Posted on 13 August 2008
By Mark Miller
You’ve done a good job saving for retirement. You’ve got your living expenses covered, with something left over for some travel and fun.
Just one thing: Did you remember to plan for long-term care? It’s no fun to talk about, but the unfortunate truth is that many of us will have a need for long-term care sometime in our lives.
The Urban Institute estimates that 25 percent of people over 65 will need help for an extended period of time with some aspect of basic personal care—bathing, eating, getting in or out of bed or dressing. A recent study by Fidelity Investments estimated the average 65-year-old couple will need to spend an additional $85,000 on premiums for long-term care insurance.
There really are only a few ways to meet this kind of need. A family member can provide care—and that’s the most common solution. But can you count on a family member when that need could be many years down the road?
You could self-fund your care if you’re sufficiently wealthy—but do you want to allocate a substantial portion of your retirement assets to pay for long term care, when that money could be earning a return and funding retirement for your spouse when you’re no longer around?
The uncertainties help explain why long-term care insurance is gaining popularity. Long-term care insurance generally covers a range of health care and personal needs outside of what Medicare or health insurance would fund. Although these policies have been around for about 30 years, they’ve been slow to catch on—just nine percent of Americans over age 55 have bought LTC insurance, according to the Urban Institute.
The policies got off to a rocky start; in the early days, some underwriters priced policies too aggressively, and then boosted premiums aggressively for existing customers. More recently, the market has settled down to a handful of solid, established insurance companies. And tougher regulation by state insurance boards has eliminated most questionable rate hike practices.
Today, the biggest hesitation for consumers is expense—and complexity.
“People think of (this insurance) as very expensive, even though it’s not if you buy it when you’re young enough,” says Richard Johnson, principal researcher at the Urban Institute and an expert on long-term care issues. “But it’s also the most complicated financial instrument anyone will ever use.”
It’s not an appropriate financial product if you have low income and qualify for Medicaid. It’s also not for you unless you’re confident that you can keep paying the premiums over what could be a very long time—if not, you could wind up throwing money down the drain by buying insurance and then letting your coverage lapse.
If you do decide to buy a policy, it’s important to shop carefully and get good advice. Insurance companies can’t cancel long-term care policies and can’t change the terms—but neither can you. Here are some of the key features you’ll need to consider:
Daily benefit. Most experts recommend policies that cover $150 in daily expenses. Be sure to get a policy with a provision adjusting the daily benefit annually for inflation, and that allows for care to be provided in your home.
Length of coverage. A policy that covers benefits for a two-year period is adequate in most cases, and situations requiring more than four years are rare.
Elimination period. Similar to a deductible, this is the length of time you pay for care before benefits kick in. The elimination period on most policies ranges from 20 to 120 days; if you’re able to finance your initial care for a few months, a longer elimination period will get you a significantly lower premium.
Shared coverage. If you’re married, consider getting a shared policy, which will feature a discounted premium and flexible access to benefits for you and your spouse. Let’s say you buy a policy offering two years of benefits for each partner, and the husband subsequently goes into a nursing home and exhausts his benefits. The couple has the option of tapping into the spouse’s benefits to continue paying the husband’s expenses.
If you’re ready to take the plunge, check to see if you can buy long-term care insurance at work. Your employer can’t subsidize the cost, but you’ll probably benefit from attractive group rates and a quality underwriter. This approach has been gaining in popularity, and 42 percent now offer policies to employees and/or spouses, according to a Hewitt Associates survey.
If you purchase an individual policy, stick with one of the major carriers with solid financial ratings and responsible track records on premium increases. Financial planners can help you select an underwriter and sort through the thicket of feature choices; you can also find a broker on your own through the American Association for Long-Term Care Insurance.
Calculators: the American Association for Long-Term Care Insurance offers useful tools and calculators for long term care insurance.
Guide: Kiplinger’s website offers a Long Term Care Center that collects all of the magazine’s content and resources on this topic into a single, handy page.
Interview: The Urban Institute’s Richard Johnson