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.
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.