Originally begun in the 1980s, Long-Term Care insurance has been going through major structural changes over the past few years for a variety of reasons. Companies have been leaving the market and rates are on the rise.
Some experts say the time to buy a policy is now, before the market gets any tighter or rates get any higher. Those companies still in the market are becoming more stringent in what they provide, such as no longer offering unlimited benefits.
Even with rising premiums, the cost of going without a policy could be even worse. Assisted care is costly, whether it’s in a residence or a facility such as a nursing home, and it’s expected to get much more expensive in the future.
It’s also important to keep in mind that LTC benefits aren’t just for the elderly, they pay for anyone who is incapacitated enough to need a certain level of help. Genworth Financial reports that its youngest claimant on a LTC policy was just 27 years old.
LTC providers are facing a number of problems. Experts say that when these policies were first launched in the 1980s the benefits were too generous and the premiums too low to be sustainable.
These policies also had a very low lapse rate. Since few people let their policies expire, underwriters had to pay more in benefits than they expected. A low interest rate environment also makes it financially difficult for underwriters, which put their premiums into stable investments such as government bonds.
A September, 2012 report by Moody’s Investors Service highlighted these issues and said the sustainability and viability of the market overall is in question.
“Five companies have exited the group and/or individual sector of the market since 2010, due to weak product results, a challenging economic and operating environment and changing corporate strategies,” the report says.
The need for coverage
While all of these issues have hurt the industry, the real reason LTC insurance is having trouble is it hasn’t done a good enough job of educating people about the need for coverage, according to Phyllis Shelton, president of LTC Consultants and the author of several books on the subject, including “Protecting Your Family With Long Term Care Insurance,” “Long Term Care: Your Financial Planning Guide” and the booklet “The ABCs of Long Term Care Insurance.”
She says the market is at “the eleventh hour,” with increasing numbers of baby boomers ready to retire and hit state budgets at a time when resources are low.
“Now things are in a critical situation. It’s not too, too late but consumers really need to get long-term care insurance as fast as they can while the current deals are still on the table,” Shelton says.
It’s unlikely to find any two LTC policies that are exactly alike, yet at their most basic element they pay for nursing home care or in-home assistance for daily living activities, usually when two of these needs are triggered—such as needing help with eating, bathing, dressing, transferring and bathroom needs. Benefits could also be triggered for cognitive impairment, such as Alzheimer’s or a stroke.
With medical advances allowing people to live longer, the odds are that more people will need this kind of care, according to Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
“If you live a long life the chances that you are going to need long-term care at some point are enormously high. Medicare doesn’t pay, health insurance doesn’t pay so you need a plan and for many people long-term care insurance is that plan,” Slome says.
He says there are about 200,000 Americans getting paid on LTC claims at any given time, with the average person receiving benefits for 2 ½ to three years.
Dan Pisetsky, president of U.S. Living Benefits, says many people are unaware that Medicare only covers 100 days of nursing home care and is intended for temporary situations. Anyone needing help beyond that could face a financial pinch without LTC insurance.
In Connecticut, for example, Pisetsky says the cost of full-time in-home is more than $70,000 per year, with a nursing home costing $100,000 per year. He says the most common use of a LTC policy is having a caregiver come into the home.
According to the American Association of Retired Persons, the average private pay costs of a nursing home stay in 2012 was around $88,000 per year and was more than $100,000 in 10 states. The cost of assisted living facilities averaged $41,000 per year and a full day services was $66 per day.
Pisetsky notes that with talk about cutting or restraining Medicare spending at the state and federal level, people could find a LTC insurance policy even more important than in the past.
When to buy
Shelton says people should buy a LTC policy as soon as they can afford it, as it provides coverage for more than just nursing homes. She notes that anyone could be hit by a drunk driver, have a stroke get hit with a disease that puts them in the need for long-term care, either at home or in a facility.
Although premiums are on the rise, the same is also true for health insurance and medical care in general.
