Many financial planners agree today that the high cost of long term care is the most serious risk to the security of senior Americans. Long term care is defined as sub-acute care that is required because an individual has a prolonged illness or injury and needs help from others in order to live. One may need assistance in order to perform two or more activities of daily living (bathing, continence, dressing, eating, toileting or transferring), and/or one may need supervision due to cognitive impairment.

• In 2020, nursing home care cost averaged about $300 a day or about $109,500 a year in California according to the Genworth Cost of Care Survey.
• At least 3 in 4 Americans are either uninsured or underinsured for long term care.
• According to US Government statistics, over half of Americans who reach age 65 will need long term care for more than a few months at some point. For a couple, the percentage rises to 77% that at least one spouse will need care for more than a few months at some point.
• Among people age 65 and older, 30% have three or more chronic diseases.
• Nearly 79% of people who need long term care live at home or in community settings rather than in institutions.
• The main causes of long term care are Alzheimer’s, stroke, circulatory disease, injury, and cancer.
• Of those who enter a nursing home, 44% will stay at least one year and 12% will remain longer than five years.
• Long term care insurance reduces a person’s chances by 66% of having to spend down his or her savings to the point of impoverishment to qualify for Medicaid assistance.
• The average cost for a home health aide or homemaker in San Francisco, Los Angeles, and San Diego is at least $25 per hour.
• The long term care insurance industry is proud of its record of paying nearly 97% of all claims submitted.
• 66% of long term care insurance claims are paid to women.
• If you meet Medicare requirements, Medicare will only pay the full cost of skilled nursing home care up to the first twenty days of a covered stay and then only a small part of the bill for the next eighty days.

In general, the annual premium for long term care insurance rises by at least 30% from age 50 to age 60 in a California policy and by more than 40% from age 55 to age 65.

The problem is how to manage an event that is increasingly likely to occur as we age. Because we are likely to live a long life, we are likely to get old. If we get old, we are likely to become sick or injured. If this happens, we are likely to need care. Who will pay for that care? Who will provide it? How can the potentially severe consequences of needing care be minimized for one’s family and one’s financial plan? The costs of care are huge and growing. Long term care insurance costs pennies on the dollar and protects against a devastating loss of assets should extended care be needed.

The average cost of a nursing home in California is now roughly $109,500 per year, or $300 per day, and is rising yearly at a pace above the rate of inflation. Medicare only covers long-term care for a matter of weeks, if at all, and is now under severe financial pressure. Medicare supplements and other private insurance policies also give minimal benefits. Medi-Cal only covers cost as a welfare supplement for the poor.

Many Americans still believe that the chances are slight that they will need long-term care. They claim that their family history, or their genes, or their lifestyle, minimizes their risk. Unfortunately, if they believe these factors will enable them to live a long life, they are building a case that they have a higher risk than others of needing long-term care. The longer one lives, the greater the risk. Thus, a healthy 65-year-old may have as high a risk of needing long-term care as another 65-year-old with health problems, because the healthy person has a longer life expectancy.

Others feel that they do not need protection because their spouse, child or close friend can take care of them if necessary. But very often, a long-term care scenario can impose more stress on the caregiver than on the patient. Policies can be designed to pay for other caregivers to relieve the primary caregiver or caregivers, enabling loved ones to retain their own quality of life.

Denial can lead to lack of planning. Better for many to pay for insurance and not need it than to deny their human frailties and have their life’s savings depleted.

One of the main reasons Americans buy long term care insurance is to avoid becoming a burden to their loved ones. They preserve their independence. They obtain the peace of mind that if they do become sick or injured, they will feel free to utilize the best quality of care available in the marketplace. They can die with dignity and usually without pain.

Another Important reason Americans buy long term care insurance is to protect their assets, as they didn’t work their entire lives to spend their savings on nursing care. They want to preserve their assets to pass to their loved ones. It is now agreed that any motivated person with sufficient assets to easily cover the cost of the insurance should buy protection.

