick exercise on what I like to invite my clients to think about when we are designing how much coverage is appropriate for them and that is to talk about their ideas, as far as legacy planning for the future. For me and my clients, long-term care insurance is nothing more than an asset, a protection play. They want to protect their assets against the high cost of long-term health care or they want to protect their family members from being the person responsible for providing the care.
Let’s talk about that scenario. I love my parents. I will help them if they need long-term health care, but personally I do not want to be the one that has to change their clothes, take them to the restroom, and do those types of personal things. I would feel much more comfortable, if I could pay somebody to do those private things and I know that my parents would like to have their dignity intact, not relying on me to do these things. Once, my parents were started for the day and had their personal chores done, such as bathing, dressing, using the restroom, and those types of things, I would be more than happy to take it from there. I am sure you probably feel the same way.
Legacy Planning
Let’s talk about legacy planning. I have found though interviewing many people that they are two types of people that are out there who are considering long-term health care insurance and they are very similar in one way, but very different in another. The way that they are similar is that they have worked hard throughout their adult life and they do not want to do without in their retirement and they have a significant desire to pass assets beyond, for a healthy spouse, children, grandchildren, favorite charity or religious organization. Many of these people already have defined contribution plans already in place for charity. If you are that type of person, you need to be considering long-term health care insurance and maybe you want more coverage between 70 and 90 percent worth of protection because that the best way to protect the most assets. If you have a significant desire to pass a legacy on for your family, you probably want to have this type of coverage.
If, you are the second type of person who has worked hard in their adult life they don’t want to do without in retirement. You may not have a significant desire to pass assets beyond to a healthy spouse, children, grandchildren, favorite church or religious organization and you are just looking at long-term health care insurance to make sure that that you are not a recipient of Medicaid. You want to maintain your freedom of choice and ensure that you have assets, so you can get the best quality of care possible. Then you might want a plan that pays 50% of the cost or up to 70% of the cost. Don’t be afraid to look at the policies like these, they cover everything and that’s probably the number one way that you are going to save money on your long-term care insurance premium.
Unfortunately, I have had person after person in my office over the years that have brought in quotes either from a captive agent or somebody who isn’t a specialist in the long-term care insurance space and the premiums are ridiculously expensive because they don’t understand the value of co-insuring in order to reduce premiums to an acceptable level. Remember affordability is key because you are going to carry these policies throughout your entire lifetime, until you need them.
Benefit Period
The next thing that carriers are going to ask you to choose from is what’s called your benefit period and that is measured in years at a minimum, not a maximum. Hang with me for a little bit because this will make sense in just second. Your choices to receive those monthly payments are measured in years. You can choose to receive those payments for a minimum of one year, all the way up to ten years. My advice to you is, since we do not have a crystal ball and we can’t see what is in our future, let’s play the odds. 
It is the smartest thing to do. When we look at men and woman there’s a slight difference in care expectations, as far as how long you might need care. When men need care, on average they need care for just about three years. When woman need care they generally need help for just about five years.
I personally don’t feel like there’s any reason to have a policy that pays more than seven years for a couple of very good reasons. One, the Society of Actuaries and the claims departments of the carriers know that you have a 2% chance of needing long-term health care services beyond seven years and those people are typically people with Alzheimer’s or people with a spinal cord injury. The other reason I would not recommend you having a plan beyond five years is because of the Medicaid spend down rules. Medicaid spend down rules require us, as Americans, trying to qualify for Medicaid, to submit the last five years of financial records because what they are looking for is that you have two thousand dollars or less of personal liquid assets, five hundred thousand dollars or less of home equity.
If, you have anything more than that as an individual, you will be required to spend all the liquid assets down to a two thousand dollars base, to try and qualify for Medicaid. If, you are found that you are trying to gift assets away to try and look impoverished on paper, they are most likely going to find it and they will exclude you from qualifying for Medicaid for the time-period that the money that you were trying to gift away, would have paid for your care. It is important to understand Medicaid rules because if we have a five-year look-back period and you have five-years worth of coverage.
That would give you, if you are working with an experienced and knowledgeable professional and attorney the ability to gift your assets away legally and still protect them against Medicaid spend down.
Let’s roll it out one more step further. For people that are married or in a same-sex or commonwealth partnership and you have a shared plan. I recommend, that you each of you have three-years worth of coverage, for a total of six years, that you both would share. If one person dies without needing care the surviving spouse will have a minimum of six-years worth of coverage that they could use, thereby making it much more reasonable that they could gift assets, if you need to and you can roll out the other experiences or situations beyond that.
My job as a long-term care insurance professional is to utilize all of the tax laws that are available and all the laws regarding Medicaid to make the most robust, but affordable plan the client, as possible. If, you are in a married or partnership situation, I suggest that you get a shared plan with three years of coverage each, for a minimum of six years of coverage. If, you’re an individual, I suggest that you have plan that has three to five years worth of coverage.
How Are Benefit Years Measured?
Why do I keep saying measured in years at a minimum? Stick with me here because this is probably one of the most important things that I will share with you through this whole article.
What I mean when I talk about years measured as a minimum, is what you are actually purchasing with a long-term care insurance plan is the ability to access cash. The way that it is determined how much cash is available to you inside of your policy is just a function of how much money you want to get paid on a monthly basis and how long you want to get paid that money. Here is a quick example and that is we take your monthly benefit amount and times it by 12 months and then times that by your benefit period and that is the value of your policy.
How To Calculate Your Policy Value
(MBA x 12 months) x Benefit Period = Policy Value
Example
($5500 x 12 months) x 6 years = $396,000
So, in this example, if you had a policy that paid $5500 a month for 12 months and a six year benefit period, your initial policy limit would be three hundred and ninety-six thousand dollars. This means that you have three hundred and ninety-six thousand dollars, as a firewall between the long-term care insurance facility or provider and your personal liquid assets.
