A New Perspective on Long-Term Care Insurance
We’ve modified our long-standing advice.
The advice we provide has been remarkably consistent over the past 30-plus years.
Occasionally, however, something changes that requires us to alter our advice. And that’s exactly what has happened regarding long-term care insurance.
Skyrocketing LTC insurance costs in recent years — including increases of as much as 130 percent — have turned an already expensive product into, for many, a downright unaffordable one.
This has created a massive quandary. After all, one of the biggest financial threats facing you is the cost of long-term care. Some 70 percent of Americans aged 65 and older are likely to need these services at some point, according to the Department of Health and Human Services. A private room in a nursing home costs an average of $92,378 per year (and as much as $120,000 in urban areas, such as New York City), while the average cost of an assisted-living facility is $43,539 a year, according to Genworth. Although the average nursing-home stay is three years, 20 percent of today’s 65-year-olds will need LTC for more than five years, according to HHS — and women tend to need care more often and for longer periods than men do (because they live longer).
Compounding the problem: LTC costs are not tax-deductible, and they are not covered by health insurance or Medicare. So if your spouse suddenly needed to move to a nursing home at a cost of $8,000 per month, how long would it be before you faced financial devastation?
This is why we devote so much attention to LTC costs — and why we routinely recommend that our clients purchase LTC insurance. We’ve been offering this advice for decades. Indeed, we recently checked our files and found an LTC policy that provided adequate, appropriate protection for a client back in 1994. The policy cost about $1,500 per year — annoying, but tolerable.
Today, that policy costs $6,500.
The worst part is that the price increases don’t merely affect today’s buyers of LTC policies. They apply to all previous buyers. Unlike life insurance, for which premiums are guaranteed never to increase, the cost of LTC policies can rise over time — and rise they have. Prices are getting so high that many people either can’t afford them or simply are unwilling to pay the $12,000 or more per year it takes to insure a married couple — especially since they don’t know whether they’ll actually use the insurance.
Despite all this, we maintain the view that LTC insurance is something you can’t afford to be without. Policies are expensive because the cost of care is expensive, and while paying 10 grand or so a year is unpleasant, it’s far better than spending 100 grand every year for several years if care is needed.
So, it’s a matter of rocks and hard places. The situation has become dire, and that’s why we realized a new approach to LTC insurance is needed.
Our goal: to balance your need for coverage against the rising costs of that coverage.
Our research and analysis over the past six months has led us to modify our recommendations. The advice you’ll receive from us will continue to be tailored to your specific circumstances and personal situation.
That said, generally speaking, our advice will often reflect the viewpoints shown in the four subsections shown below.
If you’re under age 50 and do not have good personal and family health histories, or if you’re 50 or older and don’t currently own LTC insurance:
We continue to recommend that you consider purchasing LTC insurance if you haven't already done so. In addition to suggesting that you compare traditional LTC insurance policies with LTC state partnership plans, we now recommend that you consider hybrid LTC policies. We never recommended these types of policies in the past, reflecting another change in our advice.
When you buy a traditional LTC policy, you pay monthly, quarterly or annual premiums. When you need assistance with two or more activities of daily living (walking, eating, bathing, toileting, dressing and transferring from bed or chair), you qualify for benefits under your policy. Your policy will dictate how much money you will receive and how long you’ll receive it — and whether your benefits will rise with inflation. The more benefits you want, the more the policy will cost. If you exhaust your policy’s benefits but still need care, you’ll have to use your savings and investments. If you run out, you’ll become eligible for Medicaid.
It’s that running-out-of-money part that caused states to create partnership LTC plans. After discovering that many people were going broke paying for care — forcing state-funded Medicaid programs to take over the costs — states created an incentive for you to buy LTC insurance (reducing reliance on Medicaid). The incentive: Instead of requiring you to spend all but about $2,000 of your own money on care in order to qualify for Medicaid, the states let you keep as much money as you received in LTC insurance benefits. So if your policy pays you $300,000 in benefits over several years before reaching its limit, you get to keep $300,000 in assets and still qualify for Medicaid.
Partnership policies can be complicated, and in some states they are ridiculously more expensive than traditional policies.
This is why a careful analysis of each is required to determine which is better for you. Both types of policies suffer a mutual drawback: If you never file a claim, you never get any money back, regardless of how much you’ve spent on premiums.
That fact has always been annoying. But when we add to it the fact that premium costs have soared and are likely to rise further, coupled with our expectation that LTC services will become virtually extinct in coming decades, hybrid policies are now more attractive than they were. But let’s be clear on this point: We’ve never liked hybrid policies, and we don’t really like them now. It’s just that, comparatively speaking, we like traditional and partnership policies less. In other words, hybrids haven’t gotten better; the others have gotten worse — making hybrids more worthy of consideration than they used to be.
What makes a hybrid different from traditional and partnership policies? Life insurance. Yes, instead of offering benefits payable only when care is needed, hybrid policies offer the opportunity to get back some of the money you pay in premiums. Money is returned to you if you cancel the policy without having received benefits or to your heirs if you die without having received benefits.
Hybrid policies often cost more in the first year than traditional or partnership policies. But over time, thanks to the ability to get some or all of the money back, hybrids can prove to be less expensive. Hybrids also let you lock in the cost: Once the policy is purchased, the annual premium is guaranteed never to rise — eliminating the worry that rising costs will make the policy unaffordable. And because of the cash value/death benefit features, medical underwriting for these policies is sometimes more lenient than for the other policies. All these factors make hybrids worth considering today.
If you’re under age 50 with good personal and family health histories:
We now generally do not recommend the purchase of LTC insurance. Instead, you should consider self-insuring, meaning you should save as much as possible (including what you would have paid in LTC insurance premiums) so you have the funds to pay for long-term care services, should you or your spouse or partner need them.
In the past, we often recommended LTC insurance for people under age 50. Our position has changed for two reasons. First, today’s policies cost significantly more than they did in years past (and we expect further increases in the future). Second, those who ultimately use LTC services typically don't need them until they're in their 70s — and sometimes not until their 90s. That’s 20-40 years away for the under-50 crowd. And we believe advances in exponential technologies — including medical innovations in science, neuroscience, physiology and psychology — will eliminate the need for long-term care by 2030. This means that people under age 50 with good personal and family health histories are not likely to need LTC services — ever. So, no need to pay for such insurance.
If you already own an LTC policy:
If the current price of your policy is making it unaffordable, talk to the agent or financial planner who provided it to you. Recognizing the price issue, many insurance companies are letting policyholders alter their contracts to make them more affordable. Changing the waiting period, daily benefit, years of coverage, inflation protection or other features could reduce the annual cost while ensuring that you still have protection.
It might also be worth comparing your policy to others, including hybrids. Ask your insurance agent or financial planner to show you proposals. But be careful that an agent doesn’t try to persuade you to buy a new policy simply so he can earn a fresh commission. Keeping your policy might be your cheapest and best option.
If you don’t have an LTC policy:
Talk to an independent financial planner for help in determining whether a policy is in your best interests, and if it is, have him or her recommend one that is affordable and meets your needs. If you don’t have an advisor, we are happy to help you.
If you have questions about any of this information, and how it applies to your situation, contact us today.
Originally published in Inside Personal Finance October 2016
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