Searchlight Crusade

I’ve run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I’m getting down to nuts and bolts of what you need to know while shopping for a policy.

The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn’t do you much good to have a huge lake and a too-small pipe that can’t put out the fire, which is the daily bills you have to pay for care.

The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.

Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same “lake” of benefits, the former has a larger “pipe” (or “stream”, if you’d prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can’t use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the “lake” that’s how long it takes. I’ve known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you’re going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The “time duration stated” – the Y years part – is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always “until exhaustion.” Given the facts of the situation, it is better to have a big “pipe” than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It’s also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.

It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won’t be out of pocket for those not-so-little extras.

Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.

One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you’re likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. (“But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel”). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don’t have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.

Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You’re going to have to pay the back premiums, “bring your payments current,” and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not “don’t make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer’s.” About six months to maybe a year in some cases, is about the limit of lapse protection.

Elimination period is the time after you start receiving care, before your policy starts paying benefits. It’s analogous to the “deductible” on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you’ve got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you’re lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don’t live in one of those states, the policy can get you through the “lookback period” where Medicaid will go back and attach any assets you transferred elsewhere. I know I’ve said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destiture.

Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it’s a risk, not a certainty. You don’t wait to buy health insurance until the heart attack starts, you don’t wait until you’ve got terminal cancer to buy a life insurance policy, and you don’t wait until the doctor diagnoses you with Alzheimer’s to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.

Other bells and whistles you should be interested in include “step down” options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..

One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn’t advise it unless you are going to use benefits within the next couple of years or not at all.

Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let’s say it’s twenty years down the line, and your “total pool” of dollars has gone to $871,000, but now you start using them. Let’s say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your “available lake” to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn’t really long-term adequate, but it’s what’s available. If you’re relatively young, you probably want to overbuy by some factor to compensate for this.

One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson’s commission. Unfortunately, it can also double – or more – your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.

Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy – the insurance company doesn’t work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.

The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less – a lot less – than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting – even considering the time value of money. I always called this the “penalty box”, and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn’t make sense to buy after age 60; what I’m saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I’ve had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you’re buying at age 80, you are overall more likely to use benefits, and for a longer time, and second, because it’s likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.

Caveat Emptor

(Part 2 of a three part Series on Long Term Care)

I wrote in the previous column a lot about long term care issues. This column deals with the insurance policies available for long term care. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky enough to live in California, Connecticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership. In many states, there are indemnity policies available for those who don’t like paperwork, but the gotcha is that they are all NTQ, non-tax-qualified.

Let me explain what’s going on here.

In all of the legal policies, there are listed Activities of Daily Living, or ADLs. For non-tax qualified, there are seven, and for tax-qualified, there are six. It is the inability to perform a certain number of these activities without assistance that triggers eligibility for benefits. For tax-qualified policies, these are Bathing, Eating, Transferring, Continence, Toileting, and Dressing. Non-tax qualified adds the ADL of Ambulating, for a total of seven possible qualifiers. Note that the preparation of food is not a qualifying factor, hence Meals on Wheels and similar programs, as well as the traditional family support structures. “Assistance” ranges the gamut from just having somebody there in case something happens (“Standby assistance”) to having to have someone do it completely for you.

Bathing is performing the functions to clean yourself.

Eating is feeding yourself food you are given.

Transferring is being able to “transfer” from one support mechanism to another – for example, bed to wheelchair or wheelchair to toilet.

Continence is what you’d think.

Toileting is ability to perform the tasks necessary to eliminate waste material in a normal fashion.

Dressing is the ability to get clothing on and off as required.

Ambulating is moving yourself under your own power on your own feet from place to place.

Of these ADLs, bathing is almost always among the first to go and hence a trigger for the policy. Eating is probably the least prevalent trigger for benefits, followed by dressing, but there are no solid study figures I can find. Ambulating always goes before or with Transferring. Within broad parameters, each individual insurance company can write their own definitions of each of these. For instance, a number of companies used to define “Transferring” more or less the same as most people think of as walking, thus making it easier to qualify for benefits, and hence, a better policy than competing policies. Of course, they will be priced accordingly, as well, but there is a lot of variance on pricing within the industry. Of the policies I used to sell, the one with the broadest coverage was usually the second-cheapest in the competitive quotes. So shop around.

