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.
And long-term care price increases haven’t let up during the recession. A cost-of-care study by Genworth Financial in 2011 found that facility-based care has risen at a compound 4.35 percent rate annually since 2005. For example, in 2005 the median annual rate for a private nursing home room was $60,225, compared with the 2011 median annual rate of $77,745. This increase represents a 4.35 percent compound annual growth rate over that period.
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?
This is where long-term care insurance may be a reasonable option to consider. 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 seven percent of Americans over age 55 have bought LTC insurance, according to LIMRA, an industry research group.
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. 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.
Rate hike issues
If you have long-term care insurance or have been shopping for it, the last couple years have provided some unnerving sticker shock. Major insurance companies have been seeking rate hikes as high as 40 percent on existing policies, and many carriers are reevaluating their products and pricing. One major carrier – Metlife – decided to stop writing new policies altogether.
How can policyholders and prospective buyers cope with LTC rate shocks? Here are four strategies to consider.
1. Don’t re-shop your coverage. If you’ve had your LTC coverage for a while, the premium almost certainly is much lower than what you’d pay on a new policy at an older age–even with a steep rate hike thrown in.
What’s more, the risk that coverage will be denied due medical condition rises with age. Just 9.5 percent of buyers under age 50 are denied, according to the American Association for Long-Term Care Insurance (AALTCI). But 14 percent of applicants in their 50s are denied coverage, and 23 percent of those in their 60s are turned down.
2. Reduce your benefit. The most expensive and comprehensive LTC polices offer lifetime benefits with 5 percent compound inflation riders. But price pressures are driving the industry – and consumers – toward less comprehensive, cheaper policies that still provide solid coverage.
Your options include cutting back the daily benefit amount or increasing the elimination period – the amount of time you wait before benefits begin after filing a claim. Another option is to cut the length of time that benefits are paid.
If you’ve got the unlimited coverage and face a big rate hike that you can’t afford, consider dropping back to less coverage. Likewise, anyone shopping the market will do well to consider the less comprehensive coverage.
Three years of benefits will be enough to cover all but 13.1 percent of policyholders, according to a recent Milliman study based on the claims history of four large insurance companies; just 7.6 percent will need more than four years of benefits and only 4.5 percent require more than five years.
3. Consider the policy’s current value. About 40 percent of LTC policies have compound inflation riders that boost the value of daily benefits and total dollars available to policyholders. If you have that kind of coverage, a big rate hike may not seem so bad. If a 55-year-old couple bought a policy in 1995 with a $150-per-day LTC benefit and a five percent compound rider, the benefit would be worth about $400 by 2015, according to AALTCI.
4. Research rate hike histories. If you’re shopping for a policy, ask carriers or insurance agents for the track record on previous rate hikes. State insurance departments can provide records of consumer complaints against carriers.
How to buy
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.
Resources
Should you buy a long-term care policy? This calculator takes into account your age, assets and expected retirement income–very importantly–your ability to pay premiums. From the American Institute of Certified Public Accountants.
Is AARP looking out for you? Moneywatch.com analyzes long-term care and health policies from AARP and other major carriers.
National Clearinghouse for Long-Term Care is a website maintained by the U.S. Department of Health and Human Services. The site offers comprehensive guides to understanding, planning and funding a long-term care need.
American Association for Long-Term Care Insurance offers useful tools and calculators for long term care insurance.
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.
Video
Richard Johnson, The Urban Institute’s Richard Johnson
My two-part discussion with Christine Benz, director of personal finance at Morningstar, on trends in long-term care insurance.
