Get Ready for New Wrinkles in Long-Term Care Insurance
By: Source: AARP Bulletin Today Date Posted: 2003-09-03 13:40:00-04:00
Americans worried about how to pay for the medical and personal care they'll need in late life can expect to hear some new ideas next year on how long-term care insurance might be made more available—and affordable.
New ideas, experts say, are needed in an industry whose products over the years have tended to be extremely expensive—and sometimes so complicated that an average person can't understand them.
Another obstacle hindering its appeal to consumers: the mistaken belief among large numbers of Americans that Medicare covers nursing home and in-home medical expenses. Medicare doesn't cover these expenses on a long-term basis. (See Many Are Mistaken about Their Coverage—a Problem of Perception.)
Because of these and other woes, only 6 million policies were sold during the 1990s, reports LIMRA International, an industry research organization. That's triple the number a decade ago, but still a trickle compared to the need.
On the plus side, says AARP policy director John Rother, there's growing recognition of that need—that more Americans in the future will require help defraying the cost of nursing home and in-home care.
As a result, he says, Congress next year may consider a bipartisan measure that would establish a $3,000 credit toward caregiving expenses, plus a deduction for long-term insurance premiums. (See AARP's Position.) "The bill enjoys broad-based support," says Rother. "I think it's going to go somewhere."
FEDS GETTING IN ON THE ACT
Another catalyst for change comes next October, when the federal government will begin offering a discount group insurance program as an optional employee benefit to 20 million federal employees, including retirees and the military.
"I think that is going to create a lot of interest," says Charles Mondin, associate executive director for the United Seniors Health Council, a nonprofit consumer group in Washington.
Possibly as a result, "I think we'll see more employer group plans offering [long-term care benefits] to their employees," Mondin says.
As Mondin suggests, it isn't only Washington that's acting. The insurance industry itself is rethinking some of its old practices. For starters, it's moving to change its image and broaden the appeal of long-term care insurance to attract a wider market of younger buyers.
One big change taking place: Coverage offered today is far more comprehensive and oriented toward in-home care, rather than just nursing home coverage.
BUYERS ARE GETTING YOUNGER
The average age at which people purchase policies is declining, but it is still in the mid-60s. Getting that age down lower, so premiums are cheaper but customers pay them for a much longer time, is a major goal of the industry.
Another goal is price stability. Prices fluctuated sharply in the 1980s, when some insurers tried to gain business with premiums too low to cover claims only to have to jack them up later on unsuspecting customers.
The stories of older consumers forced to abandon their coverage just when they needed it most because they could not afford the premiums cast a pall over the industry.
While the premiums charged by some insurers have soared, prices generally have been steadier. The average annual premium rose 11 percent from 1995 to 2000, reports LIMRA, the research firm, from $1,505 to $1,607.
What all this activity means is that Americans are likely to be hearing a lot more about long-term care insurance and quite possibly will become a target of the industry's marketing campaign.
ANSWERING THREE BIG QUESTIONS
For those interested in purchasing some kind of financial protection against the onset of disability, three questions are key:
- Do I need long-term care insurance?
- Can I afford it?
- Is this the right time for me to buy it?
Some financial planners find the arguments for long-term care insurance unpersuasive. "The risk of being in a nursing home long enough, the chances of using it, are pretty remote," says financial planner Philip Cook, of Torrance, Calif.
But most experts suggest that consumers weigh a few key factors before deciding. Chief among them: Modern medicine is extending life expectancies into the 80s.
While many people are now living longer without disabilities, growing older still increases the chance you or your spouse will end up in a nursing home or assisted living or need at-home help with the basics of life: eating, going to the bathroom, getting dressed or walking.
Then there's the real fear of saving one's whole life for a comfortable retirement only to see the money paid out to a long-term care facility.
"The first question is, do you have other ways of taking care of yourself," says Martin Weiss, president of Weiss Ratings, Inc., an industry-rating firm in Palm Beach Gardens, Fla. "Savings, or family members. If the answer is 'yes, I have other plans,' you don't need long-term care insurance."
But if the answer is no, then you may want to consider such insurance.
KNOWING IF AND WHEN TO BUY
United Seniors Health Council, a nonprofit group in Washington, advises people to have $75,000 in assets beyond their home and cars and an annual income of $25,000 to $35,000 before purchasing insurance. Other financial experts suggest assets of between $100,000 and $200,000.
Age is another factor. Long-term care insurers urge people to buy coverage while they are still young, when it's relatively affordable. A 40-year-old will pay half or less what a 60-year-old will pay for the same coverage.
But be careful. While you may think it a bargain to pay only $600 a year at 40, if you don't start collecting any benefits until you turn 80, you will have paid out at least $20,000 in premiums, and very possibly a good deal more.
One insurer says this is a good deal. He argues that this amount of payment would buy a policy that could provide $200,000 to $300,000 of overall benefits. Many people would be hard-pressed to finance that amount of care, says Paul Forte, a vice president in the group insurance division at John Hancock. "This is really quite affordable."
Consumer advocates, however, maintain that a $600 annual premium would buy a policy with coverage of only $100 a day, providing a benefit over four years of only $146,000.
However, you do have another option. You can wait until you are much older and pay two to four times or more annually than you would at 40, but pay it for a much shorter time.
A standard John Hancock policy, for example, providing a maximum daily benefit of $125 for a four-year term with 5 percent compound inflation protection would cost $1,238 annually if purchased at 55. Wait until 60 and the premium rises to $1,638. Delay further, until 65, and you'll pay $2,175. Really procrastinate and don't buy until age 75, and the toll will be $4,838.
Margie Barrie, executive vice president of LTCI Consulting Group in Reisterstown, Md., warns there's an even greater cost to waiting too long: "You run the risk of not being insurable at all because of health." Most companies will not sell to those with certain identified health conditions.
CHOOSING THE RIGHT POLICY
Should you decide to purchase a long-term care policy, you will have to make many decisions in crafting a policy.
First, you must choose how many years of coverage you want. Most consumers opt for somewhere between four and six years, according to John Hancock, knowing the average stay in a nursing home is between two and three years. The years of coverage begin when you start collecting benefits, not when you first buy the policy.
The next decision is over the amount of the daily benefit. Today, $100 to $150 a day seems the norm. This is the maximum reimbursement you will receive, though many companies allow you to save up a pool of unused benefits (say you only spend $80 one day, the remaining $20 is added on to the total pool of money available over the policy term).
Insurance doesn't have to cover all the risk. Factor in savings and potential steady income from a pension plan, and you may be able to make do with a lower daily benefit, shouldering some of the cost of care yourself.
"You don't want to become insurance poor," cautions Andrea Spatz, a financial planner in Los Angeles.
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