As the baby boomers get older, they face an important question: Who is going to take care of them when they can no longer care for themselves?
About 13 percent of Americans try to answer this question by buying long-term care insurance, which is a fraction of those who will need help. Yet issues with long-term care insurance, including rising costs and exclusions, make it less popular than it was a decade ago. Fewer people are buying long-term care insurance, fewer companies are offering it, and medical underwriting is getting more stringent as premiums rise.
Is long-term care insurance a good option for you? The question is not as easy to answer as you might think.
“It’s not one size fits all,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an independent organization for long-term care providers.
The very rich probably don’t need long-term care insurance, and the poor can’t afford it and will be forced to rely on Medicaid. Those who don’t fit into either of those categories should look at long-term care insurance as part of their retirement planning strategy.
“You absolutely should be discussing it with your financial advisor,” says Reid Abedeen, a partner in Safeguard Investment Advisory Group in Corona, California. “They need to evaluate everything working together versus just the investments achieving growth.”
The annual cost of a semiprivate room in a nursing home is more than $88,000 a year in Orlando, Florida, according to Genworth, an insurance company. A private nursing home room is almost $95,000 a year, and 44 hours a week of home health care services would run about $42,000 per year. Medicare doesn’t cover any of those costs.
Few people can afford those costs out of pocket. “In today’s environment, for many people, a long-term care policy is going to become today’s solution,” Slome says.
Slome estimates that a healthy 65-year-old who bought a policy today would pay $2,500 to $4,000 a year. But the cost varies considerably based on location, age, health, gender (women pay more) and the amount of coverage you get.
“The younger and healthier you are when you buy the policy, the cheaper the policy and the better it will be,” says Chris Orestis, CEO of Life Care Funding, which specializes in converting life insurance policies into long-term care funding. But the younger you are when you buy, the more years you are likely to pay premiums.
A long-term care policy won’t cover all situations that aren’t covered by Medicare. If you break your hip, for example, and need help temporarily, a long-term care policy is unlikely to be useful, since most don’t kick in until you’ve been permanently disabled for 90 days. Most policies sold today limit coverage to a certain number of years or a certain dollar amount.
Before a policy begins paying for care, insurance policies require that you demonstrate you have lost the ability to engage in at least two activities of daily living: eating, bathing, dressing, toileting, walking and continence. If you are unable to walk around the block, for example, but you can still walk around your house, the insurer may deem you able to walk.
Due to costs and limitations, other types of hybrid policies are springing up. These policies may have shorter waiting periods before benefits begin, set different rules for coverage and be sold to people who are older or have health problems and can’t buy long-term care policies.
One increasingly popular type of policy mixes long-term care insurance with life insurance. Customers pay a lump sum or monthly payments. If they don’t use the policy, their heirs get a payment when they die. Abedeen says he recently sold such a policy to a couple who paid $114,000 upfront. If either or both need long-term care, the policy will pay up to $6,100 a month per person in benefits, but if the benefits go unused, their heirs will get $307,000 when the second person dies. The couple can also pull the money out at any time. “Premiums can never rise,” Abedeen says. “It’s a really great plan for protecting that money that disappears in long-term care.”
Another option is annuities with long-term care riders. You buy an annuity but rather than taking withdrawals, you earmark the money for long-term care. If you don’t need long-term care, you can elect to receive the money after the annuity matures or let it go to your heirs. It’s also possible to sell your life insurance policy to get cash for long-term care. If you are being cared for at home, a reverse mortgage is an option. Or you can consider buying into a continuing care community. Short-term care policies are also available, which have a shorter waiting period but provide care for no more than a year.
Slome says the two groups who most need long-term care insurance are couples and single women. For couples, the first to get ill usually is cared for by the healthier spouse. If the illness eats up the couple’s assets, the survivor could be left with nothing. Single women receive two-thirds of all the long-term care benefits, he says, and they have to pay more for long-term care insurance.
If you’re considering a long-term care policy, here are nine things to consider:
Investigate the best option for you. Talk to a specialist in long-term care to determine what options fit your circumstances, plus talk to a fee-only financial planner about where long-term care insurance fits into your retirement plan. “You need to have a seasoned advisor who is independent who can allow you to look at these options,” Abedeen says.
Compare policies and read all the fine print. How long is the exclusion period before the policy begins paying benefits? What capacities must you lose? How many years of care are covered? While you should investigate these policies yourself, the situation is complex enough that you should consult an expert who doesn’t sell policies to help make a decision.
Investigate the companies. Many companies have left the market in recent years. “If you’re going to look at long-term care policies, you want to make sure you look at the health of the companies you’re buying them from,” Orestis says. “You always want to do your own homework.”
Don’t insist on a Cadillac if you can’t afford one. One way to cut the cost of long-term care insurance is to choose a policy that covers fewer years or pays out less per day. Eliminating the inflation rider can also cut the cost. “Historically, what people have recommended is first-class care,” Slome says, but not everyone can afford that. “Some coverage is always better than no coverage.”
Don’t stop paying premiums. If you don’t think you can keep up with the premiums on your policy your entire life, you shouldn’t buy one. Once you quit paying, your policy is no longer in force, and everything you’ve paid will be lost. Make sure the insurance company has a person to notify if premium payments stop. Many families have found out the hard way that when mom or dad developed dementia, he or she quit paying premiums, and the policy lapsed.
Don’t keep your long-term care plans a secret. Make photocopies of the first two pages and give them to someone who is going to be responsible. You may also need someone to advocate for you when it comes time to use the policy or file a claim, so authorize someone to speak to the company on your behalf in advance.
Apply earlier rather than later. If you’re not healthy, you can’t buy a policy, so the best time to apply is before you develop health problems, usually before 65. An AALTCI survey found that insurers rejected 44 percent of applicants ages 70 to 79, 25 percent of those 60 to 69, 17 percent of those 50 to 59 and 12 percent of those under 50.
Investigate policies for couples. Couples have the option of buying shared benefit policies. Each person would sign up for a two-year plan, for example, but one spouse can use all four years if needed.
Review your long-term care plans every year. While you probably won’t want to change your entire policy, you may have options to change coverage. Or, if you elect not to buy a long-term care policy, revisit that decision periodically. New products may emerge. “You don’t want to take any option off the table,” Abedeen says. “These options should be looked at every year.”