A generation ago, the average life expectancy in the U.S. was about 72 years, according to the Census Bureau. Today, due to advances in medicine, diet and lifestyle, the average American can expect to live 10 years longer. Actuaries predict this number will continue to increase.
A longer, richer life is something most people look forward to, but those extra years can stretch financial resources. People are living longer on retirement income, sometimes with Alzheimer's or other unexpected long-term disabilities. According to the Health Insurance Association of America, the average annual cost for long term care is $42,000. That can quickly drain a person's net worth, or even deplete their entire estate.
A few years ago, restrictive benefits and high prices made long term care insurance unattractive, but now it is a different story. The quality of policies has risen dramatically, while costs have come down. With the new array of easy-to-understand products, agents no longer need 15 years experience to sell long term care insurance. And, it's easier to explain it to the senior audience.
From an investment standpoint, when planning for retirement years, preserving assets is generally of utmost importance. Purchasing long term care insurance is an important part of accomplishing that goal.
Age matters
Medicare provides only limited long term care benefits and picks up less than 5 percent of the nation's long term care expenses. Medicaid covers just less than half of these expenses. In most states, to qualify for Medicaid, a person must have no more than $2,000 in "countable" assets.
While assets such as primary residence, car, and personal items are not considered countable, most assets would have to be converted to cash and used before qualifying for Medicaid. People attempting to transfer assets to qualify for Medicaid are subject to a 36 to 60 month "look back" provision. Assets given away during that period will delay government benefits by the amount of long term care coverage that those assets would have paid for.
The older a person is at the time of purchase, the higher the premium. In other words, there is a premium increase for delaying the purchase of long term care insurance. For people ages 40 to 60, the price of insurance increases about 8 percent per year. For a person over age 70, there are premium differences of about 12 percent per year.
It should be noted that a policyholder who purchases coverage at age 45 would always pay the rate for 45-year-olds. Rate increases can only be incurred if the insurance carrier raises the premium uniformly across all age classes. The individual policyholder cannot be singled out for a rate increase.
Know the options
Long term care insurance costs differ depending on provisions of coverage, so the annual premium can vary dramatically. Home health care can be included or insured as a stand-alone policy. Nursing home and assisted living benefits can be purchased separately, with or without home care benefits. Premiums for a 65-year-old can range from as little as $300 per year to over $2,000 per year. The younger a person is, the lower the premiums. Benefit periods can range from one year to a lifetime of unlimited benefits available to the policyholder.
Is it worth it? Let's look at these numbers. Assume someone age 65 buys a policy that pays for three years of benefits, with inflation protection for a $1,500 annual premium. At age 85, the policyholder begins to receive benefits, and, after three years, the policy has paid its maximum of $305,505. The insured collected $275,500 dollars in benefits over and above their cost of the premium. On the other hand, if the 65-year-old had invested $1,500 annually in a 5 percent tax-free account, they would have a total of $49,599 at age 85.
According to Best's Review Magazine (April 1996), 50 percent of people over the age of 65 were projected to enter a nursing home at some point. Half of the people who enter a nursing home were projected to have a stay of more than 2.5 years. The chances of needing long-term care are:
Age 55 1 in 10
Age 65+ 4 in 10
Age 75+ 6 in10
Being financially prepared for the unexpected isn't the only reason to buy long term care coverage. Even those with enough financial assets to self-insure should consider purchasing a long term care policy. LTCI provides the kind of protection that enables the policyholder to pass their assets to their heirs, or use their money for vacations or special purchases without worrying about paying for a long-term illness, if one occurs. A policy liberates holders from the cloud of uncertainty that often looms over retirees.
No matter what age your clients attain in life, long term care insurance can relieve a burden and increase the likelihood that those years will be happy ones.
Gary A. Katelman, CSA, CLTC is LTC director for Senior Market Sales. He is an active member of NAHU, HIU and the Society of Actuaries. Mr. Katelman specializes in LTC product development, agent training and is an expert on individual and worksite LTC programs. In 2004, he led a panel discussion for the Society of Actuaries, helped introduce several association-marketing programs and taught numerous LTC CE credit courses. For more information, contact him at 402-343-3635.
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