Insurance World

When a client tells me that Long Term Care insurance is “expensive,” my response is invariably, “compared to what?” The insurance on our two cars plus a van we use only on vacation is $1200 per year–and we only have liability. If we had a wreck, it would pay for the other guy’s car. We would get nothing!

Our homeowners insurance is about $700, and it was the least expensive company we could find. We’ve never had to use it–but we aren’t even tempted to drop it.

Our health insurance is the pits–and if you are paying for private health insurance, for COBRA or simply footing your own medical bill, I’ll bet yours is about the same. We pay a whopping $6000 per year have no vision or dental care, and we each have a $2500 annual deductible. Unless we have to be hospitalized, we never will meet those deductibles, but we’ll pay that bill every month and be thankful just to have it.

In contrast, our LTCi bill for a policy that covers both of us for five years at a benefit of $150 per day is about $160 per month, or just under $2000 for the year. If we should need to use it, we have a $547, 500 pot of money to spend. Furthermore, we have the paid-up survivor’s rider, meaning one of us will stop paying the premium when the first one dies. None of our other insurance policies–not even our homeowners–will ever give us so much for so little!

Creative Planning

When to buy
The best time to buy LTCi is in your late 40s to early 50s. In your younger years, a private disability policy that replaces your income is more appropriate. Furthermore, some companies allow you to convert disability insurance to LTCi at age 65–without medical underwriting.

For most people, the best time to purchase LTCi is in mid-life when you are also making more detailed plans for retirement. Look for a company that does NOT have periodic rate increases, such as an automatic increase every five years. The best companies try to price the new policies in such a way as to absorb the increased costs of health care, thereby protecting clients with the oldest policies against multiple rate increases. Be aware, however, that any company could have a rate increase in LTCi because it is health insurance.

How to pay
No one can “afford” to add another monthly bill to their budget. That’s because, no matter how much money we have, most of us live according to our income, hopefully putting some aside for retirement, but otherwise maintaining a lifestyle equal to our income. Very few people have an extra hundred or two just waiting for some insurance agent to suggest a way to spend it. You will have to evaluate your finances; you should be able to cover the LTCi without taking food off your table or letting the light bill go unpaid.

Most people pay with a monthly bank-draft. If you don’t have a large bank account, it is usually easier to spread the payments out over the entire year. You do have the option, however, of paying quarterly, semi-annually or annually. You can also change your mode of payment at any time once the policy is in place.

Paying annually
Many people, especially retirees, begin their LTCi payments on a monthly bank-draft and switch to annual payment in later years. Paying annually saves money, since all companies charge a few dollars extra for the monthly processing. If you are still paying taxes and receiving a refund in April, it may be worth planning to use some of that refund to pay off the annual premium and then pay it annually at that time.

Another way to pay for LTCi–and keep all of your income in your pocket at the same time–is to take advantage of IRA accounts, mutual fund returns, or annuities. If you can find a company that sells both annuities and insurance, you will have an ideal situation. You can reposition an IRA into a good, high interest fixed annuity and use some of the interest to pay your LTCi premium. Be sure to look for a fixed annuity, not a variable one as it is impossible to lose money on a fixed annuity. Furthermore, if it is qualified money, the government will force you to take a distribution each year after you turn 70 Ѕ. You can use that required distribution to pay your premium, and if you either itemize your taxes or have your own business, you will be able to deduct most of the premium from your taxable income.

Planning to use an annuity to finance your LTCi has other advantages as well. An annuity is tax deferred until you withdraw it, meaning you can put more of your retirement income in your pocket. Also, while you can draw on it during your life, it works similar to life insurance when you die in that it is distributed directly to your beneficiary without going through probate.

Paying for LTCi without taking it directly from your income just takes a bit of advance planning. If your premium is about $2,000 per year, for example, a $67,000 fixed annuity would pay your LTCi with interest to spare. Your principle would never be touched!

You want it, but truly do not have the premium
Some people have experienced the hardships of taking care of a senior parent or the anguish of watching them lose everything to a nursing home. The year 2005 was the last year seniors could transfer their assets under the current three year look back period. In 2011, the government can look back five years, meaning assets transferred in 2006 will be subject to penalty. Many people who have seen their parents lose nearly everything would love to have LTCi, but either are not medically qualified or truly can’t afford it.

If you are not medically qualified, there is little anyone can do. However, if it is a matter of money, be frank with your agent. After all, even a year or two with a benefit as low as $100 a day is better than no coverage at all.

If you can’t afford LTCi, however, and know that you really should have it, you should bring the family together to discuss it. Which of them would be willing or able to take care of you? Would each family member be willing to chip in a small amount now rather than try to come up with $4000 or more per month later on to prevent you from losing the family home?

