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Happily Ever After - with Something Left Over
Understanding the benefits of long-term care insurance ‹ before it1s too late
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Business New Haven
9/30/2002
By: Melissa Nicefaro
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A year1s stay at an average Connecticut nursing home can run $100,000. David Guttchen, director of the state1s Partnership for Long-Term Care, explains how nursing home insurance works and why it can be critical to protecting one1s assets.
How long has long-term care insurance been around?
Since the mid-1980s. It didn1t become a product that people paid much attention to until the mid-1990s. It1s been out there, but in the early days there were just a few companies selling it and, to be honest, the early products weren1t very good. [Insurance companies] were very restrictive in their policies mostly because [they] were just getting into the business, unsure of what the risks were, what they ended up doing was modeling their products after Medicare benefits. And that doesn1t pay for long-term care.
Are these kinds of policies purchased as life insurance would be?
There are different markets for these policies, the biggest being the individual market, where in some cases you can buy a plan that covers both spouses. You go through an insurance agent and get a policy issued from an agent. The other way to get a policy is through a group or association program.
It1s a young business and it seems still to be evolving.
Over the last few years we have seen more of a consolidation in the long-term care insurance business. It1s not a bad thing, but some companies started to get into the business in the early- to mid-Œ90s and some of those companies realized that it1s not a quick return. Long-term care is a hard topic. It1s not something that1s sold over the phone and in many cases, it takes more than one visit from an insurance agent because a person has to become educated before he starts spending money on a product. They need to understand what it is and why they need it. You1re also talking to people about a time in their life when they1re going to be dependent on others, and that1s a difficult situation for anyone to talk about.
So insurance companies were pulling out quickly after jumping in?
Some insurers found they weren1t getting the return on investment that they wanted, so some of the larger sellers of long-term care insurance like G.E. Capital and John Hancock have actually bought business from other companies. In the long run, I think that1s positive. There1s still an enormous amount of consolidation out there, but what it does is keeps those companies that are serious about the business in there. It1s really in no one1s best interest to sell for a few years and then stop selling. What happens is that becomes a closed book of insurance business and there1s a greater risk that over time, the premiums are going to be raised. In any insurance risk pool, you need people who need care in combination with people who don1t. If you have a business that1s not growing in any way, all you1re doing is having people who are ultimately going to get sicker. So if risk isn1t spread properly, there is the potential of having to raise rates. So we1d rather see companies that are actively selling being the ones who are in the market.
Are rates fair right now?
We believe they1re fair. In Connecticut there are two types of long-term care insurance. There is regular long-term care insurance, which is regulated and reviewed by our insurance department, and Partnership for Long-Term Care coverage, which is also reviewed and regulated, but it also goes through us at the state Office of Policy & Management. We1re like an extra layer of approval. We do believe rates are fair. There is a great disparity between rates and there is quite a difference between insurers based on different assumptions that they have and different expenses that they have. Today, we haven1t experienced any company having to raise rates, but that1s not surprising since it takes quite a few years for a company to get enough experience to figure out if they need to do that or not.
What are the Partnership1s goals?
The Partnership exists for two reasons: Every day individuals and families are impoverishing themselves while paying for their long-term care. Nursing homes in Connecticut average over $80,000 a year. Most people, when you consider all the ancillary expenses, are paying close to $100,000 a year. Once you get your limited Medicare benefit, if you get anything at all, you1re on your own since health insurance won1t cover you in long-term care. More people are paying for care at home, which can be very expensive, and more and more people are getting assisted living. At some point, most people are going to need some long-term care and they end up on the Medicaid program, which is financed with tax dollars. We spend over half our Medicaid budget on long-term care alone ‹ well over $1 billion per year, which represents a little over ten percent of the total state budget. The second reason the Partnership exists is because private long-term care insurance is not necessarily always the answer for someone.
Why is that?
The younger you are, the more options you have. The problem is that despite a lot of efforts on our part and others, people tend to focus on this as they get older and the longer one waits, the more expensive it is. The only type of long-term care insurance outside of our program that can really provide some assurance that you won1t outlive your insurance benefit, is to buy an unlimited policy. You can buy a certain amount of coverage, or a maximum amount. Buying Œunlimited1 alone isn1t enough because you need to look at how much the insurance is going to pay for each day that you need care. If the nursing home charges you $250 a day, but the insurance you bought covers $100 a day, you have to pay the difference. Even though the policy may pay as long as you need care, at a rate of $150 a day, you1re likely to wind up exhausting all the money you have left.
The second piece of that is what we call inflation protection. Most people are buying these plans well in advance of needing it since you have to be healthy in order to be approved by one of these companies. Even if I1m buying at 60, 65 or 70, I1m healthier than the average person and it may be 15 years before I submit a claim. An inflation protection feature in the policy increases your benefits each year in an attempt to keep pace with cost increases. If you bought $200 a day today, even though it seems like a lot now, it won1t nearly be enough with the costs. So buy unlimited, buy a good daily benefit (which in Connecticut needs to be close to $200), and add the inflation feature.
That sounds expensive. So would you recommend people weigh the options of spending all their money on an insurance policy versus spending the money on long-term care?
Most people can1t afford that, so they end up buying something less. Somehow they1re making choices because they can1t afford all that. The problem is that, depending on the choices they make, they put themselves at some risk and some put themselves at significant risk because they buy an inadequate plan. My concern is that they probably feel that they have some coverage and even though, from the state1s perspective, it1s good that they have some coverage, we1re concerned because they really haven1t got what they thought they got, which is a plan that they thought would keep themselves out of the poorhouse. So we set out to educate about the importance of planning and we developed an insurance product that we feel provides people with quality coverage without the risk. That1s what1s known as a Partnership-approved plan, which needs to meet three criteria: 1) You can1t purchase less than $130 per day nursing home coverage; 2) it has to have inflation protection provision with the benefits of the policy compounding by five percent each year; and 3) Medicaid asset protection. Connecticut was the first state in the country that made this provision available.
How does asset protection work?
If an individual buys one of these private policies approved by the Partnership, when they start to use their benefits, they start to earn asset protection. They earn that at a rate of $1 for every dollar the insurance policy pays out in benefits. Let1s say you bought a policy that1s going pay for a couple of years at $150,000 worth of benefits. You use up your benefits, but you still need long-term care. Normally, if you exhausted your benefits and applied to Medicaid, you1d still be subject to normal Medicaid rules. If you were a single person, that means you can have no more than $1,600 in assets to be eligible. But if you use a Partnership approved policy, if you have used your $150,000 in benefits, you have accrued $150,000 in Medicaid asset protection, which means that when you apply, they1re going to allow you to keep $150,000 of your assets. Anything above that, you have to spend, but then you can keep the $150,000 and go on Medicaid. The asset-protection feature does not cost the consumer any more money.
Are businesses starting to include this insurance in benefits packages?
The biggest one is an offering through the federal government where employees or retirees or family members of the employees or retirees can buy through a group plan. It1s still ultimately a policy from an individual insurance company, though.
This is an ongoing challenge. The ideal is that employers would contribute something toward the premium. Even if companies contributed a modest amount, I think you1d have a lot more people participating because there would be an incentive there. Long-term care is still very much viewed as a voluntary, discretionary benefit.
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