During 2020, the COVID-19 pandemic has affected in one way or another the lives of many federal employees. But employees should not forget that there continues to be a long-term care crisis in the United States as many senior citizens are, or will be soon, facing the challenges of long-term care.
This column is the first of three columns discussing the issue of long-term care and what federal employees should know in preparing for their likely future long-term care needs.
What is long-term care?
Long-term care refers to a host of services to assist an individual in need of care with the “activities of daily living (ADLs)” that include bathing, eating, toileting, getting in and out of bed, or in need of care because of a cognitive impairment such as dementia. Health insurance (such as the Federal Employees Health Benefits Program or FEHB) and Medicare pay for medical expenses in which an individual is under the care of a doctor, nurse or other health care professional, or is in the hospital. Health insurance and Medicare pay for what is called “skilled” care. Long-term care is considered “custodial” care and health insurance and Medicare do not pay for that type of care.
Medicaid, the federal and state health insurance program for low-income people, pays only for nursing home care. But an individual would have to spend down most of his or her financial assets in order to qualify for Medicaid. Medicaid is therefore not a recommended way of paying for long-term care.
Who needs long-term care and for how long?
According to a study by the Urban Institute and the U.S. Department of Health and Human Services, 52 percent of people who are 65 years old today will eventually develop a disability and require long-term care services. Of those who require long-term care, men will need services for an average of 1.5 years and women will need services for an average of 2.5 years. This latter information is important with respect to choosing the duration of an individual’s long-term care insurance policy.
What is long-term care insurance?
A long-term care insurance policy pays for custodial care up to the policy’s limits if an individual has a cognitive impairment such as dementia or Alzheimer’s Disease, or if the individual cannot do two out of six ADLs. The ADLs are:
- caring for incontinence;
- toileting; and
- mobility (ability to sit, stand and walk).
Most long-term care insurance policies sold today pay for custodial care in a nursing home, assisted living facility; for adult day care, or for custodial care in one’s home.
While a good long-term care insurance policy can pay for a good portion of the costs for in-home care, the cost of a stay in an assisted living facility or for the cost of a private room in a nursing home, for many individuals the problem of long-term care insurance can be the prohibitive cost of the insurance premiums.
In deciding whether or not to purchase a long-term care insurance policy, an individual should keep the following information in mind:
- The younger an individual is when he or she applies for long-term care insurance, the cheaper will be the premiums, at least initially;
- Most individuals do not have a need for long-term care until they are in their late 70’s or early 80’s;
- Long-term care costs are increasing annually, on average by 2 to 4 percent, exceeding the average cost-of-living adjustments (COLAs), that federal pensions (CSRS and FERS annuities) and Social Security annually receive in most years; and
- Once a long-term care insurance policyholder incurs a need for long-term care and the insurance company must reimburse the policyholder for any long-term care costs, the policyholder ceases to pay the insurance premiums.
The national median daily cost for a private bed in a nursing home in 2019 was $280 a day or $102,200 a year – an increase of 2 percent from 2018. This is according to insurance company Genworth’s 2019 cost of care survey. A yearlong stay in one’s own room at an assisted living facility cost on average $48,612 during 2019.
What is the best age to buy long-term care insurance?
The key to buying long-term care insurance is to buy it at the right age that keeps the annual premiums affordable while saving the individual buying the insurance money on the total premium paid over the life of the long-term care insurance policy before the individual needs long-term care.
The following facts should be considered in deciding at what age on should apply for long-term care insurance:
- the younger one is at the time of applying; the cheaper will be the premiums;
- there is generally no rating system when it comes to long-term care insurance. An individual is either approved or rejected for the insurance by an insurance company with no “preferred”, “standard” or “substandard” ratings;
- Most individuals who have a need for long-term care will need that care by the time they reach their late 70’s or early 80’s. This means that by purchasing long-term care insurance in one’s early 40’s, the premiums will likely be cheaper compared to buying the insurance when one is in his or her 60’s. However, the individual will likely be paying premiums for more than three decades before filing a claim.
According to the American Association for Long-Term Care Insurance, people older than 70 file more than 95 percent of long-term care insurance claims and nearly 7 in 10 claims are filed after age 81.
An example of the cost of waiting to buy long-term care insurance is illustrated using Genworth’s long-term care cost calculator:
A male, age 50, living in New Jersey, purchased a long-term care insurance policy paying a monthly premium of $161.72 in order to receive $182,700 in covered benefits. He pays 29 years’ worth of premiums until age 79 (the average age for making a claim) for a total of $56,278 in premiums paid. If he would have waited until age 70 to apply for the long-term care insurance, his monthly premiums would have been $370.88, or $4,450.56 annually.
Although the man’s total premium outlay in the nine years from age 70 to 79 is about $16,000 less ($56,278 less $40,055) compared to buying the insurance at age 50, by waiting the man faces the risk of being priced out of the long-term care insurance market at age 70 because of the higher and unaffordable premium. By waiting until age 70, the individual is also at a greater risk of rejection for the long-term care insurance because of poor health.
Most financial advisers would recommend that the optional age to shop for a long-term care policy, assuming one is still in good health and eligible for coverage, is between age 60 and 65. Married couples may want to apply five years earlier.
The reason that early 60’s is a good age to apply is because one is “not too young and not too old”. A still affordable monthly premium coupled with a total premium savings is a winning combination.
The exception to purchasing the insurance in one’s early 60’s would be if certain medical conditions may set in at that time. For example, if an individual has a history of diabetes in the family and that condition typically shows up in family members when they are in their early 60’s, then one should apply for the insurance in one’s 50’s or earlier, if necessary.
Finally, long-term care insurance premiums can increase over the years. But an insurance company must get approval from a state’s regulators in order to raise the premiums for all insurance policyholders located in that state. This is something that does not happen with other insurances; for example, homeowner’s insurance.
Long-term care insurance companies have been imposing significant rate hikes for a variety of reasons for nearly a decade. This includes the Federal Long-Term Care Insurance Program (FLTCIP), which will be discussed in the next column.
As long-term care insurance premiums continue to increase at a rate exceeding pay increases and cost-of-living adjustments, more and more individuals are being priced out of the long-term care insurance market. They must look for alternatives to pay for possible future long-term care expenses, and this will be discussed in a subsequent column.