The real purpose of LTCi
In the long run, LTCi is not about you. Yes, it provides you with care when you need it, but it is really about your family. It is about sparing them the expense, the frustration, the guilt associated with caring for an ailing senior when they have their own share of problems. It is about keeping your spouse alive instead of burning out prematurely while taking care of you. According to the Alzheimer’s Foundation, 65% of the caregivers die before the person they are taking care of. Also, more than 70% of those caregivers are eventually a daughter or daughter-in-law who will do most of the work because none of the other family members will do it. The end result is contention within the family as those who do the work will feel like they have contributed more than their share. Do you really want to be remembered as a source of conflict? They deserve to be included now. LTCi really is all about the ones you love.

If you’re in the unfortunate position of having to make a claim on your critical illness insurance policy, the last thing you want is insensitive hassle or apparent non co-operation from your insurer. But according to numerous newspaper articles, that’s precisely what’s happening. The core problem is that before they’ll pay out, the insurer will always want to make exhaustive enquiries about your past health record. Whilst you’ll have provided them with lots of similar information when you initially applied for the cover, the insurers will now insist that all the information is rechecked. And if at the time you said you weren’t a smoker, they’ll now want this verified by your doctor.

The reasons are obvious. They’re faced with a big claim, typically way over Ј100,00, and they want to be certain that you told them the entire truth about your health when you first applied. This means that now you’ve claimed, they’ll crawl over your medical records in great detail checking that you disclosed everything on your application. Every small and apparently insignificant detail will be subject to intense scrutiny. The problem is that their reams of correspondence can be quite upsetting for you.

The insurers defend their procedures saying that they need to be certain that when they accepted the business, you disclosed the full truth about the factors affecting your health. They want to be sure that you didn’t cheat by omitting some information in order to dupe the company into issuing a policy when they otherwise might not, or to help you qualify for a lower premium. Either way, non-disclosure as they call it, is cheating and a valid reason for them refusing your claim. It doesn’t even matter if the information you omitted ultimately had nothing to do with the illness that occasioned the claim. The insurers position is that every piece of information you provide was used to work out your premium and any omission affects the calculation.

The insurers are particularly distrustful if the claim arrives within the policy’s first five years. Any claim arising during this period is classed as an “early claim” and the insurers are particularly watchful for policyholders who took out the critical illness insurance already suspecting that that they were already ill.

The problem is that all this intense scrutiny attracts a very bad press. If you’re very sick and distressed, the last thing you want is lots’ of questions and high-handed hassle from your insurer.

There’s undoubtedly a conflict here. If they are to neutralise the bad press, the insurance companies need to work much harder at softening the enquiry process and they must liase much more closely with their claimants. Insurers must present a much softer centre at what is a most distressing time for their claimants.

All this adverse PR has had two effects on the critical illness insurance market. Applicants have apparently been favouring insurers who publish the lowest rejection rates and others have withdrawn from making any application.

In practice, avoiding insurers who publish high refusal rates has little benefit. That’s because the published figures can be misleading. The latest figures show that Scottish Equitable Protect has refused to pay out on 28% of critical illness claims followed closely by Friends Provident at 25%. If you compare these figures with Scottish Provident at 13.7%, many potential policyholders can be forgiven for favouring Scottish Provident. But that’s not necessarily the best decision.

The problem with interpreting these figures is that the figures themselves can be distorted by how long the insurer has been active in the critical illness market. As rejection rates are highest with policies that have only run for a few years, then companies that are new to the critical illness market will automatically have the highest rejection rates. This leaves companies such as Guardian Financial Services looking good with a rejection rate of just 10%. The truth is that the Guardian has been in the market for over 15 years and has a mature book of business.

And it’s a pity that all this negative publicity has undermined confidence in critical illness insurance. In our view, this insurance plays an important part in protecting family finances but people are being deterred from buying it, leaving their family unit exposed if they become seriously ill. After all, if the main income provider is taken seriously ill, the family’s income can plummet. That means that the tax-free lump sum paid out by these policies can become central to the family’s financial survival.

Our advice is if you think you need critical illness cover press on. But be aware that these policies vary a lot in the cover they offer - so straight price comparisons aren’t really meaningful. Basic plans will cover one or more of the most serious conditions but comprehensive plans cover many more – for example:

Alzheimer’s disease
Aorta graft surgery
Aplastic anaemia
Bacterial Meningitis
Benign brain tumour
Blindness
Cancer
Cardiomyopathy
Chronic lung disease
Coma
Coronary artery by-pass surgery
Creutzfeldt-Jakob disease
Deafness
Dementia
Heart attack
Heart valve replacement or repair
HIV or AIDs from an assault, blood transfusion, occupational duties or accident
Keyhole heart surgery
Kidney failure
Loss of independent existence
Loss of limbs
Loss of speech
Major organ transplant
Motor Neurone disease
Multiple Sclerosis
Paralysis/Paraplegia
Parkinson’s disease
Progressive Supranulcear Palsy
Stroke
Third degree burns
Total and Permanent Disability
Cover for children

This complexity means that you really need independent advice. There are plenty of web sites that can help you. Just search for “critical illness insurance” and make sure you can talk to an adviser before you buy.