LTC Insurance Integral For Retirement

July 8, 2005
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GRAND RAPIDS — As the baby boomer generation approaches 60 and the reality that the golden years aren’t all about fishing, golf and grandkids begins to set in, the American public is becoming increasingly aware of the dark side of retirement.

“People don’t even want to think or talk about it,” said Paul Damon, president of Family Capital Management. “Their first thought of nursing homes is that they’re stinky, filled with persons of poor health — and they don’t want to go there. They don’t want to even think about it, because it might happen.”

Damon has the unenviable position of reminding his clients about that stage of life. He tries to frame it in a context of what they want for themselves and their family. Do they want the freedom to choose their living arrangements or are they comfortable with just being given what is available?

There are three answers to that question, Damon said.

“If they don’t care, they don’t want insurance, then they essentially become a ward of the state,” he said. “Medicaid will take care of them.”

Others might have enough assets to live comfortably in a facility of their choosing, like a Covenant Village, Porter Hills or Sunset Association, until their death.

“Many people who have enough assets are not interested in buying insurance as a safety net,” Damon said. “The question is: What is ‘enough assets’? When I started with long-term care insurance 10 years ago, we used to say $500,000 was enough.

“Today, it’s between $1.5 million to $2 million,” he said. “My fear, with it having gone up so much, is where will it be in 10 more years? $4 million? $5 million?”

“Most individuals don’t start looking at long-term care insurance until they’re either a) retired from their place of employment, or have discovered that b) Medicare does not provide for long-term care,” said Chris Wilks, a certified senior adviser at Regal Financial Group.

Wilks said that the majority of people only consider long-term care insurance shortly before or just into retirement — and only after researching Medicare coverage, when they discover its limits.

“Most hear it prior to retiring but they don’t believe it,” Wilks said.

By definition, long-term care is any type of care needed for more than 100 consecutive days. In practice, it’s the care required for a person that, due to old age, sickness or catastrophe, can no longer perform day-to-day functions without some assistance.

Most often, the individual will find the necessary care in an assisted living or skilled nursing facility. Accessing these facilities will quickly erode even significant assets. A bed at a skilled nursing facility averages $54,000.

Individuals who can’t afford that bill will rely on the Medicaid program. Medicare, the national health insurance program for the aged and disabled, does not cover long-term care.

For those with significant assets who develop a need for care, the state requires that assets are spent down to a level of $2,500 before he or she can access Medicaid funds. If that individual is married, the combined assets are split equally between the two. The recipient of care will still be required to spend down to $2,500, while the spouse must spend the assets down to $90,000.

As an example, if a man suffers a stroke and he and his wife share $300,000 in assets, the husband would be expected to spend $147,500 of his $150,000. The wife would be required to spend $60,000 of her half. With the current cost of a nursing home, the couple would spend down their assets in less than four years.

It should be noted that assets can’t be given away to friends or family; all funds must go toward care. Wilks said that with the recent budgetary difficulties of the federal and state governments, enforcement of that policy has reached an unprecedented level.

“The enforcement has changed. Government is billions of dollars in debt,” he said. “They’re going after every penny they can. The whole concept of retiring with a nest egg is supposed to be to have comfort in your lifestyle or for your children — not to give to a nursing home or to the state.”

Long-term care insurance circumvents Medicaid entirely. A cross between a life insurance policy and health coverage, long-term care insurance provides a safety net for the individual against the out-of-pocket costs of extended care.

This allows the individual a choice. Rather than a Medicaid-funded facility, he or she might access a retirement community like Sunset Association or Holland Home. Also, the insurance preserves the individual’s assets, allowing them to be bequeathed to family or spent down in a manner more commensurate with the traditional notions of retirement.

For the majority of his clients, Wilks attaches the insurance to an investment package. This way, the premiums, which can be significant for certain individuals, don’t come out of day-to-day income.

Regal has developed a relationship with 27 different carriers to ensure that its clients can be insured. The only conditions that could disqualify an applicant are a stroke, Alzheimer’s, dementia and multiple sclerosis. This is one of the most noticeable differences between life insurance and long-term care underwriting — none of these factors disqualify a candidate from life insurance, while those that would red flag a life policy, such as a heart condition, are acceptable for long-term care.

Unfortunately, as Wilks said, most individuals don’t become aware of the insurance until they reach retirement age. Many wait until after their health dramatically declines.

The average age of a first-year, long-term care insurance policy holder is 67. By no coincidence, that is also the top of the long-term care insurance age bell curve.

“The policy prior to that age is considerably less expensive,” Wilks said. “After that it’s exponentially more expensive. It’s underwritten similar to life insurance. If you’re 40, it’s inexpensive; if you’re 80, it’s very expensive.”

For every year past the age of 50, Wilks said, the cost increases 10 percent. A policy purchased at 60 is twice that of one purchased at 50.

Wilks suggests clients consider a policy between the ages of 50 and 55.

“What we’re seeing in our industry is a bigger push from brokers such as myself and from government to tell people they should look at this as soon as possible,” Wilks said.

“The federal and state governments are trying to find ways to entice people to buy long- term care insurance,” said Alliance for Health President Lody Zwarensteyn. “It hasn’t been a large seller to date, but the public sector needs the private sector to get it off the hook for the cost of long-term care.”

Zwarensteyn said he believes the issue of Medicare/Medicaid is a bigger retirement problem than Social Security because of its intense budgetary pressure.

“There is a denial out there that people will never need it,” he said. “A lot of people say (about insurance), ‘Why should I buy it? I’ll just get rid of my assets and the state will take care of me.”

Rep. Jerry Kooiman, R-Grand Rapids, is steadfast against that attitude. The budget he helped mold squeezed out a large portion of Medicare/Medicaid funds. He believes that the system has gotten out of control.

“We need to look at the person’s ability to live on their own vs. their need for skilled living,” he said. “We’ve got people in nursing homes because the only way Medicaid will pay for their long-term needs is at a nursing home. We’ve got to change that dynamic.”

Kooiman thinks the state is over-utilizing nursing homes and underutilizing in-home care, which carries an annual average price tag of “only” $12,500.

“The key is a single point of entry,” he said. “We have to get them before they go into a nursing home, because once they’ve lost all their assets, there is no way to get them living at home.

“We need to educate people about long-term care insurance,” he said. “Just like you get automobile insurance and health insurance, it should be seen in the same category, that this is something that when you’re in your 40s and 50s you need to be thinking about.”    

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