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The following is Phyllis Shelton’s response to Consumer Reports, October 1997 article “How Will You Pay for Your Old Age?”

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Response to “How Will You Pay for Your Old Age?”
(Consumer Reports, October 1997)
by Phyllis Shelton

The most popular topic lately seems to be the infamous Consumer Reports article, “How Will You Pay for Your Old Age?” The good news is that the magazine did grudgingly accord a place for LTC insurance policies — they weren’t simply trashed as in the May 1991 article. In fact, the technical aspects of LTC insurance were fairly well researched. A short script for an immediate response to the article is: “We are very happy that Consumer Reports is now recommending long-term care insurance to certain individuals. However, we believe the magazine did a huge disservice to consumers for the following reasons:

1. The rating criteria mainly recommends policies with the easiest access to benefits, with no regard for the financial strength of the insurance company. Policies with below-market premium and liberal access to benefits offered by insurance companies without strong backing makes rate increases almost a certainty, and that’s if the insurance company stays in business.
2. The article recommends non-tax qualified policies vs. tax-qualified policies. With no clarification from the IRS, it appears strongly that the benefits from nonqualified policies will be taxed as ordinary income, something which few consumers could accept.
3. The magazine portrays insurance agents as doing a poor job after interviewing only 13 agents. (A similar research effort was displayed a few years ago when Consumer Reports stated that consumers do not feel strongly about the taste difference between Coke and Pepsi, based on interviewing 19 consumers!)

“There may be ‘bad apples,’ but there are many, many more wonderful men and women who represent the consumer and the insurance industry with the utmost caring and professionalism.”

Detailed Response:

“We are a comprehensive source for unbiased advice about products and services, personal finance, health and nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.”

By interviewing only 13 agents in 3 states and grading LTC policies on how easy it is to qualify for benefits, Consumer Reports has perpetrated one of the greatest injustices of its 61-year history on its readers. Here is a synopsis of the errors and omissions in the referenced article:

ERROR: The best way to rank LTC products is on the ease of qualifying for benefits. (P. 49 — “Ratings”)
Fact: The best long-term care insurance policy is not the one that pays the quickest. The more liberal the access to benefits, the greater the risk the policy will have premium increases. The new tax-qualified policies pay when you need help with at least two activities of daily living (typically bathing, dressing, continence, toileting, transferring and eating) for at least 90 days, or if you have a cognitive impairment (like Alzheimer's) that makes you a threat to yourself or others.

Non-tax qualified policies, which the article rated the highest, have a more liberal benefit access with one or more of the following:

  • The certification that you will need care at least 90 days is not required;

  • Some pay when you need help with only one ADL, and at least one policy will pay nursing home charges at the policy-holder’s discretion with no benefit trigger at all!

  • Some pay when you can perform all of the ADLs and you have no cognitive impairment — you just have an illness or injury that requires care. This benefit trigger is called “medically necessary,” and some non-qualified policies also apply this trigger to home care as well as to nursing home care.

All of these easier ways to collect benefits sound great in the short-term, but Congress tightened up the access to benefit provisions under the new tax-qualified policies for a great reason: to remind us that long-term care insurance is for long-term conditions, not for short-term events that usually result in a quick recovery. By doing this, Congress is implementing a huge consumer protection effort to ensure that LTC insurance companies do not go out of business or have huge rate increases when the claims become really heavy 10 to 15 years from now.

The article does point out in “A Tax Break” on page 45 that although benefits from tax-qualified policies are not taxable income, the benefits from a non-qualified policy may in fact be taxable — an event not worth the risk to me. I think Congress is very likely to use the tax hammer as a way to make sure long-term care insurance is preserved for long-term conditions, but until we have a definite clarification from the IRS on this issue, I can’t see allowing clients to take the risk of having benefits taxed as ordinary income. (The 1099 that insurance companies are now required to provide to people who receive benefits from all types of LTC policies, including accelerated death benefits and viatical settlements, clearly says that benefits from qualified plans are excluded from income, and “qualified” is in bold on the form.)

