Long-Term Care Insurance: Should You Buy, and When?
Most of us who live long enough will need help with everyday activities someday — but only some of us should buy insurance to pay for it
The statistics can be scary: nearly 70 percent of Americans who live to age 65 will eventually need help with everyday activities such as bathing, getting dressed and eating. If they go into a nursing home, the annual cost can easily exceed $80,000 (and these prices will only go up).
Unfortunately, Medicare, the federal health insurance program for most Americans over 65, covers nursing home bills only when the care is “medically necessary,” and then only for up to 100 days. If patients need ongoing help with those daily activities, often referred to as “custodial care,” they and their families will have to find another way to pay for it.
That’s the logic, and part of the sales pitch, for long-term care insurance. It’s designed to cover much of what Medicare doesn’t, not only in nursing homes but in other settings, including assisted living facilities, adult day care centers and the person’s own home.
Still a relatively new product, long-term care insurance is complicated, costly, and sometimes unpredictable, in part because the insurance industry misjudged its profit potential. In recent years, many policyholders have faced double-digit rate hikes. A number of major carriers stopped issuing new policies. Perhaps not surprisingly, only about 8 million Americans currently have one — that’s just 10 percent of the 55-plus population.
Until recently, researchers believed that was a serious mistake. Based on an analysis of government data, they projected that 30 to 40 percent of Americans should purchase a policy. However, new research, released in November 2014, challenges that notion.
The latest study, published by the Center for Retirement Research at Boston College, contends that earlier research overestimated the average nursing home stay and failed to account for instances where Medicare did provide some coverage. As a result, according to Anthony Webb, PhD, an economist and one of the report’s authors, the number of people who should purchase a policy is “probably half of the previous estimates.”
Is insurance right for you? Three key questions to consider
So if only 15 to 20 percent of Americans are logical candidates for a long-term care policy, how do you know if you or a loved one are among them? Ask yourself these questions.
1. Will you qualify for Medicaid? Medicaid is the joint federal and state health insurance program for low-income Americans, among others. Unlike Medicare, it often covers many of the same things a long-term care policy would, including care at home. To qualify for Medicaid, however, you need both a relatively low income and relatively modest assets.
The rules can vary by state, but many elderly people who need services will qualify eventually if not immediately. Most retirees already have modest incomes, and even if they have some savings and other assets, a few months in a nursing home could exhaust those quickly. An estate-planning attorney can also suggest ways to qualify for Medicaid while still protecting some assets for a spouse or other heirs.
Medicaid currently pays about 60 percent of the nation’s long-term care costs, according to the federal Centers for Medicare & Medicaid Services.
2. Could you pay out of pocket? If you don’t expect to qualify for Medicaid, you have two options: buy a long-term care policy or cover the cost yourself if it’s ever necessary.
Financial planners often suggest that clients with substantial assets don’t need to buy a long-term care policy but can simply “self-insure” instead. That leaves a middle group — those with too much money to qualify for Medicaid but too little to cover a lengthy nursing home stay without serious damage to their savings — as the most likely candidates for insurance. As a general guideline, Ben Birken, a certified financial planner with Woodward Financial Advisors in Chapel Hill, North Carolina, suggests those are people with roughly $1 million to $3 million in net worth.
3. Can you afford a policy? Long-term care coverage isn’t cheap. Birken estimates that a good policy for someone in his or her mid to late 50s could run $3,000 to $6,000 a year.
What’s more, given the industry’s history of rate hikes, the price you pay to begin with might rise substantially over time. If you buy a policy in your 50s, it could be decades before you need it, if you ever do. By then, you may be living on a reduced income, making the premiums more of a financial burden or even unaffordable.
“My biggest advice would be to make sure you’ll be able to maintain the policy,” economist Webb says. “It’s a really, really dumb thing to buy the insurance and lapse it.”
But that’s just what many policyholders do. Birken recommends that rather than drop their coverage, policyholders faced with a huge rate hike call their insurers and see if they can change provisions on their policies to make them more affordable.
If you do decide to buy long-term care insurance, shop around — an easier task now that only a handful of major companies remain in the market. Birken says the best age to shop is in your mid to late 50s; after that, the cost can be prohibitive, especially if you have health problems. He recommends looking for a carrier that has received high marks from independent agencies and not choosing by price alone. The lowest-cost provider, he points out, could be the next to announce a big rate hike.