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Understanding Long-Term Care Insurance

Basics of health care insurance coverage

Understanding Long-Term Care Insurance

Buying a long-term care insurance policy can be expensive, but there are steps you can take to make it more affordable and flexible. — Getty

For many Americans — in particular the 70 million-strong baby boom generation born between 1946 and 1964 — the phrase "long-term care" (LTC) is achieving new urgency. The oldest of the boomers are now less than a decade away from their 80s, the age at which many will start to need help in performing the activities of daily living (ADL).

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What exactly is long-term care? The term comprises a host of services that vary widely. They range from home care and adult day care to residential care in assisted living or nursing home facilities. But long-term care is generally defined as hands-on assistance provided for an extended period of time to people (of any age, though older people are the primary users) who can't take care of themselves due to a prolonged disability, illness or cognitive impairment such as Alzheimer's disease.

You qualify for long-term care when a physician or other health professional certifies that you are unable to independently perform at least two ADLs, such as bathing, dressing and eating.

The cost of care

Unfortunately, long-term care doesn't come cheap: According to Genworth Financial, a private room in a nursing home averaged $92,378 in 2016, and a home health aide averaged $46,332. In expensive areas, those costs can nearly double. To estimate costs in your area, use Genworth's long-term care calculator. And contrary to common belief, Medicare and other forms of health insurance do not pick up the tab, because long-term care is not considered a medical expense. Medicare will only cover skilled nursing care and therapy services following a hospital stay.The upshot: Unless you're confident that you can pay for this care yourself (or you qualify for Medicaid, which occurs only when you've exhausted your resources and meet this government program's other eligibility requirements), you should probably consider purchasing long-term care insurance (LTCI).

To insure or not to insure

But the average consumer faces a dilemma: The cost of this insurance is almost as prohibitive as the cost of care. First comes sticker shock — a typical policy taken out by a Maryland couple in their mid-50s can initially run around $3,100 annually, and premiums can shoot up without warning — followed by the discovery that the LTCI landscape is confusing, unpredictable and unclearly regulated.

Two deterrents in particular — the high cost and the yearly "use it or lose it" nature of the product — have made LTCI unappealing to most Americans. Only about 8 million people have some form of long-term care coverage, according to Limra, an insurance-industry research firm and sales have been declining.

But experts in the field also believe that part of the problem is widespread denial by consumers. If you're a healthy 50-something, it's hard to imagine that one day you'll be frail and unable to care for yourself. Or you may believe that your kids or other family members will step in.

What's more, you balk at the idea of "wasting" money on pricey premiums for something you're pretty sure you'll never use. Why not invest that money and use it for care when and if the need arises? If it doesn't, your kids will inherit a nice nest egg.

These rationales, while understandable, overlook a few realities. First, even if you're lucky enough to have family members willing to care for you, they may not be able to provide the level of care you require — because they lack proximity, sufficient time, technical expertise, or adequate health or strength of their own. Consider this: 7 percent of family caregivers are 75 or older, and the average spousal caregiver is 62.3, according to AARP research.

As for self-insuring, many financial planners do favor this method, in part because they lack faith in LTCI products, but also because they believe that a diversified investment portfolio, compounded over 25 to 30 years, will yield sufficient funds to pay for most of an average person's care.

But you need to ask yourself whether you'll actually invest the money you'd spend on premiums, and whether your returns on your investments will keep pace with health care inflation, which has significantly outpaced general inflation for years. Also, keep in mind that should an earlier-than-anticipated need arise, a LTCI policy takes effect immediately, whereas it takes 30 years to amass 30 years' worth of investment earnings. If you have a financial adviser, have an in-depth discussion with that person about the pros and cons of LTCI.

Finally, this is insurance, a product that routinely involves paying premiums to protect you against a life event — a worst-case scenario — that you fervently hope never occurs. Which brings us to the question of need. Your chances of having either a car accident or a house fire are about 25 percent over your lifetime, yet those odds are unlikely to convince you to drop your auto or homeowners policy.

Now consider that the U.S. Department of Health & Human Services puts the likelihood that the average American turning 65 will need some form of long-term care at 70 percent. In truth, you have probably been wildly underestimating your own risk: The strong probability is that you will need long-term care at some point in your life.

Is a long-term care policy the answer? The conventional wisdom has been that if you have limited income and resources (defined by many experts as having assets, including your home, that total $50,000 or less) or you are very rich, you can forgo this insurance. In the former case, the government — i.e., Medicaid — will pay for your care, and in the latter you'll have sufficient resources to pay for it yourself.

But if you're somewhere in the middle, LTCI is probably the best way to preserve your assets for your heirs, spare them a large portion of the physical and financial burdens of your care, and enhance your chances of getting your personal choices of care met.