Choosing a Long Term care Insurance policy can be complicated and should be done with the help of an industry professional.  There are many factors that determine coverage and cost, clients should realize that it’s imperative to choose a good insurance company and a good agent. As yet, there are only a handful of insurance companies and agents that have wide experience in this field. The main factors in choosing an insurance company and an agent are:

• Is the insurance company highly rated and stable, so that it will be around many years from now to pay a claim?
• Does the insurance company have a good track record of paying claims?
• Does the insurance company have competitive rates, give good value, and have a strong presence in the long term care insurance industry?
• Is the agent trustworthy and a specialist in long-term care insurance?
• Is the agent part of a larger organization that is available to assist you in time of need?
• Can the agent offer many plans from top companies and not merely represent one company?

The most common type of policy is comprehensive. It pays benefits for care in one’s home or in a facility. This is by far the preferred type of plan due to its flexibility. This type of plan pays benefits of care in any state, and many pay international benefits as well.

In recent years, hybrid or linked products have also become popular. They combine life insurance or annuities with long term care or chronic illness riders. These riders can accelerate the death benefit to pay for care. Some policies contain extension of benefit riders which can cover care beyond the amount of the death benefit.

These products are generally more expensive than traditional long term care insurance, but policyholders always receive a benefit and the rates are guaranteed.

In order to receive benefits, first the client’s doctor has to certify that he or she  is sick or injured. He must either require assistance in two or more of the previously mentioned activities of daily living, or he must need constant supervision due to cognitive impairment. In a tax-qualified policy, the client’s doctor must certify that the illness or injury is expected to last at least 90 days.

Second, he must receive care from a person or facility that meets a definition in his policy. In general, a facility must be licensed, maintain records and have the ability to care for him 24 hours a day. If he needs the care of professional caregivers in his home, they must also be properly licensed. If he only requires personal care and services at home and aides, no licensing is needed. Nor does he have to utilize a licensed home health care agency. Some policies reimburse even if care is given by a family member.

Home health care policies often require a written plan of care, designed by a doctor, nurse or social worker and agreed to by the patient. Benefits cover a very wide range of services performed within the plan of care. A social worker is also able to monitor this plan, change it if conditions change, and aid the patient in procuring caregivers. The best policies pay the costs of the social worker’s services.

There are three levels of nursing care that vary in intensity, and long term care policies cover all of them in the same manner:

• Skilled care: Rehabilitative, short term, intensive 24 hour care, usually following an illness or injury requiring acute care first. Assuming a three-day hospital stay, Medicare and other health insurance policies cover room and board for skilled care only in a nursing facility. The average stay is less than 20 days.
• Intermediate care: Rehabilitative care for up to six months which requires less than 24-hour supervision by a nurse.
• Custodial care: Care necessary due to a chronic or permanent illness or injury, which is less intensive, but which may continue indefinitely. This care helps a person perform activities of daily living or supervises a person if cognitive impairment exists.

The primary need for long-term care insurance is to cover the costs of custodial care, as custodial care accounts for more than 90 percent of nursing care costs. Other types of insurance policies provide no benefits for custodial care. Over half of custodial costs are for people having cognitive impairment. Many custodial care scenarios begin with a mild degree of illness, but slow deterioration sets in.

There are seven main variables in long term care policies which all influence the premium:

1. Age: The younger you are, the lower the premium. The age is the single largest element in determining the premium. This factor creates a substantial additional cost if one waits to purchase long term care protection.
2. Daily benefit: The maximum amount a plan will pay for one day of care. This can vary from $50 to $500 per day. The cost of a semi-private room in a nursing home in California in 2020 averages about $300 per day, according to the Genworth Cost of Care Survey. Clients may want to protect against all of this cost or only most of it.
3. Benefit limit: This is the number of days or years that a plan will pay a benefit … not from now, but from the time the client gets sick. Benefit limits can vary from one year to lifetime coverage. The longer the benefit limit, the greater the protection but the higher the cost.
4. Inflation protection: Because nursing care costs are rising, clients need a way for their daily benefits also to increase over time. Otherwise, the policy may not adequately protect your client many years from now if he/she gets sick. Policies normally contain riders offering automatic daily benefit increases of up to 5 percent each year, either at “simple” or “compounded” rates, plus other options.
5. Elimination period: This can also be called a deductible and is a period where clients pay out of their own pockets before a plan begins to pay. This period normally varies from 0 to 100 days, with the 100-day elimination period yielding the smallest premium.
6. Tax benefits of policy: Some or all of the premiums may be tax-deductible depending on your filing status. Typically, the benefits of a plan are income tax-free. For specific details contact us and your tax advisor.
7. Partnership: Companies in partnership with the State of California have special, tax-qualified policies wherein the State pays lifetime benefits in skilled nursing facilities under Medi-Cal after the insurance company benefits run out. The amount of insurance company benefits paid out is preserved in the estate of the client.

