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