Long-Term Care as an Asset Protection Device
By Richard Freitag
Increasingly, bank executives and directors are deciding to assure themselves and their spouses of a continued positive lifestyle in their retirement years and to protect their financial assets from the risk of being depleted in the years following their retirement. How? By including a long-term care (LTC) insurance program as part of their bank’s compensation strategy for the bank’s senior executives and directors.
Long-term care is a growing concern for anyone planning retirement. We are likely to live longer than previous generations, but we are also more likely to require at least some elements of personal and maintenance care on an ongoing basis as we age or as a result of chronic medical conditions we develop in our retirement years. In fact, according to the American Health Care Association, approximately one in two of all individuals age 65 and older will need long-term care services sometime in their lifetime, and for seven out of 10 couples, one spouse will require nursing home care.
Some statistics from a recent MetLife Survey and U.S. Congress Office of Technology Assessment validate the issues facing all of us as we age:
• Average life expectancy after age 65 has now increased to 17.9 years and the older one gets, the longer the life expectancy and the greater the chances are that chronic conditions will result in an increased need for assistance with the Activities of Daily Living (ADLs);
• Currently 6.4 million people age 65 or older need long-term care; one in two over age 85 require care and assistance with their ADLs;
• The prevalence of Alzheimer’s disease doubles every five years after age 65, and nearly half of all people age 85 or older are believed to have some dementia;
• Individuals 85 years and older are the fastest growing segment of the population;
• Nearly one in every four households (23 percent or 22.4 million households) is involved in care giving to persons age 50 or over;
• Thirty-nine percent of Medicare home health users require help with three or more ADLs.
Long-term care does not just apply to the elderly. In fact, according to a National Underwriter article, some 40 percent of people who need long-term care are under the age of 65. Younger people may need long-term care for a variety of reasons including accidents, multiple sclerosis, strokes or other debilitating conditions.
Unfortunately, long-term care expenses are not materially covered by traditional health insurance or Medicare. Medicare only pays for limited assistance for a brief time after a hospital stay. Additionally, Medicare’s ability to finance any material future LTC services is questionable, at best. And Medicaid effectively requires a near total spend down of all assets before providing any benefits.
Because of the aging of our population and the statistics of utilization and clear need outlined above, more and more employers are choosing to offer an employer-sponsored group LTC insurance program. The goal is to provide their senior executives and directors, as well as their other employees, with a vehicle that offers underwriting, cost and portability advantages as well as coverage for care, wherever that care is given - home, assisted living facilities etc. or a nursing home.
The New Jersey Bankers Association, through its NJBA Service Corp., has recently finalized such a LTC insurance group program for its member banks.
The Cost of Long-Term Care is Rising
A survey of New Jersey long-term care nursing home facilities in 2003 showed many of them in the $225 to $275 per day range, i.e., $82,000 to $100,000 per year, with medical care costs rising at 10 to 15 percent per year as all of us have noticed from our medical care group insurance premiums. At those levels of increase, a continued rise of 10 percent per year would see nursing home costs double in seven to eight years and double again in another seven to eight years. As mentioned earlier, average longevity at age 65 is 17.9 years now, much less what it may increase to in the future.
Long-Term Care Duration
Most long-term care starts in the home environment whenever and wherever possible, and it is when care becomes impossible to administer at home or through an assisted living facility that nursing home care becomes the necessary choice. The average nursing home stay is 2.5 years or so, and even that average includes many short-term, post-hospital stays and does not include the years of home care that so many people have before the necessity of going into a nursing home care facility.
The Need for Planning
Without sufficient planning, long-term care costs will need to be paid out-of-pocket from assets worked so hard for during working lifetimes. Statistics show it is very common to see retirement assets soon drained and retirees and their families robbed of their independence and their lifestyles as well as family relationships disrupted. Increasingly, many of the upper-end nursing homes do not take Medicaid and require significant assets before qualifying a potential entrant. Long-term care insurance offers an effective tax advantaged alternative to this troubling scenario faced by so many individuals in their retirement years.
Discriminatory Yet Qualified Bank-Sponsored, Long-Term Care Programs
A bank-sponsored, tax-qualified, long-term care insurance program can be designed as part of an executive/director compensation package to cover a select group of senior executives and the bank’s board members. Unlike other forms of discriminatory programs and deferred compensation, your bank can select which senior management executives are included, and the program’s costs can be funded and still deducted currently by the bank while the executive/director is still employed.
In addition, the program’s benefits will be neither taxable to the senior executives as it is funded nor when the benefits accumulated are paid out. Additionally, the costs can be incurred over a 10- or 20-year period so that the program’s costs can be funded by the time the executive or board member retires from service of the bank. And multi-level benefit programs can be offered simultaneously.
