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Long Term Care Insurance

With ever increasing life expectancies comes an ever increasing likely hood that at some point you will need help carrying out the basic activities of life, such as getting out of bed, dressing and eating. Long term care insurance will help pay some or all of cost of getting this assistance either at home or in a nursing home over a long period of time. Note the phrase "over a long period of time". Most health insurance, including Medicare, provide coverage for short periods of time, for example, while one is recovering from an operation or illness. However, neither of these provide coverage for long term care.

The national average for a year in a nursing home is just under $100,000. This results in full long term care insurance policies being very expensive. Given this high cost you first need to decide whether you should purchase long term care insurance. Then, if you decide that the answer is "Yes", then you need to decide which of the many coverage options are best for you. These options include, lengthy deductable periods, short coverage periods and policies that cover only part of the cost. Each of these options has their advantages and disadvantages. The discussion below is intended to help you decide whether you should buy long term care insurance and if so which coverage options are best for you. Remember, we are Fee Only Advisors who get no commissions so we are concerned with only what is best for you.

Long Term Care, What It Is and When You Need It

As stated above, the term "long term care" refers to assistance doing basic tasks like getting out of bed for a long period of time. It does not refer to temporary assistance while you are recovering, for example, from an illness. Most people equate needing long term care with needing to be in a nursing home. This is not true in the majority of cases. This is why 79% of the people needing help with these tasks live at home and get assistance from family and friends. My father in-law is an example of the kind of care that is usually sufficient. He needs help getting into and out of bed. However, once he is up and in his wheelchair he is mobile and capable of doing many activities, including preparing a light lunch. Insurance companies usually want to assist you in staying in your home because it is cheaper so long term care policies tend to pay for modifications to your home, like ramps and modifications to you bathroom that will enable you to stay there. They may also pay for someone to come to your home and help you there or pay for you to go to adult day care.

One other fact. The average stay in a nursing home is only 8 months. Thus, MOST of the time a short coverage period, like one or one and one half years is sufficient. However, if you stay in a nursing home over 1 year you are likely to be there a minimum of two years and three or more is common.

Long Term Care Insurance Problems

Unfortunately, long term care insurance is very expensive and you have to pay for it well in advance of needing it. In addition, government rules keep insurance companies from offering you refunds if you take out a long term care policy and later decide that you either don't need it or can't afford it. Thus, if you stop paying your long term care insurance premiums you can't recover the money you previously paid. This money is not necessarily totally lost because many policies allow you to receive reduced benefits based on what you have already paid. If you buy a policy make sure it has this provision. However, this is still very different from other long term insurance products like whole life insurance or an annuity where you can recover your money, usually with interest, if you decide to stop paying the premiums.

Table 1. Long Term Care Insurance Premiums for $250/Day and Five Years of Coverage and Rejection Rates
Age Start Paying Premiums Annual Cost Rejection Rate
55$2,37515%
60$3,10218%
65$4,10924%
70$6,71140%
Footnote: Rates from Glenworth Insurance company website fall 2015

In addition, insurance companies have the right to increase your premiums if their costs rise. Large premium increases have been common the last few years. Given that the purchase of a long term care insurance policy is an unpredictably expensive, long term, and almost irreversible decision it is important to understand exactly the benefits that a long term care insurance provides, when you need this care and equally important, what the alternatives to it are.

Alternatives to Long Term Care Insurance

Family

As discussed above, most people needing assistance receive it from family and friends. This is a practical alternative if all you need is some assistance with some basic tasks. Thus, most of the time a family members can provide the care assistance needed and still hold down a full time job. Also, this is not a yes/no situation. It is not uncommon for family assistance to be adequate without being an unsupportable burden for most of the period of dependence and it is only for the last few months that full time nursing care is need. In this case a policy that provides only a year of coverage will usually, but far from always, be sufficient.

Of course, just because your family is giving you assistance doesn't mean that they have to do all the work. It is quite possible to have someone visit your home for a short period in the middle of the day or you could to go to senior day care. In either case a long term care policy that provides less than full nursing home benefits might be all you need.

It is not uncommon for an adult child to quit work mid career to take care of a parent. This option has to be taken cautiously because reentering the work force is very often difficult. If you are out of the work force for more than a year employers assume that your skills are out of date and will hire someone with more recent experience. Thus, there is a significant chance that you will have to start over at the bottom of the career ladder. You might even have to go back to school and take refresher courses.

