Making a Decision About Long Term Care Insurance
A new federal program provides long term care coverage - but is it right for you?
By Karen Kopp DuTeil

For Army Col. Warren Johnson of the National Guard Bureau, the decision to purchase long term care (LTC) insurance is a no-brainer. "All I can see are pros," he says. "It gives you the mechanism to [maintain your] lifestyle into the future. You can say, ‘I'll never end up in a nursing home,' but you never know what will happen. You can say, ‘Well, I've saved a lot of money,' but you don't know what the cost of [home, assisted living, or custodial] care will be in the future. Are you willing to put your family through that [financial instability]?"

His concerns are valid. While TRICARE and Medicare will cover skilled nursing on a limited basis following hospitalization, some 11.5 million Americans currently need care for the longer term, and some 40 percent of those over the age of 65 will have to enter a nursing home in their final years, at an average annual cost of $40,000 to $50,000 in today's dollars.

With such figures in mind, the Office of Personnel Management (OPM) now offers military and other government employees and retirees the option of purchasing LTC insurance through the federal long term care insurance program (FLTCIP). The coverage, which is operated by Long Term Care (LTC) Partners, llc, a partnership between Metropolitan Life and John Hancock Life Insurance companies, was first offered for early enrollment from March 25 through May 15 and will be available again during an open season that runs from July 1 through Dec. 31. Following this one-time open season, LTC Partners will conduct continuous enrollments. While those eligible will begin receiving information at their offices or in the mail by early fall, you can learn all about the new coverage now and decide whether it will fulfill your needs.

What will LTC insurance cover?

Unlike Medicare, TRICARE For Life, or TRICARE for beneficiaries under 65, which pay only for skilled nursing care (such as at a rehabilitation center or with a home nurse) for a limited time following hospitalization, LTC insurance covers a variety of care options, including custodial nursing home care, home health care or unskilled (non-nursing) home care, assisted living facilities, adult day care, and respite care.

To start receiving benefits, you must meet one of the following conditions:

• You must be unable to perform two activities of daily living (ADLS) - eating, toileting, moving to or from a bed or chair, bathing, dressing, and controlling bowel or bladder - and a health professional must certify that your condition is expected to last at least 90 days; or
• You must have a severe cognitive impairment - such as a loss of short- or long-term memory; disorientation as to person, place, or time; or a loss of deductive or abstract reasoning - that could place you or others in jeopardy if you do not have substantial supervision.

Can My Health Affect Eligibility? Working federal employees and active duty military (including selected reservists) and their spouses will face only limited health restrictions during the open season (July-December 2002). During this one-time enrollment period, active employees can answer a short list of health-related questions to determine if they are likely to need benefits in the near future. All other applicants, including military retirees, must meet more strict requirements (by answering numerous health-related questions and facing a review of medical records and potentially even a personal interview). Following the open season, all applicants will be required to meet these stricter requirements. Regardless of your answers to such questions, you must fit into the Office of Personnel Management's broadly defined term of "federal family," which includes about 20 million people. You can purchase the long term care coverage if you are: a member of the uniformed services; an eligible selected reservist - a drilling reservist or guardmember assigned to reserve component units, an individual mobilization augmentee who is a reservist assigned to a reserve component billet in an active component unit, or an active guardmember or reservist who is a full-time reserve member on full-time National Guard duty or active duty in support of the National Guard or Reserves; a federal employee, including employees of the U.S. Postal Service and Tennessee Valley Authority (but not employees of the District of Columbia government); an annuitant - a member of the uniformed services entitled to retirement or retainer pay, a retired military reservist who qualifies for an annuity, a federal retiree, a survivor of a federal employee or annuitant receiving a survivor annuity, or an individual receiving compensation from the Department of Labor; a spouse of an eligible employee or annuitant; an adult child (at least 18 years old) or stepchild of an eligible employee or annuitant; or a parent, stepparent, or parent-in-law of an eligible employee (but not annuitant).

How long will I be covered?

Here it gets a bit confusing. While details are yet to be worked out, starting in July, the FLTCIP will allow beneficiaries to choose a maximum daily or weekly benefit as well as a policy length. If, for example, you choose a five-year policy with a $600 weekly benefit, you would have $600 × 52 weeks × 5 years, or $156,000, in your "pool of money" for services.

Another policy will offer lifetime coverage, in which your pool of money never ends. This, of course, is a more expensive option.

No matter what benefit level you choose, the FLTCIP insurance will pay up to 100 percent of your maximum benefit for institutional care, including expenses associated with nursing homes and assisted living facilities, and will pay up to 75 percent of your maximum daily benefit for care you receive while living at home, such as home health or adult day care.

What other choices must I make?

In addition to deciding on the daily dollar benefit amount and length of policy, you must choose a waiting period and type of inflation protection.

