Volume Four, Issue 1 February 2001

Transcription

1 Volume Four, Issue 1 February 2001 In This Issue In this first issue of the McGraw Wentworth Benefit Advisor for 2001, we will examine the value of long-term care insurance. We will look at the benefits of and areas to avoid when purchasing long-term care insurance. We will briefly examine the government s role in the long-term care market, and we will stress the importance of securing your financial future and how long-term care fits into that plan. We welcome your comments and suggestions regarding this issue of our technical bulletin. For more information on this Benefit Advisor, please contact your Account Manager or visit the McGraw Wentworth interactive web site at worth.com. Long Term Care YOUR FINANCIAL FUTURE MAY DEPEND ON IT As baby boomers begin to reach retirement age and people live longer, the need for greater financial security beyond retirement exists. While healthier lifestyles and advanced medical care provide new opportunities for more active retirement years, they also increase the possibility of injury or degenerative illness and the need for expensive long-term care. According to a 1990 Health Insurance Association of America report, 60% of Americans over the age of 65 will need long-term care. Recognizing this new problem, employers are beginning to make long-term care insurance available to their employees and their families. Long-term care insurance can cover a number of services needed as a result of injury, illness or the aging process. Coverage can include services for medical, personal and social needs. It can provide money for lifestyle assistance in a home or a nursing home and services such as assistance with bathing and eating. Why Should I Consider Longterm Care Insurance? Many people have not focused on the need for longterm care insurance, but there are several reasons to consider it: 1 in 10 Americans older than 65 and almost half of Americans age 85 or older will require assistance with everyday activities. Long-term care aims to increase independence by making the patient functional and able to care for him or herself. Most health insurance policies do Continued on Page 2 An estimated 12.8 million Americans of all ages need assistance from others to carry out everyday activities.

2 Volume Four, Issue 1 February 2001, Page 2 not cover long-term care. The cost for long-term care could severely drain retirement savings. What Services Are Available? You will find a broad array of service providers and care options to meet long-term care needs: Adult day care centers Assisted living facilities Companions and chore aides Home health aides Home health care Home modification services Hospice services Independent living Nursing homes Personal care aides Residential care Skilled care What Options Do You Have To Pay For These Services? The cost of long-term care services should be considered when building a financial plan for retirement. Your own plan may be to use: 1. Retirement savings: Your social security and other income, personal IRAs, savings and home equity can help pay for longterm care services. In addition, balances in company sponsored profit sharing, 401k, and pension plans should be considered. Remember, people are living longer and spending more time in retirement, and family life has changed with divorce rates increasing and family units shrinking. Divorced parents, as well as those with fewer or no children are less likely to receive assistance form family members. Therefore, they will be more responsible for their own well-being. 2. Government Programs: Medicare does provide some benefits for long-term care but is limited to nursing home stays up to 100 days and only following a hospital stay with a daily copayment for days It does not cover the extended stays typically associated with long-term care illness. In addition, Medicaid, a program for the elderly poor, is not available to middle income families until all other options and resources are exhausted. 3. Private Long-Term Care Insurance: Private long-term care insurance, whether an individual or employer-sponsored policy, can help provide for a person s longterm care needs. Long-term care insurance offers a number of products and options to choose from. Costly services that otherwise may not have been $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 covered by retirement savings or government programs, can be covered by a long-term care policy. The Cost of Long-Term Care The costs of long-term care services continue to increase with no sign of slowing down. Based on a new study conducted by the American Council of Life Insurers (ACLI), the cost of longterm care services will more than quadruple over the next 30 years. A September 1999 Journal of Financial Service Professionals article states that today s $45,000 cost for a nursing home stay is a result of a 3% increase in cost over each of the past ten years. If the 3% increase continues, in the year 2030 the annual cost of staying in a nursing home will be $190,000. Nursing home care is not the only area of long-term care service where we can expect dramatic increases in Costs of Long Term Care Adult Day Care Assist ed Living Home Health Aide Source: Journal of Financial Service Professionals, September 1999 Nursing Home Continued on Page