Any Long Term Care Insurance policy should include the following features among others:

• Guaranteed renewable: The company cannot cancel the policy unless the policyholder fails to pay the premium.
• Covers mental conditions: The policy should cover mental and nervous conditions due to any organic brain disease, including Alzheimer’s Disease.
• Exclusions: Exclusions should be minimal and should not affect the client’s intent to be protected.
• Premiums shouldn’t change: Premiums should not be influenced by any change in the client’s age or health, and the client should expect them not to change during the life of the policy. However, companies reserve the right to change rates on a statewide basis. Clients should be urged to buy from a company that does not have a track record of raising rates, but should be prepared to pay a higher premium years later if a rate increase occurs.
• No Pre-Existing Conditions: Once the company offers coverage and the client accepts it, any previous medical history, assuming it is admitted on the application, is of no consequence.
• Waiver of Premium: The company allows policyholders to stop paying premiums once they are receiving benefits. There can be waiting periods of up to 90 days before this waiver takes effect, and it may not be available when home health care is obtained.

When clients apply for coverage, the company investigates their health history to decide whether to offer them coverage. Clients release medical records, and some companies will call them on the phone and ask questions about their health. If they are older, the company will have a social worker see them, at their convenience, to do a face-to-face interview with no disrobing.

For those with health problems, the big questions is, can they get coverage? If they cannot, no financial decision is required. The only way to answer the question, however, is to have them apply.

The underwriting process normally takes about five to six weeks. This gives the applicant plenty of time to read materials explaining the policy applied for. The agent physically delivers the policy after it is issued. This presents an opportunity to finalize the structure of the policy and to become comfortable with the buying decision.

Annual premiums should probably not exceed 7 percent of gross adjusted income. The premiums can be financed out of income, but many believe it is also sound to utilize assets to pay premiums, thus using assets to protect assets.

A typical comprehensive policy for a 65-year-old could cost from $200 to $300 per month. The same policy would only cost 70% as much at age 55, but 80% more by age 75. This is even before considering that an increased daily benefit may be needed if one waits to buy coverage.

Because of all the previously mentioned variables, the costs are up to the client. He or she should be comfortable both with the premiums and the protection the policy offers. There is no magic formula as to how much protection to buy, as everyone’s needs are different. A good long term care insurance agent is like a good doctor or carpenter. Clients need a trained professional in long term care insurance whose judgment they can trust.

Insurance companies are growing increasingly adept at designing products that can satisfy two needs at the same time. These products are called linked products , and normally provide a long-term care benefit inside either an annuity or a life insurance policy. Thus far, the following designs are available from leading insurance companies:

• Annuities with Long Term Care Insurance Rider

These are basic annuities which offer all of the advantages annuities possess. But in addition, a rider at nominal cost can create a pool of money that can cover some long term care costs, usually for a limited period. They are usually funded by repositioning a current asset, either an existing annuity or a bank CD. One can often improve on ones current return and at the same time cover long term care costs. These products are ideal for a person who cannot qualify medically for long term care insurance and yet has a great need to be protected.

• Life insurance with Long Term Care Riders

These are whole life or universal life products that include long term care riders. They can be funded with single premiums or premiums over time. There is a death benefit at an appreciated amount that serves to transfer assets like traditional life insurance policies. But in addition, there is a substantial long term care benefit that can be utilized when long term care is needed. These products are ideal for a person who primarily wants to be protected against long term care costs but yet has a desire to transfer any remaining assets to heirs. They are more expensive than traditional long term care insurance policies, but the policyholder always receives a benefit, and the rates are guaranteed.