Response to "To Protect and To Save"
Length of Stay for all Nursing Home Users Age 65+
|Stay < 3 months||(M) 33%||(F) 23%||(All) 26%|
|Stay 3-12 months||(M) 23%||(F) 17%||(All) 19%|
|Stay 1-5 years||(M) 31%||(F) 35%||(All) 34%|
|Stay >5 years||(M) 13%||(F) 25%||(All) 21%|
Source: Kemper, P and Murtaugh, CM. Lifetime Use of Nursing Home Care, New England Journal Of Medicine, Vol. 324 (9), 1991.
Length of Stay for Extended Nursing Home Care Users
(Entrants staying >3 months)
|Length of Stay||Percent of Patients|
Source: Long Term Care Group, Inc., based on Kemper as cited above.
Long-term care insurance is designed to pay for the small but catastrophic risk of needing extended nursing home care. While only 9% of all seniors will both enter a nursing home *and* stay more than 5 years, the costs they face exceed $200,000, based on an average cost of $40,000 for a year in a nursing home. Nearly one-fourth of all seniors face a financial risk of $40,000 to $200,000 or more.
Clearly, if you are among the ”one-in-ten” seniors who has an extended nursing home stay, you would wish you had coverage for this risk to preserve your assets for your spouse or other loved ones and/or to enable you to purchase the type and amount of care that best meets your needs. However, if you are among the 57% of seniors that do not end up needing nursing home care, then you’ll be better off financially without having bought insurance. But there is no way of knowing in advance which person you will be that is the uncertainty for which insurance is designed. It’s no different than not knowing whether you will experience a fire or flood in your home. Even though the probability of such an event is extremely small, it is still prudent to buy insurance for that rare, but financially catastrophic event. It gives you peace of mind, protects assets and ensures that you will be able to make the choices you want to make should the catastrophic event take place.
These figures also do not address at all the probability of needing care at home and the costs associated with that. Research suggests that the probability of becoming disabled to the point of needing long-term care (in any setting) is 60%. The average duration of disability is about 2.6 years. So the need for costly care at home might take place instead of needing nursing home care, or in addition to the risk of needing nursing home care.
The article cites research that suggests that about 12% to 23% of the population would be rejected for insurance because of their health. Approval rates for long-term care insurance vary widely based on the age of the buying population, how the coverage is being marketed and the underwriting philosophy of the carrier. If readers followed the advice of the article, and didn’t buy long-term care insurance until they scored highly on the ”will you need it” quiz, then it wouldn’t be surprising to see rejection rates in the higher ranges. Like other insurance, it is coverage you buy *before* you need it. If the need for long-term care insurance were widely acknowledged and people bought coverage at younger ages, the approval rates would be much higher. For example, many group plans sold at the workplace to working-age buyers and their spouses experience approval rates of 90% to 100%. While experience still varies, approval rates continue to increase as the purchase age declines and as carriers incorporate better tools which let them better identify appropriate risks and accept more applicants that might previously have been declined.
Finally, the statistics on the low incidence of policies in force that have triggered benefits to date is extremely misleading. No credible source is provided and no explanation of methodology is given. The article trivializes an important point--that the industry is young and it is appropriate to see a fairly significant lag time between purchase and claim. While not a credit to the industry, many of the earliest policies sold did have serious limitations and restrictions. This also plays into effect, although, fortunately, these limited provisions have been abolished and carriers today are selling truly meaningful benefits. The claim that high lapse rates are to blame for the low claims incidence to date is also unfounded and inflammatory. Again, no cite is given for the data provided on policies lapsed between 1990 and 1997. It is also highly exaggerated to say that all these lapses are due to either ”failure to pay the high premium” or the death of the policyholder. Policies can lapse voluntarily because the insured has found a more desirable policy, they may have upgraded coverage within the same insurer (which is often recorded as a lapse of one policy and a purchase of another), or they may have voluntarily terminated coverage for reasons other than affordability. Also, a recent industry study of 31 companies suggests policy termination rates (lapses plus death) for policies issued in 1993-1996 of about 3-5%. For policies issued prior to 1989, the termination rates were still on the low side about 4 to 9%.
*Reverse Annuity Mortgage (RAM)*
The article proposes using RAMs as a better vehicle for financing long-term care needs. While there was some enthusiasm early on for this approach, it has never been popular with seniors. The strong desire to maintain and pass on one’s family home as part of an estate is probably one factor. Another problem with Rams are the lending limits which seem woefully inadequate to pay for typical long-term care needs. The one example cited is a $208,800 RAM which pays only $25/ day; that doesn’t go too far when paying for at-home care or nursing home care which can cost on average $55 to $100 per day. The article cites an overall Fannie Mae limit of $240,000. Based on the daily payout in the $208,800 RAM, even this wouldn’t go far in covering long-term care costs.
Finally, the article suggests that whatever long-term care need can’t be met by the RAM, there is always self-insurance. This means simply putting aside a lump sum of money today in the event that it is needed for long-term care tomorrow. That isn’t as easy as it might sound and it doesn’t make good economic sense for many people. First, while some individuals are willing and able to set aside a large sum of money ”just in case” they need it, others don’t have the discipline or the funds to do so. More importantly, many seniors want to preserve the assets they’ve worked a lifetime to accumulate not so that they can use them to pay for long-term care but so that they can pass them on to a surviving spouse or other loved ones. If preserving an estate is not an important objective (and indeed for some it isn’t relevant), then self-insuring for long-term care makes sense if there is enough time and discipline to save sufficient funds prior to when care is needed. But this just doesn’t hold true for many people.
Consider the example in the article of the couple in their mid-60’s with total assets of $800,000. The article suggests that they could put aside $200,000 of those assets (presumably at age 65). It says that, by age 79, they would have saved enough to afford 10 years in an assisted living facility, although no information is provided on the presumed costs of the facility or whether the couple living there has care needs that exceed what the facility can provide.
Instead of putting aside one-quarter of their total assets, this couple could make a much more modest investment in long-term care insurance and gain more protection. If this couple took only a small portion of the annual interest earnings on their $800,000 assets, they could both buy a comprehensive lifetime policy with inflation protection. By age 79, they would have paid total premiums of $56,000 (assuming a cost of $4,000 a year). By ”investing” only a fraction of the interest earned on their assets, they have given themselves complete financial protection from potentially catastrophic long-term care needs. And if one or both of them should need costly care, the entire $800,000 asset is protected and preserved for the surviving spouse or other loved ones.
*Don’t Forget about Medicaid*
The article admits that Medicaid is not ideal, but cites it as a safety net should your long-term care costs outlast your assets. One important fact left out of the statements made about Medicaid is that Medicaid typically pays only for nursing home care and not in all facilities. So one’s freedom to choose the type and location of care is limited.
Eileen J. Tell is Vice President for Product Development with Long Term Care Group Inc. (LTCG), a full-service third-party administrator and outsource partner for long term care insurers. Ms. Tell is responsible for product design, compliance, market trends, competitive and regulatory analysis. She has played a key role in the design and operation of the CalPERS Long Term Care Program, the nation's first self-funded long term care plan with over 130,000 enrollees. She has designed competitively-priced, comprehensive insurance programs for insurers, affinity groups, HMOs, and retirement communities. She also assists insurers in key product implementation areas like marketing and sales, customer service training and support, regulatory and competitive analysis, compliance and market research on long term care needs and preferences in the senior market. Ms. Tell has published articles on a broad range of topics including long term care finance and delivery options, health care cost containment, HMOs, physician practice patters, and end-stage renal disease.
Ms. Tell can be reached at ETELL@LTCG.COM with any questions or comments.