Response to "To Protect and To Save"
SmartMoney Magazine, November 1999

Guest Author, Eileen Tell

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The article entitled - To Protect and To Save - in SmartMoney magazine doesn’t really give a smart or accurate advice about the best ways to meet the unknown future need for long-term care which may befall any of us, or our parents. Basically, the article suggests that most seniors would be better off either self-insuring for the long-term care risk or using funds from a Reverse Annuity Mortgage (RAM). Both these methods, however, presume that the primary objective is to be able to pay for long-term care costs, even if it means  liquidating your assets, including your home, in the process. The article  ignores the overwhelming evidence that most people want to leave an estate, however modest, to their surviving spouse, children or other loved ones. The primary objection to relying on private long-term care insurance is the belief that the policies will not pay benefits when the time comes. Both these premises are flawed and outdated.

*Cost of Private LTC Insurance*
The article gives an example of a  husband age 65 who purchases a long- term care policy paying $85/day without  inflation protection, providing 4 years worth of benefits for an annual premium of $1,500. It goes on to illustrate how inadequate this coverage is for this hypothetical couple since the $85/day isn’t adequate by the time the individual  needs care and since they didn’t buy a policy for the wife who is actually more likely to need care since women live longer. The fact that this hypothetical  individual didn’t purchase a plan that best meets his needs doesn’t illustrate  that long-term care insurance isn’t valuable--it merely illustrates that this hypothetical individual didn’t get good advice on how much and what type of coverage to consider.

There is a great deal of price variation in the marketplace, although less so today than when the market first emerged. Some of the price variation is a result of different coverage types and amounts, so a buyer who wants a more  affordable policy with the flexibility to meet future uncertain needs can certainly find one. There is so much choice about coverage amounts and carriers to buy from that a buyer can literally match almost any price point they might have. Instead of paying $1,500 for coverage for one person that doesn’t keep pace with inflation, the hypothetical couple could have each purchased a policy  paying benefits for 3-years, starting at $85/day and increasing each year to keep pace with inflation. A policy of this type could cost as little as $1,921 or up to $3,971. (This is with 0-day deductible. The 60-day deductible cited in the article would further reduce this cost.) The article also fails to mention the nearly universal practice of providing premium discounts of anywhere from  10% to 50% when two members of a married couple both purchase coverage, making  it even more affordable to both be insured.

*Restrictions on Benefit Eligibility*
The article suggests that it is nearly impossible to receive benefits from a long-term care policy, even if you need long-term care, citing implausible examples and inaccurate statements  about how policies work. In one example, the article suggests that the  individual would need both hands-on help with activities of daily living *and* supervision to qualify for benefits. This is not true -- either a need for hands-on help or for substantial supervision will trigger benefits  under most policies. The article says that, citing one example, the need for home-based nursing care for a chronically bad back would not be covered. This is stated quite emphatically. However, if a ”chronically bad back” meant that you  needed help with 2 or more Activities of Daily Living, then this long-term care need would be covered. The use of loss in Activities of Daily Living or cognitive impairment as a benefit trigger is cited as a drawback of long-term care coverage that is designed to limit when benefits can be accessed despite  the presence of true need. That simply isn’t a true representation. These criteria are used because they are extremely objective and reliable measures of when someone needs long-term care. These criteria have been reliably used by gerontologists for over 20 years to measure the need for long-term care in a fair, consistent and objective manner. They are chosen as a criteria for long-term care insurance payment because of their objectivity and reliability.

*Will They Need Help?*
The article includes a quiz designed to assess how likely you or your parents are to need long-term care and whether or not it makes sense to seek out private coverage. While some aspects of the quiz  have some validity, e.g., that women are more likely to need long-term care than  men and that the risk of needing care increases with age the rest of the questionnaire will serve only to seriously confuse the issue. The quiz suggests that today’s profile predicts tomorrow’s risk. Life would be simpler if  it worked that way, but it doesn’t. While you may be healthy today, with none of  the ”early warning signs” of needing long-term care, and while today you may  have a spouse and other family supports who could provide care, that situation  can (and will) change. Most people don’t need long-term care until they are older, so their social and health situation today doesn’t predict what  resources (financial, social or otherwise) they will have to draw upon when they do need long-term care. The nature of a ”risk” is something that is of an  uncertain magnitude and timing. Getting a high score on this ”quiz” doesn’t tell you with any more certainty whether you will need long-term care and, if you do, how much it will cost, how long you’ll need it for, and what your personal situation will be at the time you need it. And getting a ”low” score doesn’t assure you that you won’t need long-term care or that, if you do need care, you will have the personal or financial resources to handle that need on your own.

Finally, the ”quiz” makes several very misdirected recommendations. One is that, if you score a 40 or higher, indicating that you currently need long-term care or that your chances of needing long-term care are very high, then you  ”might be good candidates for a private long-term care insurance policy.” However, if your high score is due to the fact that you already need care or have been diagnosed with a condition that will shortly require long-term care, you would not be eligible to buy insurance. (The tired but true analogy that you can’t buy fire insurance while the house is burning down is a fact of life of insurance.)

Alternatively, the quiz suggests that if you score fewer than 25 points, you may need only a limited amount of care. The key phrase is ”may”. You may need a  limited amount, or you may need more care than you can afford or more than your  family can provide. The reality is, even after taking the quiz, you don’t know  what the future holds. A low score may give a false sense of security. Someone  who scores low because today they are married, age 55 to 64 and has adult children nearby may face a dramatically different risk in 10-15 years when they  are 65-79, single and their adult children have either moved away or have busy lives with demands which would limit their ability to care for an aging parent.

*Tricky Statistics*
Many of the ”facts” and ”figures” cited in the article are untrue or misleading. These include the statistics on the risk of  needing long-term care and the likelihood that one’s policy will pay for benefits when the time comes.

The statistic cited in the article--that half of all nursing home stays are  less than 90 days--is not true. Overall, only 26% of all persons who enter a nursing home at some point in their life stay less than 90 days. Other statistics cited are also incorrect (that three-quarters of nursing home stays are less than one year and that only 9 percent stay 5 years or more). The data show that, for those who enter a nursing home, 55% stay more than one year and 21% will stay more than 5 years. (The article is correct in pointing one that  women have a higher risk of a long stay than men.) If we exclude from these data  the ”short-stayers” who have primarily an acute need for nursing home care, then  we see that 28% of those who need extended care in a nursing home will stay more than 5 years. Roughly half of those needing extended nursing home care will stay in the facility for between 1 to 5 years.

Source: Kemper, P and Murtaugh, CM. Lifetime Use of Nursing Home Care, New England Journal Of Medicine, Vol. 324 (9), 1991.

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.

*Self-Insurance*
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.