A properly designed program, made part of the bank’s compensation strategy, offers important incentive and retentive benefits including:
• Retention of the executive or director (particularly, by funding the program in 10 or 20 annual installments while employed or as part of an employment contract);
• A material tax effective benefit as the costs as paid for by the bank for the executive and the spouse are not taxable income to the executive;
• A way to attract quality directors with a program many of them could not obtain elsewhere due to health or cost considerations.
Long-Term Care Program Design
Long-term care policies vary greatly in design and benefits. Generally, those designed for executives as part of a compensation strategy are designed such that benefits are payable for “qualified long-term services” for care in the home, an assisted living facility, adult day care facility, hospice care or nursing care facilities.
The definition of “qualified long-term care services” is quite expansive and includes such items as the necessary diagnostic, preventative, therapeutic, curing, treating, and rehabilitative services and maintenance or personal care services necessary as prescribed by a licensed health care practitioner. In other words, the services must be necessary, but they need not be acute-care services. Long-term care is not just one service, but different services aimed at helping people with the essential activities of daily living.
Key Elements of Long-Term Care Coverage
Most policies contain the following elements:
• Benefit Period - The duration for which benefits will be paid. Choices are typically two years, three years, five years or lifetime;
• Daily Benefit - The maximum daily amount that will be paid for services;
• Waiting/Elimination Period - The number of days an individual must be receiving home- and community-based care or nursing facility care before benefits commence being paid under the policy. Elective choices are typically zero, 20/30 days, 60/90 days and 180 days. The elimination period usually only has to be satisfied once;
• Inflation Option - Each policy anniversary date, the daily benefit increases by the percentage elected, e.g., 5 percent compound or 5 percent simple interest;
• Home and Community Based Care Benefit - Qualified LTC services for care outside a nursing care facility such as in the home, rest home, residential care facility, assisted living facility, hospice care facility or adult care facility.
• Spousal Discount - The premium discount some carriers offer to both spouses if policies are applied for and issued simultaneously on each.
• Waiver of Premium - The waiving of premium payments, often defined as after confinement in a nursing facility, or after payment of benefits for 90 days.
• Non-Forfeiture Provisions - For an additional premium, this rider provides coverage for a period of time if the policy lapses for non-payment of premiums, or in some cases, a refund of premiums at death of the second spouse.
• Premium Payment Period - The period for which premiums are scheduled to be paid. Typically, level premiums are paid for the lifetime of the individual (unless waiver of premium takes effect). In some states, some carriers offer a 10- or 20-year premium payment period after which the policies are “paid up” and self-sustaining.
• Policies are usually of two types, an indemnity policy paying a daily amount of benefit of a stated dollar amount, e.g. $250, versus a stated dollar daily benefit amount using a “pool of money” type of approach that pays up to a daily amount for the maximum of the stated benefit period. Some polices, like the NJBA program, offer an aggregated “pool of money” rider for home care.
The 1996 legislation establishing guidelines for LTC requires that all “qualified long-term care policies” refer to a list of daily living activities referred to as “ADLs.” ADLs are Activities of Daily Living – eating, toileting, transferring, (e.g., from bed to chair), bathing, dressing, and continence, and that coverage under these policies must be triggered by the need to require substantial assistance in the performing of at least two ADL dependencies.
The NJBA Long-Term Care Insurance Plan
The recently developed NJBA LTCI program has been specifically designed for the financial community. The program is unique in many respects:
• Favorable cost and structure. Preferred group rates and underwriting, but a totally portable individual policy;
• Modified guaranteed issue (only one health question) coverage for employees and active at work board members under age 66;
• Simplified medical underwriting (only four health questions), for employees ages 66 to 85, active at work board members age 66 to 85 and active at work spouses;
• Individualized program design flexibility and alternative simultaneous plans particularly targeted to senior officers, to directors, or/and to other employees/ retirees;
• Full flexibility in designing participant eligibility;
• Level premium payment options, including paid up policy in 10 years, 20 years or lifetime premium;
• Full portability and worldwide coverage;
• Ability to add other family members at group premium rates;
• No minimum number of participants per bank.
With the aging of our senior executives and directors and the rising costs of medical care far exceeding the inflation rate for other goods and services, providing long-term care policies as an element of executive and director compensation makes good business sense and should be part of an effective integrated compensation strategy for executives and directors.
Richard Freitag is president of IFM Group Inc., which specializes in consulting with institutions to determine the most effective strategies to use human capital to drive shareholder value through executive and director compensation and benefits. IFM Group is the endorsed vendor for the NJBA Service Corp. Long-Term Care Insurance Program. Mr. Freitag may be reached via e-mail at firstname.lastname@example.org.