Long-Term Care Insurance--Protection or Pitfall?
Eve B. Scheffenacker
Baby boomers are closing in on retirement, and many of them expect that Social Security will go bust before they can collect. Their employers' pension plans are cutting back or disappearing, and their own conservative 401(k) investments aren't keeping up with inflation. Meanwhile, medical and public health advances have added years to their life expectancy and, thus, to their retirement. Little wonder that many of them worry about outliving their assets. Especially when grim statistics tell them that they'll probably need 24-hour care for at least a few of those years.
One solution, say financial planners and insurance agents, is to make long-term care (LTC) insurance part of the family's financial plan. Once a little-understood add-on to employer-sponsored benefit plans, LTC insurance is now an industry darling. Aware of the market opportunity that aging boomers present, insurance carriers are selling more than 500,000 LTC policies a year.
It's true that the cost of long-term care easily could wipe out a family's assets. The average cost of nursing home care is about $66,000 a year. In 15 years, when today's retirees are likely to be checking in, the cost probably will exceed $170,000 a year. Private insurance and Medicare will cover little, if any, of those costs. Medicaid will cover them only after you have spent down your assets. Pretty scary.
But is long-term care insurance the panacea? Salespeople may say so. But in a recent study Consumer Reports determined that "for most people, long-term care insurance is too risky and too expensive." Let's look at some of the facts and factors so you can begin to judge for yourself. Work with a fee-only financial planner whose advice isn't influenced by potential commissions.
A long-term care insurance primer
LTC insurance pays part of the daily cost of long-term nursing home or home health care. This care, usually called "custodial care," consists of helping a person perform certain activities of daily living (ADLs) such as bathing, eating, dressing, using a toilet, and walking. Most policies require a person to be unable to perform two or more ADLs before paying benefits.
LTC benefits apply only to the facility's daily room and board charge. They do not cover other major costs such as prescription drugs and medical care and supplies. All LTC policies cover facility charges for inpatient nursing home and skilled nursing care. Some also cover home health care and assisted living facilities, but at a lower benefit rate.
Think before you buy
LTC insurance isn't a one-size-fits-all product. Policyholders can pick and choose among certain features to design their own coverage. For example, you can choose your daily benefit amount, waiting period, and benefit payment period. Other coverage options may include a cost-of-living adjustment for the benefit and a family policy shared by both spouses. Other factors include your age when you sign up and the carrier you choose. Every one of these choices will affect your premium cost and deserve your attention.
"For most people, long-term care insurance is too risky and too expensive."
When to buy--The younger you are when you buy your policy, the lower your premium will be. However, if you never use the coverage or your carrier drops the coverage, you've paid a lot of money for nothing. Objective experts recommend that you buy LTC insurance before age 60 only if you have a chronic condition like diabetes that can disable you over time. Otherwise, wait until you're 60 to assess whether you need the coverage.
Choosing a carrier--Dozens of insurance carriers offer LTC coverage; you're probably better off with the big ones. Companies with high ratings (B+ or better) for financial strength are likely to be around 25 years from now when you need the benefits. These companies may charge more, but have had fewer premium increases in the past. (Remember that none of these companies has a reliable claims history to base premiums on. When that changes, everyone may face steep premium hikes.) Several of the rating services have their ratings online.
Daily benefit amount--Daily benefits may range from $50 to $200 or more. Before you decide on a benefit amount, check the average cost of a private room in a nursing home in your area. Do the same for home health care if your policy covers it, and remember that the plan will pay only part of the daily benefit for in-home care.
Every choice you make about your coverage will affect your premium cost.
Inflation protection--The cost of nursing home care is expected to keep increasing by at least 5% a year. Inflation protection may increase your premium and is worth every extra dollar. Without it, the value of your daily benefit can dwindle to insignificance in just a decade.
Qualifying event--LTC benefits usually are triggered by your inability to perform certain activities. Some policies make it difficult for participants to qualify. In fact, the National Association of Insurance Commissioners found that, in 2001, LTC benefits paid by carriers equaled only 35% of the premiums collected that year. So get a policy that increases your odds of qualifying for benefits--one that requires no more than two activites, one of which is bathing. You also want one that covers cognitive impairment and medical necessity.
Waiting period--With LTC, your deductible is figured in days rather than dollars. You can cut your premium by choosing a longer waiting period and paying more of the bill yourself. But take time to weigh premium savings against your increased out-of-pocket costs.
Benefit period--Shortening the benefit period may be a safer way to reduce your LTC premium. Most people older than age 65 who stay in a nursing home are there for less than five years. Statistics suggest that women stay longer than men. If you have a chronic disease or a family history of Alzheimer's, you may want to choose a lifetime benefit period. Otherwise, a four- or five-year period should cover your needs or give you time to plan for a greater financial demand.
Most people older than age 65 who stay in a nursing home are there for less than five years.
On top of these coverage issues, there are financial considerations. If your net worth is less than $200,000 or more than $1.5 million, most sources agree you should pass on LTC. The same is true if you can't afford the premiums now or in the future.
As you can see, deciding about and buying long-term care insurance offers possibilities, options, and pitfalls. And most of them come with a high price tag. The best advice anyone can offer you on the subject is: Don't try to figure it out alone. Work with a fee-only financial planner whose advice will not be influenced by potential commissions.
Published January 24, 2005
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