Now the point needs to be made that just because you qualify for benefits now doesn’t mean you have to start taking benefits now. Sometimes people are in situations where family can take care of them right now, but may not be able to do so indefinitely. Taking care of someone in this manner is brutally tough, and there is no shame in not doing so, or in saying “That’s enough, I can’t take it any more!” For this reason, every policy sold also includes respite care, where a caregiver who is usually a family member can get relieved by a paid provider. If you think about it, it’s to the insurance company’s advantage as they pay out less money this way, as opposed to the person starting to use full benefits right away.

Non-tax-qualified (NTQ) policies have one more trigger for care – ambulating, which tends to make them attractive-seeming to most laymen. However, they usually require three triggers to be pulled (ADLs requiring assistance), as opposed to a limit of two for tax-qualified. This is kind of like showing pictures of something that looks like a Rolls-Royce, but the the interior is vinyl, the body is made out of plastic, and the engine came out of an old Yugo.

Indeed, almost all of the games you will hear about being played are with NTQ policies. The issue is this: In order to become Tax-qualified, the policies have to toe the line of legal requirements. So the NTQ folks, who don’t meet the guidelines anyway, offer all kinds of bells and whistles that don’t really mean anything to make their policies appear more attractive to those who don’t know any better.

You see, NTQ policies are NOT generally deductible on schedule A of your income tax as a medically related expense. Furthermore, if and when they pay you any benefits, those benefits are taxable income. Remember I told you in the previous column that median billing was about $200 per day? So if you’re in there the whole year, that’s about $73,000 of taxable income, on which someone in the 28 percent federal bracket pays $20,440 on federal taxes, never mind state taxes.

Tax Qualified, or TQ, policy premiums are deductible as medical expenses, and the benefits they pay out are not taxed.

Now, for those readers who like myself, may have some knowledge of the nature of the tax code, let me take a minute for an aside. I am well aware that, in general, the IRS only allows, at most, one end of a transaction to get away from taxes. So this kind of got my attention, and before I sold any policies I verified it extensively. I confirmed a few days ago that it is still that way. To further ease your mind, remember that these are health insurance policies. The premiums I pay to my HMO are deductible, and the dollar value of the care I receive is not taxed. Tax Qualified policies of Long Term Care Insurance are treated the same way.

What this means is that it is very hard for me to imagine a scenario where an NTQ policy is better than a Tax-Qualified one. Indeed, I’ve never sold any policies that weren’t. It is for this reason that the state of California requires all Long Term Care Policies to state whether or not they are designed to meet the requirements to be tax qualified. Ask the agent looking to sell you one of these straight out whether it’s a tax qualified policy. Any answer other than a one word straight “yes” or “no” is grounds for terminating the talk. Walk out of their office or throw them out of your home, and go find an agent who knows what they’re doing and is willing to give you straight answers. And if the answer is “no”, ask them to tell you about a policy that is tax qualified. You see, one of the ways NTQ policies get sold is by paying higher commissions. They are harder to sell, because they aren’t as good for most people, so the companies give the agents a reason why they want to sell them. More $$$. It’s your call, but I wouldn’t do business with anyone who tried to sell me an NTQ policy, and yes, that means jettisoning them and finding someone else for your future needs, even if you’ve been doing business with them for decades. They’ve just demonstrated that they don’t have your best interests at heart.

I also want to make the point that agent’s commission should not, in general, be one of your criteria for choosing a policy. That’s a good way to end up with a policy that’s too small to do you significant good, as smaller policies pay less in commission also. Shop by the cost and benefits to YOU. A good agent will show you how they arrived at the figure of the coverage they are recommending, and if you shop around, the good agents will all come up with similar figures and the same way of calculating it.

Back to the main subject: we can regard it as settled that, in general, you want a tax qualified policy. Let me tell you about a subtype of tax qualified policy that people who are lucky enough to live in California, Connecticut, Indiana, and New York are able to buy: Partnership.

All Partnership policies are tax qualified. But in addition to their ordinary benefits and their tax qualified nature, Partnership policies have an extra feature: Medicaid asset protection. If you’ll remember, when I was talking about Medicaid (Medi-Cal here in California), I explained that before they will give you benefits, you are required to spend your assets on your care (or give them a lien in the case of your house) down to where you are basically poverty stricken. And indeed, if the benefits you have purchased under any other long term care policy have run out, that is precisely what you still have to do. Indeed, many people give their assets away during their policy benefit periods, so that when the policy runs out, they no longer own or legally control the assets and are eligible for benefits without a spend down. Since California’s thirty month lookback was the shortest in the nation last I checked (many states are at five years), this means you need to buy a policy where the benefits are going to last longer than that.

But once a Partnership policy’s benefits are exhausted, it protects from Medicaid recovery not only the same assets everyone else gets to protect, but additional assets as well, on a dollar for dollar basis. For every dollar the policy paid out before you applied for medicaid, you get to keep an additional dollar in assets, in addition to whatever everyone else gets to keep. Say you had a two year policy at $200 per day. That’s $146,000 you still have and that you get to keep. The Partnership instructor I had told us in class that she calls her policy her Visitors Insurance. Because she’s still going to have money, her family and heirs are going to want to keep visiting her so that they don’t get written out of the estate. Horrible thought, but this wonderfully funny lady is in her sixties and has been working with nursing home issues her whole life. She has seen too much of what really happens in these instances to be ignored. Visitors also means better care. Not to mention the fact that she will have had a policy in the first place, which means that if the facility she ends up in takes Medi-Cal patients at all, they have to keep her, and that means if there’s no Medi-Cal bed, she stays in the non-indigents ward until there is, so she’s not going to end up in Barstow, where it’s tough for friends and family to visit, and she will have hundreds of thousands of dollars to make her life more tolerable when she is moved to the Medicaid ward.

For this reason, the thing that makes sense with Partnership policies is to buy enough to protect your liquid assets (The New York program uses a different, in my mind far more onerous and less cost effective, plan where you have to buy a minimum of three years of policy benefits). In other words, the dollar value of whatever investments you may have. Since I’m in a Partnership state, this makes it easy to calculate how much of a policy would accomplish that. In non-partnership states, there’s more guesswork involved, and a large amount of sheer guts on behalf of the client.

Let me state emphatically that by inducing people who can afford them to actually buy Long Term Care Policies, Partnership policies save the states who have them a large amount of money – billions of dollars – as those people who would have needed state based aid now have insurance policies to cover their needs. The folks at the California, as well as New York, Connecticut, and Indiana Partnerships for Long Term Care, have saved their states blortloads of money by having this program in place. Luckily for all concerned, this includes two of the three most populous states.

(Supporting articles here and here and here)

However, back in 1993, OBRA (Section 1917 Paragraph 3, about halfway down the page, is the reference) was passed, which at the explicit insistence of Congressman Henry Waxman, who was then chair of the Commerce Committee’s Subcommittee on Health and the Environment, removed from all future states the ability to waive or modify the asset recovery requirement of medicaid. (I understand that Iowa and Massachusetts also have plan documents dated early enough, but have not actually implemented a Partnership program, and the Massachusetts document is even more onerous than the New York one, but better something than nothing). I understand Congressman Waxman’s concern for the budget, yet nonetheless by their propaganda you would expect Democrats to be in favor of something that benefits the middle class like this – particularly the lower middle class blue collar worker, and actually ends up saving the taxpayers money, to boot. Of course, Congresscritter Waxman is from California, which already had a program in place, and he grand-standed against “Money for the poor being used to pay for care of millionaires”. He represents a heavily blue collar district in Los Angeles, so you’d have thought he’d have done more research as to who it actually benefits. So due to this gutting of the primary benefit of having a Partnership policy, there will be no more of these wonderful programs until the law is changed back to what it was prior to 1993. In my opinion, whichever politician gets such a law through Congress should be a national hero. It gives people real incentive to buy a policy if they can afford it, secure in the knowledge that even if it doesn’t cover everything they need, they won’t be destitute after it runs out, while saving the Medicaid program tens to hundreds of thousands of dollars per patient.

So there really is such a thing as an insurance policy that keeps paying you even after the benefits are exhausted. Partnership policies are no more expensive that any other policy, and they provide asset protection, as well as additional benefits. If you are in a state that has a Partnership for Long Term Care, I would not consider any policy that was not a Partnership policy. Here in California, every policy sold must state whether it is or is not a Partnership policy. If it makes sense for you to buy a Policy for Long Term Care Insurance (a subject I will tackle in the next article), and you are in a state that has such a program, make certain that the policy you buy is one of those policies available through your state’s Partnership for Long Term Care.

Links to the four states with Active Partnership Programs:

California

New York

Connecticut

Indiana

(Continued in Part III here.)

Caveat Emptor