To: John Client

From: Peter Katt, CFP, LIC

Re: Long Term Care Insurance

You asked me to research your possible purchase of long-term-care (LTC) insurance. This report provides an overview of LTC insurance issues and quotes from three companies.

LTC Insurance Overview

LTC refers to the costs some seniors may face due to the infirmities of aging. Typically LTC insurance will cover some or all of the costs associated with nursing home care, home care or adult day care. Generally LTC insurance benefits are triggered when an insured is no longer able to perform two or three common activities of daily living (i.e., dressing, eating, bathing, toileting, mobility and taking medicine) or has a cognitive impairment or a medical necessity. The amount of benefit, the length of time benefits are paid, inflation protection and the period before benefits commence after a triggering event are variables that each insured selects for themselves. Obviously, the larger the benefit, longer the benefit payment period, purchase of inflation protection and shorter the waiting period will all increase the premium cost.

LTC refers to custodial care due to chronic infirmities and should not be confused with full-time or intermittent skilled nursing care associated with acute medical episodes. Skilled nursing care, whether in a facility or at home, is covered in part by Medicare. Medicare Supplement insurance covers some of the gaps in Medicare coverage, but neither cover LTC costs. Some studies indicate that many Americans are confused about this issue, believing that Medicare will pay some long-term care costs. It doesn't. Medicaid on the other hand may pay for some or most long-term care costs if the claimant's income and assets place them at or near the poverty level.

LTC Insurance Policy Structure

• Benefit Amount - The usual range is between $100 and $300 per day. ($3,000 to $9,000 per month). The benefit amount should be directly related to the cost in your area (or the area you intend to retire to) for nursing home care.

• Waiting Period - The usual range is zero days to one year. Get a range of premiums costs for different waiting periods.

• Benefit Period - The usual range is one year to lifetime. I recommend the lifetime benefit period. Lifetime benefits are more expensive.

• Inflation Protection - The usual inflation factor is 5 percent. Some policies figure this as simple interest and others figure it as compound interest. The inflation protector increases the benefit from the first day of the policy, not from the first day that benefits are received. Simple interest inflation protection increases the policy cost by about 45 percent depending on age. Compound interest inflation protection increases the policy cost by about 65 percent to two fold depending on age.

Tax Issues

For individual taxpayers tax-qualified LTC policies' premiums are deductible for those qualifying for itemizing medical expenses, which requires them to be at least 7.5 percent of adjusted-gross-income. The benefits received are not included as income. C corporation LTC premiums paid on behalf of executives (usually owner/employees) are fully deductible as long as the premium cost is not obviously a replacement of the insured's earned income and also represents reasonable compensation. These two requirements are contradictory, which often happens with new tax legislation. As is the case with individually paid premiums all benefits are free of taxes. Apparently the laws that allow C corporations to deduct LTC premiums failed to provide anti-discrimination language as to who would have to be covered. Therefore, at least for now, a C corporation can provide LTC for whomever they select. There is a very significant possible drawback to having a C corporation purchase LTC. This corporate involvement will cause LTC to fall under ERISA jurisdiction. This may sound harmless, but under current laws it can be a huge problem if the LTC company aggressively manages its claims to enhance profitability or to remain solvent. (Indeed, I read an investment analysis touting an insurance company's stock because of their superb claims management - great for investors while screwing insureds by aggressively denying claims). That is, an insured denied LTC benefits because the insurance company can find any reason to deny them you will have a very difficult time litigating because ERISA caps how much attorneys can earn per hour on the case and punitive damages aren't allowed. I have done a good deal of litigation support and some of the market misconduct has corporate involvement (e.g., the client's corporations contributed to a phony VEBA). The first thing defendants do is claim ERISA jurisdiction knowing that this will usually halt the lawsuit. Therefore, considerable importance should be given to the ethical quality of a company a C corporation buys LTC from for its employees.

