The dark side of improving life expectancies is often a diminished quality of life. Millions of the elderly (over-65) population have mental or physical disabilities and require costly assistance with the requirements of daily life. Anticipating the consequences of this contingency is increasingly being recognised as a fundamental component of a sound personal financial plan.
It has been estimated that 15m people in the US are unable to perform one or more of nine Instrumental Activities of Daily Living (IADLs): light housework, laundry, travel, money management, cooking, grocery shopping, taking medications, outside mobility and telephoning. Of these individuals, a large number, estimated to be over 5% of the elderly population, suffer from cognitive impairment or are unable to perform two or more of the seven basic activities of daily living (ADLs): eating, dressing, toileting, bathing, inside mobility, transferring, and continence. Those who are unable to perform ADLs usually require expensive full time help and face a potentially devastating financial burden. (The national average annual cost for long term care is about $50,000. But this cost can reach above $150,000.)
Long term care insurance (LTC) was first offered in the mid-80s and today is becoming a significant product line for a number of companies. The US government, through legislation passed in 1996, has encouraged this trend by making long term care insurance premiums for ‘qualified’ LTC plans deductible as medical expenses, subject to limitations that affect employers, the self employed and individuals differently.
Concern about financing the cost of long term care is not universal. The very wealthy can readily absorb the expense. Those of modest means will “spend down” assets and qualify for public assistance through Medicaid, a federally financed programme. In between is a large population of professionals, business owners, salaried employees and executives for whom LTC insurance premiums are affordable.
An LTC buyer’s first priority should be to identify the insurers with financial strength, a reputation for fair and reasonable claim administration, and a history of competitive pricing without post-issue premium increases. Another important issue, for plans established by corporations, is finding an insurer that offers policies with premiums fully paid by retirement or over a limited period of years.
Next will come decisions about policy design. Will payment of benefits require confinement in a skilled nursing facility? Or should the cost of home care be covered? How large a daily benefit is appropriate? Will it be adjusted for inflation? When will benefits commence? For how long will benefits be payable? Will they be payable as a reimbursement of actual cost or as an indemnity?
More information about the features of LTC policies, the available design options and their economic assessment is available on our web site: http://www.comp-strat.com.
William Dreher runs Compensation Strategy in New York, part of the IBN network