ERROR: Financial stability of the insurance company is not that important. (P. 46 — “Recommendations”)
Fact: This is probably the most deadly advice in the entire article. There has never been an insurance product that will be required to pay out as much as long-term care insurance in about 15 to 20 years when the Baby Boomers start filing claims. Consequently, financial stability of the company is more important for long-term care insurance than any other type of insurance. In its absence, we will see companies have rate increases beyond what consumers are able to pay and companies that go out of business altogether. (This activity has already occurred.)

The article erroneously informs the reader that the state guaranty funds will bail them out. A guaranty fund is a pool of money that carriers contribute to in each state as a fall-back for failing companies, but only for policyholders who are already receiving benefits when the company goes under. This fund does not just “take over” coverage with a future promise to pay if and when you file a claim. For the article to say that you can always fall back on the state’s guaranty fund is to ignore several facts:

  • You must be “on claim” when the company fails;

  • There is a benefit maximum;

  • The funds will probably not be large enough to sustain a number of small companies going out of business at the same time — a likely occurrence when claims volume hits the peak years for the Baby Boomers;

  • Many states prohibit insurance agents from even mentioning the guaranty fund because they don’t want it falsely advertised as a comprehensive bailout for failed companies.

One of the worst mistakes a consumer can make with long-term care insurance is to purchase a policy from a company with a high risk for rate increases. The top two companies recommended by this article have ratings lower than A- and assets of less than 200 million dollars. By comparison, many companies have assets in the $30-60 billion dollar range. Ask an insurance agent showing you a policy advertised by a small company if he or she has his or her personal policies, including parents and in-laws, with that company.

This article downplays the impact of potential premium increases and even tells the reader to beware of tax-qualified plans on page 43, “Qualifying for Benefits,” which completely ignores the question, “What good is the policy if it won’t be there when you need it?”

The article misses the point of tax-qualified policies entirely on page 45 by saying in “A Tax Break?” that the purpose of tightening up the access to benefits is to save money for the insurance companies. On the contrary, the money that is saved by only using long-term care insurance benefits for true long-term care conditions of three months or longer ultimately will save money for the policyholders by making sure the money is available to pay claims when they really need long-term care.

The article does show a value index of .80 to 1.25 that shows a propensity for rate increases, and five out of the top ten policies recommended by this article are below .80 and therefore at risk for rate increases, according to Consumer Reports’ own standards.

ERROR: The reason for purchasing LTC insurance is to preserve assets, so people who can set aside $160,000+ at compound interest do not need a policy.
(P. 39 — “Do You Need Insurance?”)
Fact: There are numerous fallacies in this statement.

1. The number one purchasing reason for long-term care insurance according to numerous surveys conducted by the Health Insurance Association of America is to preserve independence and choice, not to preserve assets. (HIAA reports that 1/3 of the purchasers have assets less than $30,000.)
2. The $160,000 was derived from four years of care at $40,000 each. Since the Office of the Actuary tells us the average cost of care was $46,000 in 1995, the $160,000 will not pay for a full four years. And according to this very article in Consumer Reports, the cost of care has increased an average of 9.7 percent between 1985 and 1995. So an average investment return of 10% barely keeps up with the rapidly rising cost of care.
3. A four-year benefit period may not be enough. According to several National Nursing Home Surveys and The New England Journal of Medicine, about 20 percent of nursing home patients in the country on any given day have been there longer than five years! Of course, these nursing home patients are predominately women, but that is very deceptive, because many men are taken care of at home by a spouse or daughter for many years before entering a nursing home. An LTC policy can greatly improve the quality of life for all concerned during these years of care giving.
4. The $160,000 example is only for one person. What if both spouses need it?

ERROR: Wait till age 55 to purchase a long-term care insurance policy, and then only get one between 55 and 65 if you have a serious medical problem. (P. 45 —“Recommendations”)
Fact: Forty percent of Americans needing long-term care today are between the ages of 18 and 64 (Source: GAO, 11/94). Most of these people are not in nursing homes but are at home with their families, often for many, many years of care giving. Cases like Christopher Reeve, paralyzed from the neck down because of a horseback riding accident, are not uncommon. Younger people need long-term care due to automobile and sporting accidents, brain tumors, MS, Muscular Dystrophy; and one-third of the stroke victims each year are younger than 65. (Source: American Health, Jan/Feb ’95)

Anyone age 18+ should seriously consider long-term care insurance. Not only will the person have the coverage in the event of a claim, but also will have a much better chance to get the coverage while in good health, and will also be able to enjoy a lower premium. (My accountant was only 31 when he purchased a policy from me!)

