September 1, 2001

Take Care

Finding a good long-term care policy can be tricky

The bull market that has since cooled had quite an effect among wealthier, older individuals, according to Marilee Driscoll, president of the Long-Term Care Learning Institute in Plymouth, Massachusetts. Many investors, including those who were over 60 years old, became cocky about their investing abilities, figuring that they would be able to self-insure against the need for nursing home or home health care as they aged, with the assistance of just another five years' or so run in the bull market.

But that has changed, says Driscoll. In giving a recent seminar, she encountered a number of those same over-60 investors. Not so cocky now, having seen the values of their portfolios erode substantially and not knowing when the market might hit bottom, they are suddenly revisiting the notion of long-term care insurance.

Watch Out

How do you know which long-term policy is best? Robert Davis of Long-Term Care Quote in Phoenix offers the following suggestions.

o It's critical that an advisor not just look at the headlines of a policy. Study the fine print.

o Watch out for "weasel words"--words that seem to mean one thing but actually specify something quite different.

o Beware of policies that claim the company will reimburse you for "prevailing expenses" or "usual and customary" expenses. Look for "actual expenses."

o Make sure the carrier is a large, well-rated company.

o Understand the benefit triggers.

o Make sure the policy covers hands-on and standby assistance (like verbal reminders to take medications).

o Check the stability of the company's premiums.

o Notice who determines eligibility once you file a claim. If the insurance company gets to pick the doctor to see if you meet the criteria to qualify for benefits, it's a loaded deck. You need to be able to choose your own doctor.

o Make sure automatic inflation protection is an option. o Make sure the deductible must be satisfied only once.

o Look for a policy that waives or stops premiums when you're receiving care, and that offers a discount if you're in exceptionally good health.

o Look for a policy that offers all kinds of care--nursing home, in-home, and assisted living.

o Make sure the policy covers Alzheimer's and other dementias, offers all levels of care, and does not require a hospital stay. Also be sure that the policy is underwrit- ten at time of application and is guaranteed renewable.

o Get a reasonable premium.

Driscoll tells of a 60-year-old orthodontist she spoke with who had opted not to do anything about long-term care insurance three years previously, when he and his wife had last considered the situation. He did, however, have a disability policy. They were now reconsidering the question, and contemplating a bare-bones long-term care policy. Driscoll pointed out to him that his existing disability policy would cut off at age 65, and he could perhaps more sensibly devote the premiums he was paying for disability to a long-term care policy instead.

"It was very clear after talking to them that they thought they would be in a much better financial situation than they are now," says Driscoll. "They don't have that comfortable feeling that their retirement savings are bullet-proof."

In addition to the heavy dose of reality administered by the markets over the last 18 months or so, one of the biggest threats to retirement savings can be the specter of long-term care, whether it's a residence in a nursing home, an apartment in an assisted-living facility, or home health care. With costs for such care exploding (currently a year in a nursing home can run anywhere from $50,000 to well over $100,000, and costs are expected to double approximately every nine years, according to several sources), even the wealthiest clients stand to lose much of what they've worked for. As a result, more planners are adding long-term care insurance to the strategies they use to protect clients' assets.

But it's a complex area. With about 125 companies offering policies, many of them offering multiple products with differing benefits, requirements, and exclusions, it's tough to decide. Policies aren't cheap, either, with premiums ranging from a few hundred dollars to thousands each year depending on age, health, and options. Then you also have to consider the state of the industry, new products, and legislation. How does an advisor choose?

We've amassed some information on the various factors to be considered, and some of that information follows in our annual survey. But there's much more to think about than just policy price or how many riders are available.

Depending on your client's needs, you might want to look at straight long-term care or a new combination product. There are plenty of variations to consider, with conventional policies offering either nursing home care, home health care, or a combination of the two. Herb Perone of the American Council of Life Insurers points out that long-term care used to mean mostly nursing home policies. "You can still get them," Perone notes, "but with the common long-term care policy today, you buy a daily benefit and it can be used for a variety of long-term care services--home care, adult day care, assisted living, nursing home, or some future form of long-term care that nobody's thinking about today."