Keeping it affordable

As with any expensive purchase, you need to educate yourself before taking the plunge. Most important, you have to be sure you can afford the policy's premiums — not just now, but in the future. Premiums increase over time; while by law companies cannot single you out for an increase (nor can they ever refuse to renew a paid-up policy), they can seek approval from regulators on an annual basis to raise premiums on a class of similar policies in your state. These increases, while seldom as frequent as once a year, are often extremely steep, ranging from single digits to as high as 40 percent or even more. (These huge hikes reflect the insurance industry's flat earnings due to low interest rates and the larger-than-expected number of long-term claims it has been paying since LTCI was introduced approximately three decades ago.) If you can't keep up with the premiums, you could end up forfeiting the policy and losing the benefits you've already paid for. Note: Some states require policies to include a "nonforfeiture option" or "nonforfeiture benefit," which allows you to receive a reduced amount of benefits based on the premiums you've paid. Check with your state's insurance department.

If you do buy a policy, your goal is to maximize your benefits while minimizing your cost. Here are some steps you can take to realize this goal.

1. Buy young(ish)

Premiums are lower if you purchase a policy when you're younger (in your early to mid-50s, most experts advise) and in good health. LTCI policies have strict underwriting requirements and the chances of a disqualifying health event increase with age. True, you will be paying those premiums for a longer period of time, but waiting until you're older or have a serious medical condition will not only mean higher premiums but also the possibility that you could be denied coverage altogether.

2. Know the policy's provisions

Some insurance companies require you to use services from a certified home care agency or a licensed professional; others allow you to hire independent or nonlicensed providers or family members. Companies may place certain qualifications — such as licensure — or restrictions on the facilities or programs you can use. Make sure you buy a policy that covers the types of facilities, programs and services you'll want and that are available in your area. Typically, a comprehensive long-term care policy covers:

  • Home care: An agency or individual who performs such services as bathing, grooming and help with housekeeping.
  • Assisted living: A residence with apartment-style units that makes personal care and other individualized services, such as meal delivery, available when needed.
  • Adult day care: A program outside the home that provides daytime health, social and other support services in a supervised setting for adults in need of help.
  • Respite care: Temporary help to relieve family caregivers.
  • Stays in a nursing home: A residential facility that provides a full range of skilled health care, rehabilitation, personal care and daily activities in a 24/7 setting.
  • Alzheimer's care.

Some policies have a "future service option" that will cover a type of long-term care service that is developed after you purchase the insurance.

Be sure to note your policy's "benefit triggers" — the conditions that must occur for you to qualify for benefits. As mentioned above, the general yardstick for care is when you need help with two or three ADLs, the most common of which are bathing, eating, dressing, walking and remaining continent. Be sure the list of triggers includes bathing; it is often the first task that becomes impossible.

In short, read your policy carefully and be alert to the fine print. All policies have some conditions for which they exclude coverage — drug and alcohol abuse, mental disorders and self-inflicted injuries are standard exclusions — so review these with your agent. Some states still allow companies to require you to have been in a hospital or nursing facility for a specific number of days before qualifying for benefits, though most states have outlawed this exclusion.

Make sure that Alzheimer's and other common illnesses, such as heart disease, diabetes, certain cancers, are not excluded. An insurer also may turn down an applicant due to a preexisting condition. If you have a preexisting condition, the insurer can withhold payment for that condition for a specified period of time after selling you the policy. Do not buy a policy that specifies a period of time you find unreasonable. If you fail to notify a company of a preexisting condition, the company may not pay for care related to that condition.

3. Shop around

Premiums can vary a lot, even for similar coverage, so if you're looking for an individual policy for yourself or for you and your spouse (buying together can reduce premiums), compare information and estimates from at least three carriers. The National Association of Insurance Commissioners website (naic.org) should have a list of companies doing business in your state, and can also verify that your agent or broker is licensed in your state and has additional training in LTCI.

The American Association for Long-Term Care Insurance website (aaltci.org) lists companies with strong credit ratings. You can get info on a company's history with LTCI from Moody's Investors Service, Standard and Poor's and A.M. Best. Also find out how often and by how much the companies have increased their premiums.

Better yet are group policies or individual policies with discounted rates offered by your employer. These are not only less expensive, but they also often do not include underwriting, which means you won't have to meet health requirements. These policies are usually portable if you leave your job. Professional or service organizations may also offer group-rate LTCI policies to their members.

Joint policies — a single policy that covers two related adults, such as husband and wife — are another way to economize because typically, there is a maximum benefit that applies to everyone on the policy. If a couple has a policy with a $150,000 maximum benefit, for instance, and the first partner uses $70,000, the other would have $80,000 left for his or her care. (The risk, of course, is that the first user could deplete the funds that the other might need.)

Be sure to ask your insurance agent whether the LTCI policy you're considering qualifies under your state's partnership program (available in most states), which allows you to keep a specified amount of assets and still qualify for Medicaid. For more information, check out the State Health Insurance Assistance Program website at shipnpr.acl.gov.

4. Be flexible. You can often adjust some of the terms of a LTCI policy or make certain trade-offs to make the premiums more affordable. Here are a few suggestions:

  • Limit the terms. A typical LTCI policy offers a term of three or five years and a total-dollar limit that corresponds to the cost of that much care in your area. While, of course, no one knows exactly how long you might need long-term care, realize that the average stay in a nursing home is 2.6 years for women and 2.3 years for men. So unless you have special risk factors (such as a family history of Alzheimer's), there's no point in paying for extra coverage that you won't use.