ERROR: Who pays for the care — public or private dollars — has no impact on the quality of care. (P. 47 — “How Agents Spin the Coverage — The Warm-up”)
Fact: The article completely ignores the fact that Medicaid pays less than the private-pay rate, so Medicaid patients represent a financial loss to the LTC provider of care. Some nursing homes (typically the “Taj-Mahal” type) don’t accept Medicaid patients at all, and those that have a high percentage of Medicaid patients just don’t have the funding to provide all of the niceties we might like. And a Medicaid patient doesn’t get a private room — a significant example of how private-pay dollars can make a nursing-home stay more pleasant!

ERROR: The main reason to purchase LTC insurance is preservation of assets. (P. 47 — “How Agents Spin the Coverage — The Warm-up”)
Fact: Absolutely not. One-third of the purchasers have assets of less than $30,000 and list the number one purchasing reason as preserving independence and choice — in other words, to get the same treatment and choices as a private-pay patient.

ERROR: Only 10 percent of nursing home patients stay longer than five years. (P. 42 — “Partnership Policies”
Fact: Several national nursing home surveys and individual state surveys show that about 20 percent of nursing home patients at any given time have been there longer than five years.

Errors on Benefits of LTC Policies. The typical benefit for home care is 50 percent of nursing home care. (P. 40 — “How Big a Benefit”)
Fact: Many policies offer the same coverage for home health care as nursing home care. An eight-hour shift from a home health agency or a licensed professional will cost about the same as a semiprivate day in a nursing home.

Lifetime (unlimited) benefit period is very expensive and not affordable — you only need a four-year benefit period. (P. 42 — “Partnership Policies”)
Fact: Expensive — compared to what? The life span of an Alzheimer’s patient is three to 20 years. Starting with today’s average cost of $45,000 and an inflation rate of 5.8 percent compounded as projected by the General Accounting Office in June 1991, a person needing care for the next 20 years would spent just over $1 million dollars — and wouldn’t be paying premium the whole time because the premium stops when the benefit starts! I think that potential return justifies the extra 35 percent in premium when the consumer can afford it — the approximate cost of an unlimited benefit period.

Again, about 20 percent of nursing home patients have been there more than five years. I’ll bet Consumer Reports won’t step up to the plate and pay the E&O suits that are sure to result if insurance agents systematically inform their clients all they need is a four-year benefit period!

Upgrade old policies to improve benefits. (P. 46 — “Update an Old Policy”)
Fact: The article is completely in the dark on the ruling that a “material change” will cause a policy issued Dec. 31, 1996, and earlier to lose its grandfathered status as a tax-qualified policy. (A material change is an increase or decrease in benefits or even a modal change as of this writing.) Until this provision is changed, a consumer would have to replace the policy with a 1997 tax-qualified policy to achieve the goal of getting better benefits and favorable tax treatment.

Premium waived during a claim (P. 43 — “The Frills: Which Are Useful?”)

No mention is made that this waiver can be used only for nursing home care in most policies; however, many policies waive it for all major types of care — home care, assisted living and adult day care as well as nursing home care.

People who do not have a support structure (i.e. someone to live with) should buy a nursing home only policy. (P. 46 — Recommendations — “Think Care-fully About Coverage for Home Care”)
Fact: People with no support structure are much better off buying a nursing home/ assisted living policy, not just a policy that only pays nursing home. Nursing home beds are almost full nationwide, and there is a moratorium in many states against building any new beds. People with nursing home-only policies may find a few years with no place to use the policies if there are no beds available in their area until the supply along with the availability of LTC insurance funding catches up with demand.

Waiting period (deductible) options begin with 20 days. (P. 42 — “When Do Benefits Begin?”)
Fact: Some policies have a 0-day waiting period, which means first day coverage.

The pool of money concept applies only to comprehensive policies that cover home and community care as well as nursing home care. (P. 41 — “The Pool of Money Option”)
Fact: The pool of money concept just means that any difference between the cost of care and the daily benefit selected remains in the pool and can extend the benefit period you have chosen; therefore, this concept certainly applies to a facility-only policy as well as to a policy that covers home and community care.