Many consumers still equate long-term care insurance with nursing home insurance, says Robert Davis of Long-Term Care Quote in Phoenix, which provides free quotes and comparison information on LTC policies, and sells policies. "If you want to stay out of a nursing home," Davis argues, "buy long-term care insurance. Today's policies provide benefits in your own home, and coverage for assisted living facilities." Davis knows that for many people, the most attractive alternative to a nursing home is an assisted living facility. But, he points out, "they are all private pay. The government does not provide any payment for assisted living." And with such an alternative available, a policy may be the only way clients can afford to live in them.

A Cautionary Tale

In 1998, Penn Treaty American life insurance company--which only sells long-term care insurance--went public. That same year, Consumer Reports selected Penn Treaty as the best long-term care insurance company. The company quoted low rates and did a tremendous amount of business, moving into many states and taking clients with risks higher than most other companies would take.

But the company apparently miscalculated how much it could handle in payouts. According to published reports and industry sources, Penn Treaty American has repeatedly sought, and gotten, large rate increases, resulting in a nightmare for thousands of clients who can no longer afford the policies they bought when they were in better health. Many of these people are no longer insurable.

Penn Treaty policyholders did not cancel their policies or let them lapse, as often happens. Indeed, 85%-95% of policyholders renewed every year, setting up a chain of claims that overwhelmed the company's cash reserves, according to a June 2000 report in The Wall Street Journal.

Penn Treaty is now the subject of several class action suits that allege deliberate underpricing of premiums. When contacted for this story, the company declined to comment. Penn Treaty's stock price, at this writing, is $3.45, down from its 52-week high of $21.56.

That said, many policies have quite a number of underwriting requirements before issue. If you look at our survey, you'll find that many companies pay a lot of attention to a potential insured's health before deciding to write a policy. When advising clients in less than perfect health, be wary of the company you choose. While dealing with a company using tough underwriting standards can be difficult, the risk of buying from a company using looser standards is that they may fail to have enough reserves to pay benefits in the future. Pay very close attention to the company's rating. (See sidebar, "A Cautionary Tale," on page 108.)

Then there are combination policies. Long-term care policies are now being bundled with annuities and whole life insurance. "The most common of these long-term care products," notes Perone, "is marrying a whole life policy and a long-term care benefit, where you basically get the whole life policy but death would not be the only triggering or insurable event. The need for long-term care services would also be an insurable event." Policies that offer "living benefits," allowing access to death benefits while the insured is still alive, are also being bundled with LTC benefits.

Long-Term Care Quote's Davis argues that these linked products can be important for advisors. "They're investment-oriented products with long-term care riders tagged to them. John Hancock is a leader in this: they offer variable and fixed annuities with a long-term care rider. There are products such as a universal life insurance policy with tax-deferred cash value. If the client needs long-term care insurance, the life insurance amount is freed up to pay for long-term care. If they don't need it, it remains in the family."

The question with these bundled policies is whether the client truly needs both features, and if so, whether each feature does as much for the client as would two separate policies.

Industry and Consumer Trends

Tom Riekse, president of The Heartland Group in Chicago, a distributor of long-term care insurance, has noticed other changes. "We're seeing a trend toward ways of paying home health care benefits without the home health care provider being an agency," he says. Due to public demand for the ability to pay providers who don't necessarily come from an official business, companies are beginning to loosen their requirements on how, and to whom, they will pay benefits. He also points out the numerous cases in which a family member provides care. If a relative is a nurse and is willing to care for an aging or ailing relative, that's fine--but then there's the question of whether she's working. If she is, her salary has to be replaced somehow in order for her to be able to render those services. With the changes in these policies, that can now be done more easily than before.

Riekse also points out that more businesses are beginning to offer long-term care policies as an employee benefit. "The reason we're seeing more of this," he says, "is the HIPAA tax deduction," referring to the Health Insurance Portability and Accountability Act of 1996. Driscoll agrees. "There's no other benefit an employer can offer that can have [such a] positive impact on their bottom line," she says, and points out it can make a tremendous difference to the employer in another way. "It's typically women in their prime earning years and making their largest contributions to their employers and pensions, in their fifties," says Driscoll, "who are the ones who have to cut back or resign because of long-term care duties" for relatives. If instead they can take out an LTC policy that will allow them to remain on the job, everyone benefits.