3 Volume Four, Issue 1 February 2001, Page 3 Of the 12.8 million Americans estimated to need long-term care assistance, only about 2.4 million live in institutions, such as nursing homes. costs. The above chart outlines projections for several areas of long-term care where we can expect cost increases through the year What Should Be Considered When Purchasing Long-Term Care Insurance? There are many policies and options to consider, including: 1. Covered Services: Most policies specifically identify the types of services covered. This may include services in a nursing home or services in your own home. Be sure to check that the types of services desired (such as home care) are included. You may want to make sure your policy has coverage not only for care in a facility, such as a nursing home, but also that it has coverage available for care to be provided within the comforts of one s own home. 2. Definition of Disability: Most policies define a list of activities of daily living. The list may have between four and eight activities, such as bathing and eating. In order to qualify for benefits, the policy will require the insured to be unable to perform one or several of those activities. The more potential activities on the list and the fewer that the insured has to lose, the more likely the insured is to collect benefits from the policy. 3. Benefit Amount: Long-term care policies offer a choice of daily benefit amounts. You can choose as little per day or as much per day as is desired and appropriate (up to a specified dollar amount per day). The more benefits dollars selected, the higher the premium will be. 4. Income or Reimbursement Basis: If the insured qualifies for benefits, there are two different types of payouts from the policies. Income policies will pay a fixed amount of money for each day that assistance is required, and a single claim is submitted to the carrier to begin the payments. Reimbursement policies will cover the cost of bills that are incurred up to a set daily limit, and each bill must be submitted to the carrier for reimbursement. An income policy s more liberal terms cause them to typically have a higher cost than a reimbursement policy. 5. Inflation (Cost of Living) Riders: Longterm care policies can account for inflation by increasing daily benefit amounts based on an inflation formula to cover increases in costs from year to year. If you do not account for inflation, your daily coverage amount will remain the same from year to year, and your policy depending on cost of living changes may lose some of its value. 6. Waiting Period: Most policies offer a choice of when benefits begin to be paid after a person becomes disabled (from as little as 30 days to as much as two years). The longer the waiting period, the lower the premium. You will need to evaluate how long you can afford to pay for long-term care to determine what is best for you. 7. Period of Benefits: Most policies offer a choice about the amount of time the benefit will be paid. A lifetime option (benefits for a lifetime) may be chosen or a specific period of coverage may be selected (the average nursing home stay is approximately three years). Keep in mind that, whatever the length of coverage chosen, if the policy s coverage period is exceeded, the insured will be on his or her own. However, the longer the benefit period, the higher the premium cost. 8. Renewability: Most long-term care policies are guaranteed renewable. This means that you will always be able to purchase the policy, but the carrier reserves the right to increase premiums in the future. Some policies also guarantee that premiums will not increase in the future, or they may offer a fixed premium payment that stops at some point in the future when the policy is paid-up. Continued on Page 4

4 Volume Four, Issue 1 February 2001, Page 4 9. Stability of Carrier: It is important to do your homework and research the history of the company and the product. The potential insurer s administrative policies, claims and account administration should be taken into consideration, as well as its financial stability. In addition, minimum group size requirements, premiums, portability, and underwriting policies should be examined. All of these factors combined should help the organization choose the most appropriate long-term care insurer for the employee population. Disadvantages Although there are many advantages to purchasing a long-term care policy, there may be shortcomings: Buying Too Far Ahead: The long-term care market is changing every day. If you buy a policy too far in advance, when it comes time to use it could be obsolete. You may want to wait, if you have that luxury, so that you will have the time to educate yourself on the options available to you as well as time to decide when it will be best to purchase the insurance. On the other hand, buying long-term care insurance earlier rather than waiting is a way to reduce your annual costs and avoid the possibility of having problems being insured due to health problems. Complexity: Long-term care policies are complex. Make sure you understand what you are buying. Employers can help by educating their employees on how long-term care policies can benefit them INDEXED PLAN rates steady. LIM- ITS Comparison Shopping: If you do not comparison shop, more money may be paid to one company for the same benefits you could have received with another. Education will help you avoid some of the shortfalls that exist with long-term care insurance. You should also understand the long-term care insurance market and several carriers offers so that you make a well-informed decision. Definition of a Facility: Because there are no national standards in place to-date regarding long-term care policies; each long-term care policy tends to define facilities differently from one another. Therefore, it is important that you clearly understand what the policy will cover. Rate Hikes: Rate stability is one of the, if not the, hottest issue when it comes to long-term care insurance. Remember, some contracts allow rates to be increased, does yours? Do your homework on the carriers and the contracts so that you can either be comfortable that rates cannot be increased or that your carrier Employer groups with 501-1,000 employees represent 5% of employer groups offering LTC. has a good reputation for holding The Group Advantage Employer sponsored long-term care insurance is a great way for employers and employees alike to take advantage of the benefits of carrying a long-term care insurance policy: Cost: Although employersponsored policies are often 100% employee-paid, administrative costs, though low, are employer paid. In addition, issue age premiums are typically lower for group policies than for individual policies. Employee Empowerment: Due to low unemployment and a shortage of skilled workers, employers are facing labor challenges and are looking for ways to differentiate themselves. Employers are offering long-term care benefits as a way to differentiate themselves from their competitors and as a way to make their employees feel they care about their well-being and the well-being of their extended families. Product Complexity: Long-term care policies can be confusing and difficult to understand for individual consumers. However, employer sponsored plans give the advantage of being able to design a policy that addresses issues such as those listed above (i.e. period of coverage). Continued on Page 5