“My health insurance has gone up from $337 to $1,200 a month since 1997 so don’t talk to me about rate increases,” Shelton says.
Of course, LTC policies aren’t for everyone. The National Association of Insurance Commissioners “A Shopper’s Guide to Long-Term Care Insurance” offers advice on who might consider LTC insurance.
It says someone should not buy a policy if they can’t afford the premiums, have limited assets, have trouble paying for utilities, food and other needs, are on Medicaid or their only source of income is a Social Security benefit or supplemental security income.
Those who should consider a policy, the guide says, are those who can pay the premiums and meet any potential increases without difficulty, want to stay independent of others, want the flexibility of choosing the setting in which they receive care and have significant assets and income that they want to protect.
“The market that I seek to tap is the mid-America type of person, that may be a husband and wife working with children making $100,000 or better per year who have some assets, a home, different things like this that they want to protect,” Pisetsky says.
The “sweet spot” for buying a LTC policy is from the mid 50s through age 65, Pisetsky says. He recommends people buy a policy as young as possible, perhaps when they’re in their 40s. Policies are not only less expensive when someone is young and healthy, the older someone gets they’re more likely to require a paramed exam or even a full physical.
“The market in general are adults between their mid-50s and their 60s, after your 60s the coverage is just too expensive and the chance that you will not help qualify is too great,” Slome says.
Pisetsky says prospective buyers should get help from a LTC insurance specialist, rather than buying a policy “off the shelf,” so they can make sure it meets their needs. Pisetsky bought a policy for himself when he was in his 40s. It will pay for nursing home care, home health care or an adult living retirement home.
Policy options
Couples have the option of buying a joint policy together. Shelton says the benefit of this is one spouse might need more coverage than the other and can draw on their mutual benefits.
When one spouse dies, the other inherits any unused benefits within the policy.
Buying policies together could also save a couple 20 to 25 percent in premiums, Pisetsky says. With some joint policies, the premium payments stop as soon as either spouse requires care.
LTC insurance premiums are tax deductible, depending on the age of the policyholder, and may qualify as being payable from pre-tax funds from a health savings account.
Unlike other forms of insurance, which usually have a deductible, LTC insurance has elimination periods. With health or auto insurance, the insured pays a certain amount out of pocket before their insurance kicks in. With LTC insurance, the elimination period requires a set amount of time before a policy pays out.
The average elimination period is 90 days, Shelton says, so someone in need of care would pay for it out of their own pocket before tapping into their LTC policy. Those seeking lower premiums might opt for a longer elimination period of say, 180 days or up to a full year.
For anyone considering a one-year or six-month elimination period, in order to get a lower premium, Pisetsky suggests they consider a critical illness insurance policy to meet that gap in coverage.
Shelton recommends buying a policy with a cash benefit for a variety of reasons. It’s hard to predict what kind of care services will be available in the future or what they will cost. This is especially true for those in rural areas where it could be hard to find a licensed caregiver. Having a cash benefit could help reduce the economic hardship of a family member who has to take care of a loved one.
A policy might not offer the same amount of coverage on a cash basis as it does in a nursing home. For example, Pisetsky says a policy that would pay $100 per day for nursing home care might offer a choice of $40 per day in cash instead.
There would be no restrictions on how the money is used and Pisetsky says it could be useful to someone for meeting expenses and help them stay in their own home longer than they ordinarily would have.
Every LTC insurance policy has a set interest rate by which the benefits increase, with the idea that the policy should keep up with inflation. Shelton says the best inflation factor is 5 percent compound for life, but these policies won’t be around forever as the market tightens.
It might be tempting for someone looking to save on premiums to choose a policy at a lower interest rate, but Shelton points out that the costs of LTC have been growing at 5 percent to 6 percent per year since the late 1980s. Anyone banking on having enough long-term coverage might find themselves in a bind if their policy can’t keep pace with rising costs.