Still, says Driscoll, "there hasn't been a groundswell of companies offering long-term care insurance." But that could change, she says, once the Federal government implements an LTC benefit for Federal employees, now set for October 2002, that could cover as many as 20 million people.

In the meantime, the kinds of companies offering long-term care insurance as a benefit to their employees include C corporations, law firms, and similar places of business. Says Davis, "HIPAA did give phenomenal tax advantages to businesses. A C corporation can deduct 100% of paid premiums. It's a 100% tax-free benefit for the recipient, and the corporation can select who participates based on the class of employee. It makes a great golden handcuff for top executives."

S corporations, according to Davis, didn't get quite such beneficial treatment. But they're not suffering, compared to the individual consumer. "Congress treated [S corporations] differently, and they can deduct 60% this year, 70% next year, and 100% in 2003." Not only that, but they are not required to meet the 7.5% medical expense deduction that individuals must have before they're allowed to deduct the cost of long-term care insurance.

Davis calls the HIPAA requirement for individual tax deductions a "phantom tax deduction. So few people have medical expenses that meet the requirements Congress set up of 7.5%; they're all on Medicare. Less than 10% of policyholders itemize, and they can't take advantage." There's a chance Congress may change that one of these years, making the cost of long-term care insurance an above-the-line deduction. And that, according to most of the experts we talked to, should boost business at least a bit.

More businesses, Davis points out, see the benefits of offering long-term care insurance. "The average loss [to an employer] due to caregiving is over $3,000 per employee. And the insurance industry has made it attractive to businesses by offering price discounts if you buy through the work site." Davis says that it is not only offered to employees, but also to family members--"spouses, parents, in-laws, grandparents, and grandparents-in-law."

Riekse mentions that he's no longer hearing as much talk about "'Why don't I artificially impoverish myself and go on Medicaid?' That's going away." The reason for this is that "typically you don't get the same kind of facility as on a private-pay basis. It's not supposed to happen, but it does." And with the recent Congressional report that cited one in four American nursing homes exhibiting "widespread" abuse of residents, it becomes obvious that whether it's supposed to happen or not, it definitely does. Therefore, considering private-pay care as an urgent objective for one's senior years is no longer something to be dismissed out of hand.

Not Just for the Elderly

Who's buying long-term care insurance? Younger and younger people, apparently. Riekse says that a survey from the Health Insurance Association of America shows that the average age of a policy purchaser is 67. Riekse's own experience shows that the average age of a policy purchaser is a sprightly 60.5. Davis says the same. "When I started this company five years ago," he says, "the average age was 68. Now it's 61. As a result, companies are introducing quick-pay options." What's quick pay? Well, says Davis, if you have a 45- or 50-year-old client who is taking care of a parent, they may decide that they're not going to have that situation happen to them. So they'll buy a policy at that comparatively young age, but one that's paid up either within 10 years or when they turn 65. According to Davis, most of the better policies offer those options. Another reason that the age of the purchaser is coming down is all those people buying through the workplace. "The whole thing," says Riekse, "is becoming less of a policy for old, retired people and more something that 50-year-olds are buying."

Another heartening development for advisors is something that Riekse has noticed: one-page applications. "What the advisor does is provide the name and address of the client and what plan they want. The client signs a release of medical information and then the insurance company contacts the client and goes through the whole application and makes all the arrangements."

There is one very important thing to consider, regardless of how much you know about long-term care insurance. You need to learn about this branch of insurance out of self-defense. Clients rely on you to protect their assets, and with 70 million baby boomers heading into retirement, that's a lot of assets to protect.

Riekse puts it best: "Some advisors say, 'I'm not an expert on this, but I'm going to sell it anyway.' Look; you're getting paid to be an expert on this by your clients. You can't say, 'I'm not an expert on this.' You have to have some expertise. This is a big part of financial planning today, especially for clients who are older."

"If you don't know enough, learn. Your clients will thank you. You might even want to buy a policy of your own some day.

Reprints Discuss this story
This is where the comments go.