Continuing Care Retirement Communities

CCRCs guarantee lifetime housing, social activities and increased levels of care as needs change. Upon entering, healthy adults can reside independently in single-family homes, apartments or condominiums. When assistance with everyday activities becomes necessary, they can move into assisted living or nursing care facilities. These communities give older adults the option to live in one location for the duration of their life, with much of their future care already figured out.

CCRC's are the most costly option. Virtually all requires some form of an upfront payment plus monthly fees. Generally you can reduce the upfront fee by paying a larger monthly fee or conversely reduce the monthly fee by paying a larger upfront fee. In addition, most communities offer two or three different types of contracts.

  1. Life Care Contract: This is the most expensive option, but offers unlimited assisted living, medical treatment and skilled nursing care without additional charges.
  2. Modified Contract: This is the next most expensive contract which offers a set of assisted living and/or nursing care services provided for a set length of time. When that time is expired, additional services can be obtained, but for higher monthly fees.
  3. Fee-for-Service Contract: The initial enrollment fee may be lower, but assisted living and skilled nursing will be paid for at their market rates. It is my experience that when you call a CCCR and ask what it costs to live there the rate quoted is for the fee-for-service contract.

Note that if you decide to go to a CCCR that long term care insurance can still be useful but the provisions of coverage you want will vary with the type CCRC contract that you choose. If you get a modified CCRC contract then a long term care policy that has a substantial waiting period before benefits start would be a good fit. If you take a Fee-For-Service Contract a standard full coverage long term care policy would be more appropriate. On the other hand a CCRC Life Care Contract will provide most of the benefits of a long term care insurance policy. However, even here there is still a place for certain kinds of long term care insurance. Namely, when you start needing assistance, most CCRC facilities will require you to move into their assisted living or nursing care facility. However, if you are only partially disabled having someone come to your home for a a few hours each day may be all you need. Long term Care insurance will usually pay for such in home assistance.

Medicaid

Medicaid is a government program for those who don't have enough money to pay for their medical care. The cost of nursing home care is so high that many middle class families find themselves in this situation if a a member needs nursing home care. Over half of the people who have been in nursing care for over a year are receiving Medicaid assistance. However, to qualify both you and your spouse must spend down your assets first. In addition, there are strict income limits.

Asset limits. These vary from state to state. In New Jersey where I live the person receiving care can have only $3,000 in assets. However, the value of your home, your car and home furnishings can be excluded up to a limit, which is currently $529,000. However, this exemption is not total. You may be able to keep your house and still qualify but when you die the proceeds from selling the house may have to go towards paying for the care that you received. If you are married, the stay at home spouse can have only $113,640 in net assets. Some state allow spouses to exclude the value of their IRA but New Jersey, like many states, does not.

The options for avoiding the asset and income limits are few and very restrictive. Some states allow you to protect some of your assets if they are transferred to a trust or by purchasing an annuity which will supplement Medicaid. This means that distributions from the trust or annuity can only be used to pay medical and long term care costs. In addition, you have to make the state the beneficiary of the trust or annuity upon your death. You can also avoid the asset limits by transferring assets to your children or a charity. However, these transfers have to be done at least 5 years before you need Medicaid assistance. Otherwise the recipients will have to pay the money back. In addition, many states allow the value of qualifying long term care insurance contracts to be used to exempt an equivalent amount of assets from the Medicaid asset limits.

In summary, to qualify for Medicaid you need to spend down you assets first. There are limited exceptions to this rule but they are not only limited but complicated.

Long Term Care Policy Options

Full Long Term Care insurance is very expensive and thus many people find it difficult or impossible to purchase. Insurance companies have responded with policies with a large number of options. There is no such thing as a standard policy. The purpose of this web page is to help you understand the options available to you for receiving long term care so that you can decide which of the many insurance policy options are best for you. To find out what these many options are I suggest that you read the AARP guide to Long Term Care policies. This article is also good at explaining the sometime obscure insurance industry terminology that you need to know in order to understand what an insurance policy covers. In any case, no matter which policy you pick make sure you read the policy and understand all its provisions.

Where to Get Long Term Care Policies

We are a Fee Only advisor so we do not sell long term care insurance. However, we will be delighted to help you make this important but very expensive and very complicated decision. Because we are Fee Only Advisors you can be sure that the advice we give will be unbiased and based on what is best for you. Once you have decided what policy options are best for you, you need to shop around for a policy. It is common for the most expensive policy to be 60% higher than the least expensive one. However, if you wish we will shop for you but you will have to pay our usual hourly fee for our time.

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