The alternate plan of care benefit pays off only when the insurance company and the family both agree. (P. 43 — “When Will the Policy Pay?”)
Fact: The alternate plan of care benefit requires three, not two, parties to agree: the doctor, the insurance company and the family. This benefit is only designed to pay for care that costs less than nursing home care, and the article is right, there’s no guarantee that assisted living will be paid through an alternate plan of care provision, especially as claims for assisted living get longer and more expensive. The best way to cover assisted living is with a defined benefit that is clearly spelled out in the policy.

The elderly should have term life insurance, so there is no cash value to count as an asset when applying for Medicaid (welfare) benefits to pay for long-term care. (P. 39 — “Do You Need Insurance — Total Assets”)
Fact: I can’t resist the urge to comment here. It’s statements like this that tell me clearly how unqualified the magazine is to critique the insurance industry. Less than 1 percent of death claims are paid to term life policyholders because the premiums become absolutely unaffordable at older ages.

Things This Article Is Absolutely Right About. Inflation coverage: (P. 41-42 — “Keeping up with Inflation”)
Comment: After noting that nursing home costs have increased an average of 9.7 percent from 1985-95, the article is very strong on compound inflation coverage. I totally agree with this position, although all of the inflation examples used by the article to justify selling the inflation coverage refer to costs increasing only 5 percent per year. I’ve been starting my younger clients out with about $30 more daily benefit than the cost in my area to compensate for the shortfall of the 5 percent compound inflation rider offered by LTC policies. Hopefully managed care in the LTC arena will slow the rapid rate of growth (which is substantially larger than 10 percent a year for home health care).

Home health care coverage: (P. 44 — “Should You Buy Home-Care Coverage?”)
Comment: People who have no one to live with shouldn’t depend on LTC insurance to provide 24-hour home care — this is why I’m not a fan of home health care only policies. Twenty-four hour home care is much more expensive than a nursing home, and there are situations in which one care giver can’t consistently provide all needed care; e.g. lifting someone who is partially or totally paralyzed may require two people. People without a solid support structure are typically better off using premium dollars to purchase a bigger benefit for an assisted living/ nursing home only policy vs. purchasing home health coverage.

Care coordination should not be linked to the insurance company. (P. 43 — “The Frills: Which Are Useful?”)
Comment: Care coordination that is available through an independent organization not connected to the insurance company or the LTC care provider has the potential to do a better job of keeping the patient’s interests first vs. what’s good for the insurance company or care provider.

Partnership policies are great. (P. 42-43—“Partnership Policies — A Better Way to Protect Assets?”)
Comment: Partnership policies are great. Unfortunately, the article did not recognize that Illinois has opened the door again for new states to implement Partnership plans by making it possible for policyholders to legally transfer the amount of assets protected by the policy while they are alive so that the assets are not in the estate to recover at death.

“Universal insurance (even though desirable) is not on the horizon.” (P. 43 — Partnership Policies”)
Comment: Finally, Consumer Reports admits it! Although universal coverage is still the overall agenda of the Consumers Union, the authors are smart enough to admit it is just not feasible, especially when you consider that we’ve gone from 40 workers for every retiree in 1935 when Social Security was implemented to less than four workers per retiree today. And we already spend 41 cents of every federal income tax dollar on entitlements, mainly Social Security, Medicare and Medicaid. Who is the government?

My Top Ten Criteria for “A Good Policy”

A company that offers:
1) competitive premium — not “below market” rates
2) conservative underwriting
3) conservative access to benefits
4) billions, not millions in assets (smaller companies should have reinsurance)
5) high ratings: at least A- or higher on the A.M. Best scale
6) no rate increases for policies issued in the last 5 years or longer, if at all
7) a high claims payout percentage vs. claims filed
8) benefit enhancements to existing clients
9) thorough underwriting up front vs. quick issues
10) good claims service vs. “lost” and slow claims handling

The long-term care insurance market holds phenomenal promise for consumers to retain dignity and for all of us as taxpayers to avoid exorbitant taxation in the next century, and for insurance agents to earn record incomes.

However, it is very much in the incubator stage. If we do not treat it gently by observing the above criteria, we will kill this wonderful goose, and then nobody wins.

©1999-2000 LTC Consultants, a division of Shelton Marketing Services, Inc.

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