A growing number of families are confronting an extremely vexing problem for which there is an excellent and elegant insurance solution–a special type of annuity.
This solution is rarely considered and not broadly available today, but the need will certainly come up more and more as the population ages.
Let’s first review the problem and then see how it can be addressed through insurance.
1) As people age, their likelihood of becoming disabled and needing long term care rises rapidly. Actuarial studies show that relatively few individuals in their 60s are disabled but disabilities rise exponentially in the 80s and beyond.
2) Almost all people are “self-insuring” this risk.
3) Long term care can be very costly and often the disabled person faces a cascade of increasing costs running into thousands per year, whether for home care, assisted living care or nursing home care. The wealthy are likely to strongly desire care for the disabled at home, although a 24/7 aide could run well over $150,000 a year.
There are affluent people who can tolerate these costs for a few years, but if the frail person lives for an extended period, even a substantial net worth can be seriously eroded or destroyed.
There is the possibility of spending down to Medicaid–which many people do–but this can bring problems. Medicaid often does not pay for the best of care. It usually pays for semi-private rooms only, and there are some excellent nursing homes and hospices that do not accept Medicaid patients. Medicaid will allow a non-disabled spouse to remain in a home owned by the person turning to Medicaid, but can, in some states, claim home equity when the spouse dies. For single people, Medicaid can claim the home equity to cover LTC costs. Thus, spending down to qualify for Medicaid is not a perfect solution.
Also, since Medicaid programs are in dire financial straits, it would be imprudent for those with reasonable assets to depend upon a spend-down strategy.
One positive is that most older people own their homes, often without the encumbrance of a mortgage. Even among people age 75 and over, four in five own their homes. Consequently, home equity is available to pay for a good deal of LTC costs. The real risk is the sufficiency of that money to cover all of the potential costs.
This is where the elegant solution fits in. At-need, impaired risk annuities can be an excellent solution for the person who needs LTC, and, maybe especially, their families.
This is how at-need, impaired risk annuities work. People whose condition requires, or is starting to require, increasing levels of care do not, in general, have a long life expectancy. This allows an insurance company to offer the person an impaired risk annuity that guarantees a high amount of lifetime income–higher than is available from traditional immediate annuities. This income can be used to pay for LTC for the rest of the person’s life.
Careful underwriting is, of course, required, but insurers have good mortality data available on which to base annuity pricing for those who need LTC.
Some actuaries have estimated that, depending on the person’s medical condition, individuals can get as much as $50,000 a year for life on a $200,000 single premium impaired risk annuity. Social Security, pension income, and interest on other savings can be factored in to determine the exact income needed from this source.
Is this doable? Yes, with home equity available and a person clearly leaving his or her home for good to enter an assisted living facility or nursing home, $200,000 should be a workable payment for many.
Another consideration: This payment, from the impaired risk annuity, can help ensure that the rest of the frail person’s net worth is preserved.
This scenario illustrates the advantage of using such a product. Suppose a client has a mother age 90 with $250,000 in assets and a home worth $400,000. She is frail and has dementia and must go into a nursing home. There is a risk that her $650,000 in assets will be totally eaten away. But if her life expectancy is less than four years, an insurance company might promise to pay $45,000 for life for a single premium of about $180,000. With Social Security and earnings on the other assets, the cost of nursing care would be covered. The client can be relatively assured of protecting and eventually receiving $470,000 of assets as an inheritance.
For many heirs, making sure they get a certain amount of money from an estate is better than taking a risk that the estate will be totally dismantled by LTC costs. Currently, most advisors don’t recommend these products, and most companies don’t offer them. Perhaps that should be reconsidered.
Mathew Greenwald is president of Mathew Greenwald & Associates, Inc., Washington, D.C. His e-mail address is MathewGreenwald@greenwaldresearch.com.