Premium Variability

Most LTC insurance is guaranteed renewable, which in insurance jargon means that the company cannot terminate the coverage as long as the premium is paid, but the company can increase the premiums of all such policies if it gets approval from the various states that has been pro forma. LTC insurance premiums are uncertain because there is little claims experience; especially experience for those who have the coverage that in-and-of-itself will cause a higher need for care whose triggering events are subjective. Already LTC insureds have experienced shocking premium increases because some companies have priced them to sell knowing they can raise the premiums. And because there are no surrender values for LTC policies, policy surrenders due to raised premiums are actually profitable for companies giving them an incentive that is adverse to their policyholders. Therefore, comparing companies based on cost is unwise.

It is my recommendation that the choice of LTC company should be based on its record for fair policyowner treatment. However, since there is practically no experience with LTC insurance claim payments judging fair treatment must focus on life insurance policies because there is considerable experience with them. With this in mind I am offering you the choice of a priced-to-sell policy and one from a company with unquestioned integrity whose premiums are nearly twice as much. Also, as noted in the section below I am also offering you the choice of a policy that has a guaranteed premium.

Guaranteed Premium

ABC, an insurance conglomerate, offers a single-premium LTC premium that is guaranteed. Not only is it guaranteed, but it also guarantees a full return of premium (without interest) to your heirs regardless of whether you have received any claim payments. I am very skeptical of this approach because as noted they cannot possibly know what their claim experience will be. I am not suggesting that this could cause their financial ruin because they are large enough to cover unprofitable business if this were to be the case. It is also possible that this pricing will turn out to be too high. A more realistic concern is if the premiums are not high enough to cover claims, insurance companies offering guaranteed premiums may become much tighter on the payment of claims causing some insureds to resort to litigation to earn claims they believe they are entitled to. There is anecdotal evidence this is happening with disability income claims from some companies. But, regardless of my skepticism about it I am including it as one of your choices.

Purchase Alternatives

The LTC insurance parameters I have used are:

• Benefit Amount - $250 per day for both in-facility and in-home care

• Waiting Period - 90 days before benefits begin

• Benefit Period - Lifetime

• Inflation Protection - 5% compounded annually

The three companies and premium costs are:

• XYZ - Annual premium of $4,725 for preferred nonsmoker - this premium is not guaranteed

• Excellent Mutual - Annual premium of $9,822.50 - this premium is not guaranteed - (Excellent Mutual has the highest integrity of all life insurance companies for its fair treatment of all policies. They have priced their LTC policy in the fairest manner possible to reduce the chances of having to raise premiums in the future although it is possible they could be raised. Next year all of the LTC policies will be subject to non-guaranteed dividends that could be used to reduce subsequent premiums if their experience and investment results warrant it).

• ABC - Single premium of $150,908 - this premium is guaranteed - (At an 8 percent return this single-premium has an annual value of $12,073. At 6.5 percent its annual value is $9,809. Also, the value of the return-of-premium should be taken into account. For example, if you live to age 85 using a 6.5 percent discount factor the present value of the return-of-premium is $42,827).

Payment of Claims

As noted we have little LTC insurance experience to draw on. But we do have considerable experience with disability income (DI) insurance claims. During the 1980s and early 1990s the sale of DI policies became very competitive with better and better policy features, including guaranteed premiums. These better benefits caused some companies' DI policies to become unprofitable. Anecdotal evidence is that some of these companies began paying claim managers bonuses for finding ways to deny claims and insureds started losing their benefits. DI and LTC are both subjective claims. I am concerned with the way LTC insureds will be handled regarding the payment of claims if companies find their LTC policies are not profitable. The payment-of-claims issue goes to fair treatment which Excellent Mutual has exhibited its superiority. That said, I don't want to make too much out of this because as noted there isn't any LTC experience to back up my potential concerns.

Conclusion

Given your wealth I am completely neutral whether you purchase LTC insurance. And regardless of comments made in this report I am also neutral, if you do decide to purchase a LTC policy, whether you choose to buy one based on the lowest current annual premium (XYZ), one based on a guaranteed premium with a return-of-premium feature (ABC) or one based on dealing with a company that has exhibited superior ethical policyowner treatment (Excellent Mutual) whose current premiums are much higher than XYZ's.