New Options for Long Term Health Care Insurance

As boomers get older, we’re faced with the realization that we’ll need some sort of health care.   This care can be in a health care facility or in the convenience of your home.   By the time you reach 65, you have a 12% chance that you’ll need some of this care.   That percentage skyrockets to 70% by the time you reach 85.   This is a clear example of why it’s important to understand the options you have with long term care insurance.

Options for Long Term Health Care Insurance

It is estimated that nearly 50% of Americans will need LTC at some point in their lifetime; of this group, approximately 15% will end up in a nursing home and the remaining 85% will need some other form of long term care insurance. When thinking about these numbers, also keep in mind the following:

  • The average stay in a nursing home is 2.5 years
  • The average annual cost of nursing-home care in 2004 is61,000 for a semi-private room
  • The average annual cost for an assisted living facility is  currently $30,000 or higher
  • The average home health-care system typically goes for over $55,000 a year

The conversation of how one should pay for future LTC assistance is probably one that you and your spouse have had in the past. In fact, 65% of Americans are aware of the high demand and cost of LTC assistance. However, at the end of 2002 – the peak in purchases for long term care insurance – only 5.6% of Americans over the age of 45 had purchased long term care insurance. Since then, the long term care insurance industry has seen sales decline sharply, from $1 billion to only $661 million in 20052. With numerous stories circulating of money-savvy adults who were forced to deplete their savings and retirement funds to pay for nursing homes or home health care, why have purchases for Long term care insurance not adapted to a growing consumer awareness and need?

What Does Long Term Care Insurance Cover?

To address the long-term care dilemma, we must first understand what it is and what it covers. Long term care is a type of care for chronic conditions not covered by health insurance; it is meant to support an individual who requires assistance with activities of daily living over an extended period of time. Medicare will provide only a maximum benefit of 100 days’ nursing home care, for which the recipient is only eligible after three days of hospital consecutive stay; the first 20 days are covered by Medicare, with a co-pay ($119/day in 2006) required for the remaining 80 days. All Medicare benefits end after 100 days. A patient with chronic long-term care needs will probably require some form of LTC beyond the 100-day period, which for most is where the predicament begins.

According to the American Council of Life Insurers, 48% of Americans pay out-of-pocket, 41% rely on Medicaid, and 8% receive temporary coverage provided by Medicare, but only 3% of LTC recipients pay with private long term care insurance. Once again, this poses the question: Why does traditional long term care insurance have low consumer acceptance in spite of a clear consumer need?

One of the main reasons that consumers have shied away from long term care insurance is the price tag. Long term care insurance  can be costly; in fact, a 2007 Life Insurance and Market Research Association (LIMRA) survey concluded that consumers were indeed “put off by the cost of stand-alone LTC products.” Furthermore, rates on new products are 25% to 40% higher than they were just five years ago. Another reason that consumers have not accepted long term care insurance is due to the limited choice and complexity of the products. Most consumers don’t understand how the products work, and many traditional long term carriers have left the market, further narrowing consumer choice.

Changes in Legislation for Long Term Care Insurance Products

The good news is that breakthroughs in legislation have made it possible to introduce new long term care insurance options into the marketplace, and such products are quickly gaining consumer acceptance. The Pension Protection Act (PPA) of 2006 amended some key rules for LTC / life insurance combination products.

Under the PPA of 2006, LTC-accelerated benefits may be deemed to be tax-free death benefits per Code Section 101(g) if payable for an event deemed LTC under the law. Another important benefit under the PPA of 2006 is the allowance for 1035 exchanges.

These new “Long term care insurance combination products” work as a rider attached to a traditional life insurance policy, providing a tax-free accelerated death benefit that becomes available to the insured when a long term care event is triggered. This benefit offers a single strategy that addresses the three most critical financial risks for boomers: premature death, inadequate retirement income, and the need to pay for long term case expenses.

In addition to the core protection of pairing life insurance with an LTC rider, another factor is the opportunity to enhance the income value of an Insurance Based Retirement Plan (IBRP), which itself provides supplemental retirement income to clients. Because the LTC rider is less expensive to add to an over-funded life insurance policy (due to a smaller financial risk), it has a lesser effect on the income stream available in retirement years. However, should the insured need long term care, having an LTC rider could allow for a significant additional amount of money to be pulled from the contract.

In conclusion, long term care insurance combination products offer a simple, cost-effective solution for boomers who need protection in place should the need for LTC arise.  Be sure to seek the advice of a professional to see if this type product makes sense for you and your situation. There are ways to find cheap health insurance online so you can compare quotes and see what plans would be the best fit.

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