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October 15, 2008 at 08:00 PM
With the graying of America, there is little doubt that long term care insurance — or something like it — is necessary. Two out of five people over 65 will require nursing home or other long-term assistance. In 2006, an estimated nine million Americans over age 65 fell into this category. By 2020, that number will grow to an estimated
12 million.
Yet, research by organizations ranging from Consumer Reports and AARP to insurance companies indicates that the likelihood of someone having LTCI when they need it is slim. For the individual and his or her family who lack such coverage, the results can be devastating, resulting in bankruptcy, loss of the home and increased stress.
Critical Issues
Three issues emerge as critical when it comes to LTCI. First is the misperception about who pays. Most people erroneously assume that they have coverage through their regular insurance, Medicare, or Medicaid. Therefore, they see no need to purchase LTCI.
The second issue is affordability. LTCI is not cheap, and can be a challenge for middle-income individuals and completely out of reach for those in lower-income brackets.
The final issue is denial of coverage. People tend not to think about LTCI until they hit their 60s. By then, many have developed a health dossier that — even if they can afford the premiums — effectively disqualifies them.
To address these issues requires education regarding who pays, and LTCI alternatives. The insurance industry now offers a variety of products that address the needs of those who, for health or affordability reasons, cannot protect themselves — options that, while not LTCI, can achieve similar results.
Medicare misconceptions and hard, cold facts
Americans are woefully uninformed about LTC and its associated costs. A majority — 59 percent — think that Medicare pays 100 percent for LTC, while another large percentage believe that Medicaid or state programs will cover them. Although these two programs do provide some coverage, the problem with both is that they are restrictive.
For example, Medicare pays only for short-term care — in specified facilities — after a hospital stay. After the first 20 days, the patient or family must kick in a daily $96.40 co-pay. Medicaid recipients must spend down assets and are more likely to end up in a nursing home, because Medicaid won’t cover assisted living or homecare.
When the patient or family is faced with the costs not covered, it’s easy to see how the LTC recipient or a surviving spouse (or adult child) is left destitute.
The disqualifiers: cost and health
Consumer Reports states that for most people, long term care insurance is “too risky and too expensive” — and consumers seem to agree. A mere 9 percent of Americans have such coverage, many of them through their jobs. When they retire, they often cannot afford to keep the policy. Just as they reach the age when they are most likely to need it, retirees find that they simply cannot afford LTCI.
Finally, many Americans are simply unwilling to invest hard-earned money into an LTCI policy that they may not use. If they don’t use it, they may be unable to retrieve their money or pass it along to their beneficiaries. They look at LTCI as a potential waste of money.
Health is the other LTCI disqualifier. Most policies require underwriting, which many prospects find intrusive and time-consuming. Plus, by the time policyholders reach retirement age, they often have pre-existing health problems that preclude coverage or dramatically increase cost.
Can the annuity industry offer consumers options that can help achieve similar goals as long term care insurance? The answer is a resounding “yes”.
Designing a suitable alternative to LTCI
Annuities enable the insurance industry to offer three alternatives to LTCI: confinement waivers, combination products, and riders. One of these options may be a suitable LTCI alternative that is eminently suited to a client’s needs. While you’ll have to ask some personal questions, the process will be much less intrusive than the extensive underwriting required for most LTCI.
Discuss your client’s options and preferences — given the choice, would they prefer home care to a nursing home or hospital? Will adult day care be necessary? Do they want to pass money on to beneficiaries? Once need and preference are determined, find a product that addresses them.
An overview of alternatives
For years the annuity industry has sought solutions to help those who cannot afford, or do not qualify for, standard LTCI. First were annuities with confinement waivers, followed by combination annuity/LTCI products. More recently, riders offer yet another option.
Annuity With Confinement Waiver
As the first attempt to respond to LTC needs, many annuities have a confinement waiver feature at no additional cost to the annuitant. Once requirements are met, such waivers accelerate access to funds free of market value adjustments and surrender charges, and do not require underwriting.
While confinement waivers do not require out-of-pocket expense other than the cost of the annuity, they may not cover total LTC costs. Clients basically spend their own money and there is no additional benefit.
Combination Products
Some annuities come with LTCI built in. While these hybrid products provide the benefits of annuities and many LTCI benefits, there are drawbacks. Only non-qualified money can be used, and some form of simplified underwriting is typically required. Assets must be spent down before the carrier kicks in with payments. The cost is typically less than LTCI, but can increase over time. However, this may be a viable alternative because, unlike the confinement waivers, it can cover more of the actual LTC costs, may have significant tax benefits, and requires no additional out of pocket expense.
Annuities with Riders
As the LTC market expands, the annuity industry continues to respond. The latest offerings are annuities with additional care riders that can be used with qualified or non-qualified money. These riders normally require no underwriting or spend-down of assets and, like the combination products, require no out-of-pocket expense (costs are deducted from the earnings). Once the benefit is triggered, the client controls how it is utilized. Since this is not a reimbursement plan, if the benefit is not spent it can remain in the annuity and become part of the death benefit. Some riders even provide a fixed fee that will not increase over time.
So, be creative. For LTC agents, these alternatives provide additional options for clients. For annuity agents, they open a new market and provide a range of options and choices that would not otherwise be available. In short, it’s a win-win-win situation.
Diane Shemi is director of product management for Legacy. She can be contacted at [email protected].
Combo annuity/long-term care gets a big boost in 2010
The new tax benefits of the Pension Protection Act kick in on Jan. 1, 2010 and the top five objections to
buying LTCI will quickly melt away.
