Commom Misconceptions About Long-Term Care Insurance, Part I
by Phyllis Shelton
Many consumer publications are encouraging the purchase of long-term care insurance. The October issue of MONEY magazine ("The Big Squeeze") and Kiplinger's Personal Finance Magazine, ("He Was Such a Neat Guy") offer emotional stories about caregiving. Both articles encourage consumers to plan ahead with long-term care insurance to save their family members much suffering and heartache when they are thrust , oftentimes suddenly, into the role of caregiver. Long-term care insurance provides money for caregiving services, such as daily 8-10 hour home care shifts, adult day care, assisted living and nursing home care, which can dramatically ease the pressure for the family member who becomes a primary caregiver, usually a wife or daughter. Money from long-term care insurance also can mean maximum choice and independence for the policyholder.
In my role as a national trainer of insurance agents who wish to sell long-term care insurance, I am struck by the similarities between misconceptions held by insurance agents and misconceptions held by consumers about long-term care insurance. Of course, when you stop and think about it, it's not all that surprising when you consider that agents with misconceptions may be innocently passing them on to the consumers they serve.
This series of articles will discuss these common misconceptions and what you can do to avoid ingesting erroneous information which will negatively impact your buying decisions when you consider long-term care insurance.
Misconception #1 - “Premiums can't increase.” This point can be misunderstood because the agent may say the premium is level and can't increase due to your age or your health. "The rest of the story", as Paul Harvey says, doesn't get mentioned, and that is that premium can increase by class, which usually means a specific policy in a specific state or states. Standalone long-term care insurance policies can all have rate increases at some point in the future. ("Standalone" means the policy is not connected to a life insurance policy or a fixed or variable annuity.) Some standalone policies have a rate guarantee for a few years, perhaps even ten years, but after that point, premium can increase.
Here are some steps you can take to reduce the risk of rate increases (and potentially not being able to afford your LTC policy as you get older):
1) Don't stop with company ratings. Ratings are important, and I recommend the company have at least an A- rating on the A.M. Best third-party rating scale, but don't stop there. Look for companies with assets in the BILLIONS, not millions. There are companies selling LTC insurance with $100 million in assets and companies selling it with $100 BILLION - big difference. Both the rating and the asset information can be found in the A.M. Best Life & Health rating guide in your local library. Other rating services are Duff & Phelps, Standard and Poor's and Moody's.
2) Don't even think about shopping for the cheapest policy you can find. Low premiums today are almost a guarantee for rate increases in the future. A common sales practice is to "buy the business" today with low rates with the expectation of increasing premiums later. Don't fall for it. As a benchmark, ask the companies you are considering to give you a premium for a 60-year-old couple for the following benefit plan: $90 daily benefit ($2,700 monthly benefit), 90 or 100 day elimination period, lifetime benefit period, 100% home health care, and 5% compound inflation for life. A reasonable annual premium for both spouses is in the $2,500 - $3,500 range.
3) Ask if most policies are sold with a 0-day elimination period, which means no deductible. You can imagine what would happen if automobile insurance was sold with no deductible - our premiums would skyrocket! LTC insurance is no exception. No deductible invites people to file claims, sometimes unjustified claims, and that activity drives the premium up for everybody.
4) Consider policies that are tax-qualified. This means the policy meets the government standards for long-term care insurance policies. These standards were effective 1-1-97 as part of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The marketing brochure and the policy will have words printed on them that say the policy is intended to be tax-qualified, but a way to know for sure is to look at the requirements for the policy to pay a claim. One requirement should be that your doctor, a registered nurse (RN) or a licensed social worker must certify that you are expected to need help with at least two Activities of Daily Living for at least 90 days. (Activities of Daily Living are bathing, dressing, transferring from bed to chair, toileting, continence and eating.) This language means that the policy will not pay for short-term conditions; i.e. conditions that are expected to last less than 90 days.
Why is this important? Because policies that pay for short-term conditions such as a broken hip or a mild stroke instead of just paying for conditions that last more than 90 days have a much greater risk of having rate increases than policies that just pay for long-term conditions. You see, long-term care insurance was never intended to pay for short-term conditions as most people already have coverage for that kind of care in the form of private health insurance for people under 65, or Medicare supplement, Medicare or retiree health plans for people over 65, or HMOs for people of all ages.
Please note that the 90-day certification requirement is not a waiting period. For example, if your LTC policy has an elimination period of 30 days and your doctor says you are expected to need help with bathing and dressing for at least 90 days, your policy will pay on the 31st day. This requirement is just Congress' way of making sure that LTC insurance just pays for long-term conditions in order to preserve the rate stability of the policy as long as possible.
Another way to get a claim paid by a tax-qualified policy is that your doctor says you have a severe cognitive impairment that makes you a threat to yourself or others. For example, if you take medication for high blood pressure and you can't remember to take it consistently, you could cause yourself to have a stroke.
Policies issued prior to 1-1-97 were "grandfathered", which means they are considered tax-qualified even though they don't contain the 90-day certification requirement. These older policies will stay tax-qualified as long as the benefits aren't increased. Examples of increased benefits are adding inflation coverage, extending the benefit period, shortening the elimination period, or increasing the daily or monthly benefit. (If you desire to make any of these changes to your policy, check with your agent to see if it would be in your best interest to purchase an additional policy to go with your present policy so that you don't disturb the grandfathered policy, or if it might be better to replace the old policy with a completely new policy.)
Most policies sold today are tax-qualified as there is no clear ruling from the IRS about the taxation of benefits for a non-tax qualified policies. In other words, the IRS could decide that benefits paid from a non-tax qualified policy may be taxed as ordinary income, as the 1996 law referenced above only addresses treatment of tax-qualified policies.
5) Consider insurance companies that don't accept people with health conditions such as Parkinson's disease, multiple strokes, MS or any type of dementia. This may sound harsh, but the fact is that a company that accepts these conditions is so rare that insurance agents are tempted to use that company as a :"dumping ground" for applicants with health problems, which puts the company at great risk for rate increases as people with severe health conditions generally require higher claims payouts.
(Note: The message here is to apply for long-term care insurance as young as possible to give yourself the best possible chance to qualify for a reputable company at reasonable rates. Policies are available to ages 18 and up with many companies, and certainly for people ages 40 and older.)
Next month, we will look at specific benefit provisions such as restoration of benefits, alternate plan of care, assisted living, inflation coverage, etc. so that you won't be misled about any of the payment provisions.