5 Volume Four, Issue 1 February 2001, Page 5 Stability: Individual long-term care policy rates often increase over time. Employer sponsored plans offer a stable rate over time giving, especially those younger employees, the ability to make a long-term decision knowing that rates will remain stable over a long period of time. Underwriting: Often times, an individual who would not pass underwriting for an individual long-term care insurance policy, is often able to have those underwriting guidelines relaxed or waived under the group policy. Widespread Coverage: Group long-term care plans often extend coverage at group rates to the parents, grandparents and inlaws of employees. With more and more women in the workforce as well as an increasingly larger elderly population, family assistance with long-term care needs is not as readily available. Employers are continually recognizing the social needs of their employees and are beginning to offer long-term care coverage as a work/life benefit. Employers directly benefit from these offerings because employees are able to remain at their jobs instead of having to leave to care for their elderly relatives who otherwise would not have had long-term care coverage. HIPAA s Role An estimated 12.8 million Americans of all ages need assistance from others to carry out everyday activities. With the enactment of the Health Insurance Portability and Accountability Act (HIPAA) of 1996 came clarifications to the role taxes play in long-term care insurance. HIPAA explained that: Long-term care benefits are generally not taxable. Employers can deduct long-term care costs and contributions associated with the employersponsored plans. The employer s premium contributions are not considered taxable income for the employee. HIPAA also stated that the long-term care premiums and out of pocket costs for services can be applied to the 7.5% limit in the federal tax code for medical expense deductions. These tax advantages benefit primarily the employer sponsored longterm care benefits. Premiums paid for individual long-term care policies are only deductible if deductions are itemized and medical expenses exceed the 7.5% threshold related to gross income. However, according to data provided by the Internal Revenue Service, only 4.5% of all tax filers or 6% of all long-term care policy owners take advantage of the medical-dental deduction. HIPAA has most definitely brought more attention to long-term care insurance and its value, however there is an obvious need for more public awareness. Without a clear understanding of the benefits of carrying long-term care insurance individuals are going to financially strain government sponsored programs. Government s Focus in the New Millennium Recently several new legislative proposals to support long-term care have been made at state and federal levels, including: Tax credits for long-term care A Family Caregivers Program which would give support to those family members who care for their ill or disabled relatives Long-term care insurance to federal employees and use the offering as a model to show the rest of America the value and importance in carrying longterm care insurance Where Do We Go From Here? It is apparent that long-term care will be a need for many of us in the future. As the government continues to take a hard look at the importance of long-term care and the financial burden it lifts off of government programs, the public should continue to examine the trends in the industry and prepare for their own individual future well being. Long-term care insurance Continued on Page 6

6 Volume Four, Issue 1 February 2001, Page 6 provides an affordable means to protect savings by preparing for the possible need for long-term care services in the future. Retirement should be a reward for a lifetime of hard work. Thoughtful planning can make sure that problems, such as the need for long-term care, do not prevent enjoyable and financially secure retirement years. NAME McGraw Wentworth Team 1998 INDEXED PLAN LIM- ITS TITLE PHONE Employers are continuing to get on board and focus on the need for and advantages of offering employees and their families long-term care policies. With the proper combination of doing homework on the long-term care insurers and the products available and education of their employees, long-term care policies will not only be a benefit to the insured but also to the employers offering long-term care insurance. MW Our technical bulletins are written and produced by the McGraw Wentworth staff and are intended to inform our clients and friends on general information relating to employee benefit plans. They are not intended to provide either legal or tax advice. Consult your legal counsel or tax advisor in matters that directly affect your benefit plans. McGraw Wentworth 3250 West Big Beaver Road Suite 500 Troy, MI Telephone: Fax: Internet: