The Financial Aspects of Health and Long-Term Care Insurance in Later Life

Many people make health and long-term care insurance decisions in their 50s and 60s. The availability and cost of health insurance is a key factor when retiring prior to eligibility for Medicare at age 65. About a third of early retirees have employer-sponsored coverage. Others must find coverage on their own or be married to someone with health benefits. Going without insurance in later life should not be considered an “option,” for several reasons. First, medical expenses and the incidence of life-threatening diseases generally increase with age. Second, it’s a big gamble. About half of all personal bankruptcies are associated with unpaid medical bills. One way to lower health insurance costs is to purchase a high-deductible plan. Eligible workers who lose their job or choose to leave are also entitled to 18 months of continued group health insurance under a federal law called COBRA.

With longer average life expectancies, the cost of long-term care is another major financial risk. The term “long-term care” refers to a wide range of services including assistance at home with daily activities to care in a nursing home. The risk of long-term care can be dealt with in three ways: retain it (self-insuring if you have a high net worth), avoid it (trying to stay healthy but, unfortunately, there are no guarantees), or transfer it (i.e., paying an insurance company to handle the risk). The best time to buy a policy is generally age 55 to 60. If you wait too long, premiums increase significantly and/or you could become uninsurable through some type of medical diagnosis. Premiums are lower in your 40s or early 50s but you could be paying them for a long time before coverage is needed.

How Much Do You Know About Health and Long-Term Care Insurance?

1. Which is a characteristic of the COBRA law that covers the continuation of group health coverage by workers who are laid off or elect to leave their employer?
   1. The law covers departing workers in companies with 20 or more employees
   2. Departing workers must pay half the premium cost of their former employer’s group coverage
   3. Spouses of eligible departing workers do not qualify for COBRA benefits
2. The time between the receipt of care services and the start of benefits from a long-term care policy is called
   1. The elimination period
   2. A waiver of premium
   3. Spending down
3. The minimum length of long-term care coverage recommended by many financial planners is
   1. One year
   2. Three years
   3. Six years
4. Long-term care policy benefits are generally triggered when people can’t perform routine personal care tasks such as
   1. Bathing and eating
   2. Getting in and out of a bed or a chair
   3. Both A and B
5. Which is an important long-term care insurance policy feature to compare?
   1. Inflation protection options
   2. Coordination of policy benefits with Medicare
   3. Length of the look-back period for Medicaid benefits

Answers to the quiz are as follows:

1. A: Employees of companies with 20+ workers must pay the full cost of group health insurance plus a 2% fee. Departing workers and their spouses are covered by COBRA for up to 18 months.
2. A: The longer the elimination period (e.g., 90 days versus 30 days), the lower the premium for a specific amount of long-term care insurance. The trade-off: you must pay for the costs of care out of pocket during this time.
3. B: Three years is about the average length of stay for people who receive nursing home care.
4. C: Along with toileting, continence, and dressing, these triggers are called activities of daily living or ADLs.
5. C: The best option is a compound interest rider, which means that each successive year’s benefits are increased by a certain percentage (e.g., 5%) over the previous year’s benefit.

What You Absolutely Need to Know About Health and Long-Term Care Insurance

• COBRA benefits should be viewed as a “stopgap” until long-term health insurance (e.g., a new employer’s policy, a guaranteed renewable individual policy, or Medicare) is secured. For example, someone can retire at age 63 ½ and pay COBRA premiums for 18 months until Medicare eligibility at 65.

• A major disadvantage of COBRA for younger retirees is the potential for developing a serious health condition while on COBRA that makes it difficult or impossible to later buy affordable individual coverage.

• The longer people live, the more likely they will need assistance with activities of daily living (ADLs), such as bathing and eating. Nearly half of all Americans will need long-term care at some point in their life. Those most at risk are single, female, have no available support system living within 25 miles, and have had frequent falls and bone fractures, serious heart or lung problems, or a stroke.

• Key features in the selection of a long-term care policy include:
• The amount of daily coverage (e.g., $200 per day),
• The length of coverage (e.g., 3 years versus 5 years versus lifetime benefits),
• The types of benefits (e.g., home health care services),
• The elimination (waiting) period (e.g., 30 days versus 90 days)
• The method of making inflation adjustments (e.g., compound versus simple inflation riders),
• The number of activities of living that cannot be performed in order to qualify for benefits.

The longer the benefit period, the higher the policy benefit, and the shorter the elimination period, the higher the cost. Compound interest inflation riders cost more than simple inflation riders because they result in higher benefits over time.

Long-Term Care Insurance Policy Comparison Worksheet

Use the worksheet below to list the cost and features of three different long-term care (LTC) insurance policies. Then compare the three providers to determine the best policy for you.

Glossary of Health and Long-Term Care Insurance Terms

Activities of Daily Living (ADLs)- Common daily tasks (e.g., eating) that, when they are unable to be performed, can serve as a “trigger” to obtain benefits from a long-term care insurance policy.

COBRA- An acronym for the Consolidated Omnibus Reconciliation Act, a 1986 law that provides workers in companies with 20 or more employees an option to purchase continued health insurance upon separation from an employer.

Elimination Period- The number of days (e.g., 90 days), starting from the date of an insurable event, before benefits are paid on certain types of insurance policies (e.g., disability and long-term care).

Guaranteed Renewable- An insurance policy that will continue for life or until a certain specified age, assuming no lapse in premium payments. Premiums will not increase unless they are raised for everyone with the same type of policy.

Long-Term Care Insurance- Type of insurance that covers the cost of support services (e.g., home health care and nursing home care) when someone is unable to perform basic activities of daily living.

Noncancellable- An insurance policy that will continue for life or a certain age, without an increase in cost, assuming no lapse in premium payments.

State Health Insurance Assistance Program (SHIP)- A state-run program that provides free information and counseling about senior health insurance issues. Information about the State Health Insurance Assistance Program (SHIP) can be found at www.state.nj.us/he alth/senior/ship.shtml.

Action Steps

• Apply for Medicare within 3 months of your 65 th birthday. Also contact your company human resources office to understand how company health insurance or COBRA benefits can coordinate with Medicare. Pay attention to deadlines, such as the 60 days to decide whether to elect COBRA.
• Contact an independent insurance agent, or a large carrier like Blue Cross/Blue Shield, for help pricing policies if you need to buy individual health insurance. Contact your local SHIP office or a financial advisor for assistance with Medicare, Medigap, and long-term care insurance.
• Begin a family conversation about long-term care and explore alternative options. For example, adult children may decide to jointly pay their parents’ long-term care insurance premiums rather than risk a nursing home depleting assets earmarked for their inheritance. Use statistics about long-term care or the bad experiences of others to bring up the topic gently.
• Practice “The Rule of Three” by comparing at least three insurance policies with identical features (e.g., 3-year LTC insurance policies with a $180 daily benefit, 5% compound inflation rider, and 90-day elimination period). Look for providers with high marks (A++. A+, or A) for financial stability from insurance company rating services such as A.M. Best (www.am best.com) or Standard and Poor’s (www.standard andpoors.com).
• Visit the life expectancy calculator at http://moneycentral.msn.com/inv estor/calcs/n_expect/main.asp to determine factors that indicate you may live a long life and need long-term care insurance. Also consider your personal health history and whether conditions like Alzheimer’s run in your family.
• Check online long-term care calculator to “do the math” with different planning scenarios. Others online sources of information about long-term care include AARP at www.aarp.org and the United Seniors Health Cooperative at www.ushc-online.org.

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