The reason why I keep saying that these policies last a minimum is because when we look at the bucket of money available to you, it’s quite likely that this money would last longer than six years. I’ll give you a real-life, quick example. Most people, if they need long-term healthcare services would rather receive those services in the comfort of their own home, rather than going to a facility. The care event for home healthcare and I will speak about Colorado, where I live. The average cost for care is about twenty-two dollars an hour. If, I was hiring someone to come into the home for two hours in the morning and two hours in the evening to do personal care such as, using the restroom, helping you shower, changing your clothes, I would only need four hours of care that day. Over the course thirty days we are talking about one hundred and twenty hours worth of home healthcare at twenty-two dollars and hour, you would spend around $2600 dollars.
Your long-term healthcare policy would reimburse you for the $2600 dollars, but what if your policy paid a maximum $5500 dollars per month? As a reimbursement, your plan would pay you the $2600 dollars for expenses that you incurred and the difference between the $2600 dollars and the $5500 dollars would remain in your benefits pool. Thereby, extending how long your cove rage would last. Remember, the physicians cannot tell you where you have to go to receive care, you have the freedom of choice.
The insurance carriers cannot tell you where you have to go and therefore you can have some discernment on how you spend your money. So, if you’re frugal you can make your coverage last, in this example, seven, eight or even nine years depending on the type of care that you need. Remember it’s not use it or lose it and you can turn it on and off again throughout your entire lifetime.
Partnership Plans
Now, I want to spend a moment on partnership plans. You need to make sure that you verify in your state, which plans are partnership plan eligible and here is what a partnership plan does. Medicaid asset protection is a means of protecting a portion of your assets that you would otherwise have to utilize or spend down, in order to determine eligibility for Medicaid benefits that continue to pay for your long-term healthcare. A partnership qualified policy enables policyholders to protect one dollar of personal assets for every dollar in the policy pays out in benefits. The amount of individual’s Medicaid asset protection is equal to the sum of all benefits paid under the partnership qualified policy when he or she seeks to qualify for Medicaid.
Let me put it into plan English for you. Here is a real-life example, if you have received three hundred and ninety-six thousand dollars over the course of six years, in the example that we are talking about, 
you will be able to shield the same amount of personal liquid assets for Medicaid spend down or Medicaid clawback rules and still qualify for Medicaid assistance rather than spending your own assets down. In this example, if you receive three hundred and ninety-six thousand dollars in insurance benefits you may be able to qualify for Medicaid and retain three hundred and ninety-six thousand dollars of personal liquid assets and still be Medicaid eligible.
That is a big deal because if you are trying to protect assets for the benefit of a healthy surviving spouse or people that you want to leave money to, as a legacy and it helps us to avoid over insuring. This partnership protection really has been the genesis of a lot of my wealthy client that can afford to self-insure this problem on their own to utilize a long-term care insurance plan.
What Plan Is Right For Me?
Let’s spend a few more minutes on something that is very important and it’s probably something that you all are wondering, which is how do I know that a long-term care insurance plan is right for me. You have a couple of different options. You can pay for long-term care out of your own pocket or you can transfer the risk to an insurance company, which I know seems very basic for me to say, but I’ll share it with you this way. Many of my clients can afford to self-insure a three or four hundred thousand dollar problem on their own, but many choose not to.
Here’s how we know, if you don’t own health insurance or have Medicare, you are not the person who wants to spend four hundred thousand dollars on a health event. If, your financial advisor and I am a financial advisor, as well, is telling you that you can self-insure this problem on your own. Shame on them because they probably do not know or maybe they have not asked you what you’re intentions are in regards to legacy planning. Maybe, they haven’t asked you if you want to buy that dream property and you had earmarked your money for that. Maybe, they want to keep your money inside of the stock market, so that they can keep earning their commissions. Self-insuring against this problem, to me, is very risky.
Here’s why. When I started in this industry back in 2003, the U.S. General Accounting office thought that we, as Americans, had a 40% chance of needing long-term healthcare service after age sixty-five. Do you know what has changed? It is 2017, and the U.S. General Accounting office is saying that they believe when you turn age sixty-five in the United States of American, that you have better than a 70% chance of needing some type of long-term healthcare services, at some point during the rest of your life.
Should You Risk It?
I know that none of us ever think that we will ever need long-term healthcare, but let me tell you, if you are wrong and you self-insure the penalty can be hundreds and hundreds of thousands of dollars. On the other side of the coin, if you buy a long-term care insurance policy and your wrong and you never need a long-term healthcare, it can be tens of thousands of dollars that you paid in premiums. You paid for piece of mind. What I recommend to my private clients, that I do retirement planning for, is pay for your long-term care insurance with interest on savings. So, if you are reinvesting your money into your brokerage account, simply peel off a little bit of that interest and let the interest that you are earning on your biggest asset, your retirement accounts pay for the one wrapper that is going to protect this whole thing for yourself.
Let’s face it, you haven’t done without for thirty or forty years working, eating peanut butter and jelly sandwiches at lunch, instead of going out to eat every day. Maybe, putting off buying that new car every five or ten years to save money for your retirement, only to undo it because you failed to make the proper decision and you let the odds get stacked against you. Good food for thought!
I hope that I did a good job of explaining to you the basics of long-term care health insurance and you have a great understanding of how tax qualified long-term care health insurance works. If, you need some help you can contact me with any questions at matt@solidwealthadvisors.com. I do recommend, that you work with an independent broker that can shop these premiums for you because these premiums are age and health rated. Even though, the coverage’s are exactly the same from carrier to carrier the premiums do vary and you could save yourself tens of thousands of dollars over the life of your contact, just by shopping with an independent advisor.
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