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Long-Term-Care Insurance: A Useful Planning Tool, But Out of Reach for Many

Helping Grandmother WalkAmericans are living longer.  Someone who is in their mid-60s today can expect to live well into their 80s.  That’s great news, but with longer life spans come certain challenges.  One is an increasing need for long-term care.

And that care isn’t cheap.  The national median daily rate for a private room in a nursing home in 2014 was $240 — $87,600 per year – a price that has increased by an average of more than 4% every year for the past five years (Source: Genworth, 2014).  A stay in a long-term-care facility can quickly deplete a retiree’s savings and can also put a financial strain on the other family members.  Fortunately, there is a solution to the problem of paying for long-term care:  long-term-care (LTC) insurance.  Yet many Americans don’t have, or can’t obtain, this valuable coverage.

How Long-Term-Care Insurance Works

Long-term-care insurance covers the daily costs for people who need help performing certain basic activities of daily living (ADLs) –Typically eating, using the bathroom, continence, dressing, bathing, and moving from place to place.  Policies typically cover care in a nursing home, assisted-living facility, at home, in a hospice, at an adult daycare center, or in other facilities.

LTC policies work much like other types of insurance.  Once your doctor certifies that you need assistance with at least two ADLs, you should qualify for benefits.  Some policies will start paying those benefits immediately, while in other cases, there will be an elimination or waiting period before benefits begin.  The amount you receive and how long benefits last will depend on your policy’s specific terms, and there may be a daily or lifetime cap on the total dollar value of your benefits.  Benefits may also be paid out for a lifetime or stop after a certain period like on or five years.

Why you Need Coverage

The costs of long-term care can be significant, and families often discover too late that the resources they thought would be available to pay those expenses aren’t there.  Many assume that Medicare will pay for care, but that program typically only pays for acute care, not long-term, skilled nursing care.  At most, Medicare will pay some of the costs for up to 100 days in a skilled nursing facility, but only if certain conditions are met.  Medicaid will pay for long-term care, but you need to have virtually no assets before qualifying for benefits.

While the wealthy can often pay for long-term care out-of-pocket, many people need LTC insurance to fill the gap.  Yet despite the need, only about eight million Americans have purchased this type of coverage.  Why do so few people have long-term-care insurance?  Some of it may have to do with simple denial, but a major challenge is the cost of the policies themselves.

Why Long-Term-Care Insurance Cost So Much

According to a report from NPR, a healthy 60-year-old couple can expect to pay $3,335 per year for a LTC policy that pays a daily benefit of $150 for three years.  Older people and those with health problems will pay even more.  At those prices, many people simply decide to forego coverage.  On top of the steep price tag is another challenge: Many people who want coverage can’t obtain it.

Many insurers stopped offering long-term-care policies once they were confronted with the high cost of paying out benefits and a low-interest-rate environment that made it difficult for them to earn decent returns on the premium dollars they invested.  Those companies that continue to sell policies have hiked rates, sometimes by as much as 50%, and tightened underwriting standards, so that people with common conditions like diabetes find it almost impossible to get a policy.  Women are also finding themselves shut out of the LTC insurance market, since insurers have started charging more for their female customers, as they live longer and are more likely to make claims.

The Solution

People who want to buy long-term-care insurance or who are facing a rate hike on their existing policy do have options.  The first and most obvious is to simply bite the bullet and pay for the insurance despite the increased cost.  Another option is to look closely at policy benefits and riders and make adjustments to lower premiums.  For example, the average amount of time a person needs LTC is three years, so you may opt for a premium that has a limited rather than a life-time benefit period.

If you’re relatively young, buying a policy early can reduce premium costs, though you’ll have to factor in the cost of paying premiums over a longer period of time.  Another option is to increase your savings rate so that you can afford to pay for long-term care if you need it (a perk of this strategy is that the money is available for other purposes if you don’t need LTC).  Finally, some insurers have started offering hybrid long-term-care policies, which combine features of life and long-term-care insurance.  You pay premiums and have the option of advancing the death benefit and using it to pay for long-term care.  If you end up not using that feature, your heirs receive the policy’s death benefit as they would with any other life insurance.

What shouldn’t you do when it comes to long-term care?  The worst approach is to ignore the possible future need.  Please call if you’d like to discuss long-term care?  The worst approach is to ignore the possible future need.  Please call if you’d like to discuss long-term-care insurance in more detail.

Photo Credit: Rosie O’Beirne via Compfight cc

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