Getting old is big business.
Seventy percent of all Americans who reach age 65 will need some kind of extended healthcare during their lifetime, and 20% will need care for more than five years, according to the U.S. Dept. of Health and Human Services. The cost of care can run over $1 million and is increasing at close to 5% a year. Such costs can decimate clients' retirement income and force them to liquidate their hard-earned assets. At best, there will be less left for their families; at worst, they'll run out of money completely.
If your clients are considering long-term-care insurance, you might steer them clear of the following typical mistakes:
Mistake # 1: "Service Day" Elimination Period
Don't let clients buy a policy with a "service day" elimination period. The elimination interval is the number of days you have to wait before you qualify to receive benefits and start getting paid.
An individual qualifies to receive benefits after becoming chronically ill, if he has a severe cognitive impairment, injury or disease, and requires assistance performing one or more of the activities of daily life such as bathing, dressing and going to the toilet.
Take the case of George, who bought a policy with a 90-day service day elimination period and is seriously injured in an auto accident. He can prove his is chronically ill, and every three days for the next 90 days, he receives physical therapy.
After his 90-day waiting period, George expects to start receiving his long-term benefits. But since he has only accumulated 30 days of physical therapy services, he needs an additional 60 days of services before he receives a dime.
George should have purchased a policy with a 90-day elimination period-separate from receiving services.
Mistake # 2: The Daily Insurance Benefit
The second mistake is purchasing a daily benefit instead of a monthly benefit. Say Peter buys a policy with a $300-a-day benefit. His friend Mary also buys a $300-a-day benefit, but her benefit is on a monthly aggregate basis. They both have 10 days of care in a month at a cost of $600 a day. Peter gets paid $3,000-10 days times $300-because his benefit is capped at $300 a day.
Mary receives $6,000 because her policy fell within her $9,000 monthly aggregate benefit-30 days and $300. Advisors should ensure that their clients' benefits are aggregated on a monthly basis.
Mistake #3: Buying a Reimbursement Policy
Reimbursement policies can also be detrimental to clients. Let's say Larry buys a reimbursement policy with a $12,000 monthly benefit. This means he has to send his care bills to the insurance company for approval. He can then get paid up to $12,000 a month.
Eileen buys a policy with a $12,000- a-month cash benefit. She will be paid her $12,000 benefit each month after she qualifies for benefits, regardless of the amount of her qualified expenses, if she has any.
In a given month, both Larry and Eileen have $3,000 of reimbursable expenses: Larry will get a check for $3,000 and Eileen will get a check for $12,000.
In addition to collecting 100% of the reimbursement policy, the cash benefit goes a lot further because many expenses, such as medical copays and home maintenance, aren't covered by long-term-care insurance policies. Neither are payments to family members who often provide care. In addition, Eileen doesn't have to collect and submit bills each month.
For a client going the reimbursement route, a partial or a 100% cash policy is probably the best option.
Mistake #4: The 50%-75% Home-Care Model
In my view, this is truly a rip-off because very few people understand what they have purchased.
Say your client, who has multiple sclerosis, buys a policy with a $9,000 a month benefit. Her doctor says she can receive long-term care at home from licensed caregivers.
At the end of the first month, she has $9,000 in bills and sends them to the insurance company expecting full payment. Instead she receives a check for $4,500. The insurance company explains that her policy has a 50% home-care benefit, which means while the client receives care at home the benefit is cut in half.
Clients should never buy a policy that pays less than 100% of the benefit when they receive home care.
Mistake #5: Not Building a COLA option into the policy
Long-term healthcare costs have been rising by about 5% a year, so let's assume your client starts out with a $9,000 monthly benefit. If his cost this year is also $9,000, he is in the clear. But look what happens in just 10 years: With compound inflation, his cost increases to $14,660, but his benefit remains at $9,000. And in 20 years his costs are more than 200% of his benefit.
Make sure your clients have a cost- of-living feature in their policy. And if they can't afford one, do the next best thing: Make sure that their policy has a guaranteed purchase option, which lets them increase their benefits every three years without providing evidence of insurability.
Mistake # 6: Buying a Compound COLA
The sixth mistake to avoid is buying a compound cost-of-living feature, rather than a simple interest benefit. For a $3,100 annual premium, your client can buy a $9,000 a month benefit-$108,000 a year-with a 5% compound COLA. But for the same premium, the client could have purchased a $160,600 annual benefit with a 5% simple COLA. It would take 24 years for the benefits of the 5% compound COLA to equal the simple interest feature.
The argument for choosing a compound COLA is that an individual would not need the policy until they're in their eighties, so the compound feature would seem to be the best option. However, according to the U.S. Dept. of Health and Human Services, 40% of all adults receiving long-term care are under age 65. Clients should protect themselves now, rather than bank on not needing long-term care until some time in the distant future.
Mistake #7: Not Taking Advantage of Tax Subsidies
People often overlook the tax subsidies that can significantly reduce their premiums.
If your client is a sole proprietor, a partner in a partnership, or a 2%-plus shareholder in a sub-chapter S corporation, she can deduct some, or all of her long-term-care insurance premiums on her Federal tax return.
This also applies to her spouse's premiums. If a client is age 55, she can deduct $1,270 of her long-term-care premium on line 29 of tax form 1040. And if the client is a shareholder/employee in a sub-chapter C corporation, she can deduct the entire premium. New York State residents are also entitled to a 20% state tax credit.
Mistake # 8: not taking advantage of the Premium Refund Feature
Affluent clients may want to consider buying a Return of Premium benefit, which will refund 100% of their premiums to their families when they die, less any benefits received. This benefit guarantees that all of their premiums will be recovered either as benefit payments or from the premium refund. In addition, it is a hedge against premium increases.
Even though it makes sense to own long-term healthcare insurance, many of the policies are riddled with exclusions, limitations and restrictions that can confound clients. Also, most policies are written in legalese that is difficult, if not impossible, to understand. As an advisor, it's your duty to help your clients navigate the pitfalls.
Philip Davis is president and founder of Corporate Compensation Plans (CCP), which designs and administrates innovative and tax-effective benefit programs for many of the country's largest corporations and law firms.