The waiting period is the number of days of covered care that you or another insurance pays for before the LTC insurance kicks in. Ninety days is standard, although you may opt, at much greater expense, to choose a 30-day period. It's important to note that only the days you actually receive care count toward the waiting period, so if you receive care only three days a week, it can take up to 30 weeks before your LTC policy starts to contribute. However, once you satisfy the waiting period you never have to do so again, even if you stop receiving benefits for a period of time.

The FLTCIP offers two inflation-protection features. With the compound inflation option, your benefit, and pool of money, will increase by about 5 percent each year while your premiums remain level. With a future purchase option, both your benefits and premiums will increase every other year based on the rate of inflation. However, the cost of the increase will be based on your age at the time of the increase, not the age when you sign up for the policy. For most people, especially those who likely will not need coverage for many years, compound inflation is considered the best option.

How much will FLTCIP cost?

No one is quite sure yet about costs since all the options and their prices are not yet available. According to an OPM spokesman, the FLTCIP rate could be 10 percent to 20 percent less than other standard LTC policies in some cases. However, recent information indicates that other LTC policies with similar benefits may be less costly when good health and couples discounts are involved (see "Comparing Long Term Care Insurance Plans," page 72).

The options you choose will, of course, affect pricing, with higher maximum benefits, longer lengths of policy, and shorter waiting periods equating to higher premiums. All else being equal, the younger you are when you buy the coverage, the lower your annual premiums.

The government will not cover any of the cost of your policy, as it does with other federal employee insurance programs. However, you can pay the premiums through automatic payroll or annuity deduction.

According to OPM, the FLTCIP coverage is guaranteed renewable, meaning that it can't be cancelled unless you stop paying premiums. It's also fully portable, so you can keep your policy, with the same premium, even if you leave the military or other federal employment or divorce your eligible spouse.

The Tax Advantage Like most other long term care (LTC) programs, the federal long term care insurance plan (FLTCIP) is considered a "tax-qualified plan" under the Internal Revenue Service Code. Benefits are not taxable, and you will be able to deduct premiums as medical expenses, to the extent that your total qualified medical expenses exceed 7.5 percent of your annual adjusted gross income. In addition, nearly half of the states also provide state and/or local tax benefits for purchasing LTC coverage. More tax benefits may be on the way. The Long-Term Care and Retirement Security Act (H.R. 831 and S. 627) seeks to "allow individuals a deduction for qualified [LTC] insurance premiums, use of such insurance under cafeteria plans and flexible spending arrangements, and a credit for individuals with [LTC] needs." Tax Credits Tax Deductions Maine provides a deduction for individual policies and a credit for employers.

Is FLTCIP the answer for me?

Maybe, but you should assess the program and the alternatives carefully. The primary advantage of the government's plan is its lower premium rates for some categories of beneficiaries. The features described above are not unique and are available in most plans. Other LTC insurance plans are available through more than 100 different companies, such as the General Electric Capital Assurance (geca) plan, which has been supported by troa. According to Lt. Col. John Miller, usaf-Ret., cfp, director of Contract Services and Marketing for troa, geca has maintained a 97 percent-plus claims payment rate without ever having to raise premiums for existing policyholders.

Should I get LTC insurance?

Only you, after closely examining your own financial situation, estate-planning goals, and family health history, can decide whether the security of being covered by LTC insurance is worth the cost. There are some rules of thumb to consider, however.

According to Miller, if LTC premiums cost more than 10 percent of your current income, you should probably forgo it. Those with modest incomes - in the neighborhood of $20,000 - and few assets will be able to rely on Medicaid for nursing home expenses once their own resources are exhausted.

For middle-income families with more assets, the decision becomes more difficult. LTC coverage often makes sense for those who want to protect their estates for their children. Miller says that if you have no beneficiaries, or if you consider your accumulated assets your own self-insurance against potential future LTC needs, you may want to invest those premium dollars in a good mutual fund instead.

In general, the United Seniors Health Cooperative, a nonprofit consumer organization, suggests you consider LTC insurance if:

• you have more than $75,000 a person in assets to protect, not including your house or car;
• your annual income is $30,000 or more a person; and,
• you still could afford the policy even if claims costs forced insurers to raise premiums by as much as 30 percent over the years.

As with any kind of insurance, advises Miller, remember that LTC coverage is only intended to protect against catastrophic expenses, not those run-of-the-mill health care costs that you could afford to pay with current income and investments.

More and more people are deciding that the cost of LTC insurance is indeed worth the security it offers. According to the Health Insurance Association of America, the market for such coverage has grown an average of 21 percent each year between 1987 and 1997, and the numbers continue to grow as the population ages.

Johnson says he likely will be part of that growing market, although he is still waiting to hear all the details of the FLTCIP before making a commitment. "[LTC insurance] is just another piece to achieving quality of life," he says.