25 - 1Copyright 2008, The National Underwriter Company Determining Coverage Needs and Selecting a Long-Term Care Policy  What is it?  Pays for personal care needs for individuals who are limited in their abilities to perform the activities of daily living for themselves  Pays for care provided:  In an individuals home  In an assisted living facility  In a nursing home Chapter 25 Risk Management For Financial Planners

25 - 2Copyright 2008, The National Underwriter Company Determining Coverage Needs and Selecting a Long-Term Care Policy  What is it? (cont’d)  Activities of Daily Living  Eating  Toileting  Dressing  Moving between chair and bed  Remaining continent Chapter 25 Risk Management For Financial Planners

25 - 3Copyright 2008, The National Underwriter Company  Advantages  Provides money to pay for care when it’s needed most  Provides options to the spouse who needs care as to how and where care will be provided  Assets can be passed down to the next generation rather than being used up to pay for long term care costs  Disadvantages  Cost  Benefits may never be used Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 4Copyright 2008, The National Underwriter Company  Tax Implications  How policy is taxed – Qualified or Nonqualified policy?  Qualified policy  Premiums deductible as a medical expenses  To the extent they and all other eligible medical expenses exceed 7.5% of adjusted gross income  Subject to additional dollar limitation  Based on age brackets  Example – for ages 51 through 60 limitation is $1,150 in 2008  Benefits generally not includible in income  There is a limit on benefits that may be excluded in income  For 2008 the dollar limitation is $270 per day Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 5Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Nonqualified policy  Taxation for premiums paid for and benefits received from such a policy is uncertain  It is believed the tax benefits applicable to qualified long term care policies are not applicable to nonqualified long term care policies Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 6Copyright 2008, The National Underwriter Company  When is the use of this tool indicated  Considerations  Most individuals are not aware that these costs are generally not going to be covered by Medicare, or Medigap policies  Medicare will only cover a portion of expenses for “skilled” nursing care and there is no coverage from Medicare beyond day 100  Medicaid coverage will not begin until the individual’s assets have reached a minimum level as determined by the federal government Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 7Copyright 2008, The National Underwriter Company  When is the use of this tool indicated (cont’d)  Individuals with few assets  May not need this coverage  Medicaid will kick in sooner  Individuals with substantial assets  May prefer to pay this expense out of pocket  Individuals with assets that fall between those two points  Assets that they wish to preserve for their spouses and children Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 8Copyright 2008, The National Underwriter Company  Appropriateness of coverage  Purchasing LTC is a personal decision  Depends on individuals concern for financial situation for spouse and family  Statistics  Men  Have a 33% chance of entering a nursing home  Have a 4% chance of staying more than 5 years  Women  Have a 52% chance of entering a nursing home  Have a 13% chance of staying more than 5 years  40% of individuals will not need Long-Term Care Insurance Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

25 - 9Copyright 2008, The National Underwriter Company  Appropriateness of coverage (cont’d)  Cost - a primary consideration  One view – Income at least $35,000 and assets greater than $75,000 should consider purchasing a policy  Benefit triggers  What activities of daily living are required for the policy Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Comparing and selecting policies  Basic elements of comparison  The daily benefit amount  Example- $120 benefit per day  Some policies pay a different amount depending upon the different types of long term care (skilled, intermediate, custodial care, home health care, assisted living, adult daycare etc)  Indemnity type  Pays the daily benefit regardless of what the actual LTC expense were  Reimbursement type  Pays only the daily benefit amount up to the actual cost Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Comparing and selecting policies (cont’d)  Basic elements of comparison (cont’d)  The benefit period  The time over which a long term care policy will pay a benefit  Can be specified as years (such a three or five years) or it can be lifetime  Selection of benefit period a function of affordability  Statistics  Average stay in a nursing home – 2.5 years  Other factors to consider  Family health history  Current age of the applicant Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Comparing and selecting policies (cont’d)  Basic elements of comparison (cont’d)  The elimination period  The number of days an individual must wait after long term care begins before the policy will start to pay benefits  The shorter the elimination period, the higher the premium  The policies provisions to protect against inflation  Provides that the amount paid in benefits will increase by a fixed percentage each year  Effects of inflation  50 year old policyholder may own the policy for 20 years or more before benefits are paid out  One study predict that by 2030, one year in a nursing home will cost $190,000 and adult day care will cost $220 per day. Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Comparing and selecting policies (cont’d)  Basic elements of comparison (cont’d)  The elimination period  The number of days an individual must wait after long term care begins before the policy will start to pay benefits  The shorter the elimination period, the higher the premium  The policies provisions to protect against inflation  Provides that the amount paid in benefits will increase by a fixed percentage each year  Effects of inflation  50 year old policyholder may own the policy for 20 years or more before benefits are paid out  One study predict that by 2030, one year in a nursing home will cost $190,000 and adult day care will cost $220 per day. Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Comparing and selecting policies (cont’d)  Basic elements of comparison (cont’d)  The policies provisions to protect against inflation (cont’d)  Simple inflation method  Benefit increases each year by a certain percentage (often 5%) of the original benefit amount  Compound inflation method  Increases each years benefit by a percentage (such as 5%) of the prior years benefit Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Alternatives  Accelerated death benefits from a life insurance policy  Available if insured is terminally ill  Funds can be used for any purpose  Heirs will not receive the full amount of death proceeds  Amount they do receive may not be sufficient to cover the needs that the policy was originally purchased for.  Purchase of a combination policy  Life insurance and long term care rolled into a single policy Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy

Copyright 2008, The National Underwriter Company  Alternatives (cont’d)  Medicare and Medicaid  Drawbacks  Individual may not have choice about where they receive care  Insured’s assets will have to spent first before they can qualify for Medicaid  Rely on individual’s spouse and other family members to provide care  Individual may pay for coverage using existing assets Chapter 25 Risk Management For Financial Planners Determining Coverage Needs and Selecting a Long-Term Care Policy