“They’re not going to be happy at claim time. They’re going to have a plan that covers maybe 30, 40, 50 percent of the costs and they thought they were buying a plan that covered 80 percent of the cost,” Shelton says. “I don’t care how wealthy you are, if you’re buying something that you think will cover 80 percent and it only covers 40 percent, I think you’re going to be hacked off at the person who sold it to you.”
As for the amount of coverage needed, it’s important to consider the costs of long-term care nationally and locally, as well as the rising cost of care, which could perhaps be as much as $30,000 a month within 30 years.
“The costs have tripled in the last 20 years, they’ll triple again in the next 20 years. I think 30 years from now you’re looking at costs of anywhere from $25,000-$30,000 per month” for nursing home care, Shelton says.
A 2012 study by Genworth Financial revealed that the cost of a one-bedroom, single occupancy room in an assisted living facility saw a 5.71 percent annual increase over the previous five years. The cost of a private room in a nursing home with 24-hour care increased by 4.28 percent annually over the same timeframe.
Hybrids and partnerships
One option for long-term care is a hybrid that combines LTC and life insurance in one policy. If someone taps into the policy to pay for care, the money they receive is drawn from what they would’ve received from the life aspect of the policy.
For example, someone with a $500,000 hybrid policy and a 2 percent option could use up to $10,000 within their first month of needing care.
The potential downside, Pisetsky says, is buyers need to make sure they have enough coverage to keep up with the cost of care.
“You have the ability of flexibility to convert to long-term care or a death benefit,” Pisetsky says. “The average nursing home is $80,000 per year so you could go through that real quick unless you have a substantial policy, a hefty policy to help fund for your long-term care.”
Shelton says these hybrids work as long as the policyholder sets it up with enough inflation coverage. She says too many hybrid policies are sold without it, which could leave an unaware policyholder with less coverage than they expected at claim time.
Another option that’s much less well known is a partnership program for LTC insurance. They exist in most states as a way of protecting a retiree’s assets when they first go on Medicaid.
In order to qualify for Medicaid, an individual’s assets have to be depleted until they’re left with around $14,800. Because of a federal “lookback period,” any assets held within five years of applying for Medicaid could be targeted for recovery by the state.
If a retiree had $50,000 in assets and transferred it all to a relative in order to qualify for Medicare, and that transfer was made within five years of receiving assistance, the state could seek to recover those funds as compensation.
This can also cause problems when one spouse is in a facility and the other lives at home. If the house is jointly owned, one of them can remain there while the other is on Medicaid in a nursing home.
The house would not apply under the asset requirement if it’s worth less than $525,000 but if the at-home spouse passed away the property would have to be sold to compensate the state’s cost of caring for the other spouse.
“Under federal law the state has to get paid back for dollars paid out for long-term care so that house that’s still in the name then people think they’re leaving it to their kids and then the kids have to sell the house to pay the state back for the dollars spent for long-term care,” Shelton says.
Under a partnership program, certain LTC insurance policies are not counted as part of someone’s assets for Medicaid eligibility. Someone with a partnership-approved policy and $100,000 in coverage could receive those benefits without them being applied to the lookback provision.
“In other words, instead of going completely impoverished so that you qualify at $14,800 you could buy protection to allow assets based on the pool of money that you’re buying to be protected because you have a long-term care policy,” Pisetsky says.
A partnership policy might also allow someone’s estate to hold on to their home rather than having it sold to cover the state’s cost of providing Medicare.
“A lot of people think they’re going to pass their house on to their kids and they don’t get to because of the state. The house has to be sold to pay the state back, so this partnership thing could be enough to protect the home so that it can actually go to the kids.” Shelton says.
Such an arrangement benefits both the state and the policyholder, Pisetsky says, because it protects the assets of the insured while relieving the state of some of its Medicaid costs. He says this will become even more important in the future as states could look to tightening Medicaid requirements and lookback periods as ways of reducing their budgets.
Before choosing a company, Shelton suggests examining its annual report and looking at its track record such as how long it’s been selling policies and how many rate increases it’s had. She says buyers can also check out the NAIC’s website to see if a company has many complaints filed against it.
