July 14, 2011
Long Term Care Insurance: Group plan vs Individual
As long term care insurance gains more traction as a critical component of everyone’s retirement planning, more and more employers and associations are offering group long term care insurance to their employees and members. Unfortunately, most people just assume a group plan is better than an individual plan.
The People Who Benefit From Group Plans Are People In Bad Health
First off, the idea that long term care insurance should be lower in premiums for a group is a fallacy. As Kiplinger’s Finance states: “group plans have very limited underwriting, which means that healthy people end up paying the same price as less-healthy people. If you have medical conditions, this could be a wonderful deal. But, if you’re healthy, you can do better with an individual policy that’s tougher on medical issues.” Most group plans have what is referred to as “Modified Underwriting” which means that anyone within the group is guaranteed coverage if they can answer a few “knock-out” questions. The “knock-out” questions are questions designed to identify the worst of the worst in terms of medical conditions such as: have you been diagnosed or treated for Alzheimer’s, Parkinson’s, or are you HIV Positive. The group policies typically do not check medical records nor conduct personal telephone interviews. As the Kiplinger’s Article also states: “most group plans do not offer special rates for people in particularly good health nor discounts for couples.” With individual plans, there is always an additional 10% to 15% discount for people who would qualify for the “Preferred” rate and between a 20% to 30% discount for any couples who sign up together.
Group Plans Do NOT Offer an Asset Guarantee
Lastly, you will almost never see a “Partnership” plan in the group market. This has become the latest and greatest industry benefit that is available to most people who qualify for a plan on the individual marketplace. The Partnership is a partnership between the State of California and 5 Insurance companies. The State of California has decided to become very aggressive in encouraging people to take out Long Term Care Insurance plans. The idea of a Partnership plan is that you get a smaller policy which means a smaller premium and the State of California will provide you with an asset guarantee. It amounts to an entitlement the State of California provides to you whereby for every dollar of benefits paid by the insurance company, you are able to protect an equal amount of money from the spend-down requirements of Medicaid (MediCal in California). So in other words, if the long term care policy paid out $500,000 in benefits, then if the policy were to be exhausted, you would then be guaranteed to protect $500,000 from having to be spent down to qualify for MediCal. So if your estate is valued at a half million dollars, you would essentially be protecting your entire estate from having to be spent down to the typical $2,000 that MediCal requires one to spend down to in order to qualify for MediCal benefits. This program has been so successful in California that the Federal Government has created the National Partnership through the passage of the Deficit Reduction Act. So all states will now be offering Partnership plans. It is a clear message that both federal and state governments want to encourage people to take out Long Term Care Insurance plans. Keep in mind this asset guarantee is not available in over 99% of all group plans ever sold.
So in conclusion, unless you are not healthy enough to qualify for an individual plan, group plans are never a better deal. With an individual plan you will receive more benefits at a lower cost, and you would be able to obtain a Partnership plan which would guarantee that a large portion of your assets will never have to be spent down due to long term care. And isn’t that the whole point of taking out this kind of protection? But, beware, group plans give you the illusion that they’re cheaper. They do this by taking out inflation protection or giving you a very watered down version of it. Keep in mind that historically, over the last 30 years, the costs of nursing homes have increased an average of 5% per year compounded. Most group plans and certainly all Partnership plans have a built-in 5% compounded inflation protection. This means that your benefit will increase 5% every year you own the plan, but the premiums do not increase with the increase in benefits. So with an individual Partnership plan you will receive: Inflation protection, the Asset Guarantee, and a lower premium for the same benefits you would receive with a group plan.