    Or consider splitting the term with a spouse or partner with a flexible joint policy (see above) that allocates two years of care for each of you, plus a floating year that either can use — a strategy that lowers the odds that you'll be paying for insurance that goes unclaimed. Some couples play the odds by buying just one policy for the younger spouse, on the assumption that he (or more likely she) can care for the older spouse. But when it's the younger spouse's turn for long-term care, she, lacking a similar caregiver, will likely have to rely on insurance.

  • Choose a longer elimination period. Most traditional policies have an "elimination" or "waiting" period of 90 days before your coverage kicks in, during which you're responsible for 100 percent of your costs. The shorter the elimination period is, the higher the premiums are. Find out if you can extend the elimination period (which a good policy requires you to satisfy only once during the life of the policy rather than with each new instance of care) to, say, 120 or even 180 days. You could reduce your premiums considerably over many years of payments — though your out-of-pocket costs at the time of care could go up by $30,000 or more

  • Stretch your coverage with the right policy. Long-term care policies can pay different amounts for different services (such as $50 a day for home care and $150 a day for nursing home care), or they may pay one rate for any service (which, if you're using a less-costly service, could deplete your total benefit amount sooner than it should). "Pooled benefits" allow you to use a total-dollar amount of benefits for different types of services. With this coverage option, you can combine services that meet your particular needs.

  • Don't go overboard with coverage. Although the average annual cost for a private room in a nursing home patient in 2016 was $92,378, or about $250 per day (in today's dollars), no rule says you have to buy that much coverage. Just as you can save money by limiting the term of your policy (see above), you can also shave your premiums by buying a smaller amount of daily coverage ($150, for example) and assuming you'll use savings to pick up the difference.

    As experts point out, this may be less onerous than you might think since being in long-term care may dramatically reduce your other expenses, including discretionary spending on travel, shopping and entertainment, and will likely subsume most of your medical and meal costs. Besides, no policy is likely to pay all your costs once you're in long-term care; in almost every case you should count on out-of-pocket expenditures.

    Incidentally, it's worth pointing out that a LTCI policy essentially buys you a certain dollar amount's worth of benefits. Even if you buy your policy in an expensive state, it can be used in a cheaper one, where those benefits might go farther (though of course, the reverse is also true). Most policies sold in the U.S., however, cannot be used outside the country.

  • Do spring for inflation protection. This feature adds to your cost, but it's important because it helps your benefits keep pace with the ever-increasing cost of care over the 20 to 30 years between the time you purchase the policy and the time you claim benefits. Ideally, you'll choose the recommended 5 percent compounded inflation protection. But that's the most expensive option, and you may be able to reduce premiums by choosing a lower percentage of protection (3 or 4 percent, say) and opting for simple rather than compounded growth. But this feature is complex, and you should read more about it before making a decision.

Hybrids and other alternatives

Perhaps the most important development in LTCI over the past several years has been the industry's introduction of hybrid — or "linked-benefit" — products. The chief appeal of these products, which have proved very popular, is that they combine life insurance with long-term care benefits, typically by adding a long-term care rider to a life insurance policy. Whether you use the long-term care benefits or never touch them, your policy will pay out some portion of its death benefit — a welcome antidote to the "use it or lose it" nature of traditional policies. In addition, these policies usually don't require underwriting (meaning you won't be rejected for health reasons), and rates are fixed and not subject to the swift, unexpected hikes that characterize traditional LTCI. There are also tax advantages to choosing certain hybrids, which you should go over with your tax adviser. An annuity, too, can sometimes be combined with a long-term care rider. If you own a traditional life insurance policy or annuity, by law you may be able to exchange it for one of these hybrids. Speak to a knowledgeable adviser before making a decision; there are pros and cons to each product.

Other ways in which a life insurance policy can be leveraged to cover long-term care include purchasing a policy with an accelerated death benefit, or ADB. This is a feature that essentially allows you to get an advance on your death benefit to pay for care while you're alive. There are downsides, though, and these policies may interfere with your ability to qualify for Medicaid. You can also borrow against a life insurance policy to pay for long-term care, or, more conclusively, in a process known as life settlement, sell the policy to a third party and use the proceeds, which are taxable, to pay for long-term care. This option is generally available only to women age 74 or older and men age 70 or older. Finally, there is an option known as a viatical settlement. It is similar to a life settlement — it also involves selling your life insurance policy to pay for care — but this option can be exercised only by the terminally ill and approval can be difficult to obtain. Realize that all these options will reduce or eliminate the benefit that your life insurance policy would otherwise pay upon your death.

Not all financial experts believe that these hybrids and other life insurance options are superior to typical stand-alone LTCI policies. It's important that you consider all the possibilities and make an informed decision based on what you believe is best for you and your family. In nearly every state, you have 30 days to review a signed policy. If you change your mind during this time, you can return the policy for a full refund.

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