Do You Need Long-term Care Insurance?

To buy or not to buy — a hard decision as costs for long-term care insurance trend upward

It’s practically a given that people should purchase life insurance policies to deal with the inevitable. But what covers them should they become too sick or frail and might need long-term help in the form of a home health aide or care in an assisted living or a nursing home? In spite of longer life spans (or perhaps, because of them), the reality is that most seniors — an estimated 70 percent of people now turning 65 — can expect to need some form of long-term care in their lifetime, either at home or in a residential or day-care facility, according to the US Department of Health and Human Services. In fact, more than 12 million Americans currently rely on long-term care services. Yet the majority of those approaching seniority have no plan in place for their own long-term care, and few of them are prepared to foot the bill for it. According to a recent Harris Interactive/HealthDay poll, nearly two-thirds of Americans think “most people” should buy long-term care insurance, yet less than 8 percent of adults in this country have bought it. Some seniors might be hedging their bets, figuring ‘what are the odds I’ll need it? Other seniors are researching options for their healthcare spending, such as long-term care insurance.

Long-term care insurance covers services that may not be included with regular healthcare or Medicare. These services include help with daily activities, home health care, adult day care, as well as care in assisted-living or nursing homes. Just as important, if not more so, it covers expenses for those with chronic illnesses like Alzheimer’s, Parkinson’s, multiple sclerosis and diabetes — which standard health insurance policies and Medicare usually do not pay for and family members often cannot manage on their own. Medicaid covers some long-term care benefits, but only after a person’s assets have been depleted.

Is long-term care insurance expensive? Yes, but so is long-term care. According to a 2011 market survey of long-term care costs done by MetLife, the average daily rate for a nursing home in New Hampshire is $276 if you share a room, or $309 for a private room. And assisted living base rates in the state can range from $3,000 to nearly $5,000 a month. Still, long-term care insurance might not be for everyone.

“Generally speaking, the typical long-term care insurance purchaser is an individual or spousal pair who are not rich — the wealthy do not need it because they can afford to pay for the services out of their savings [or cash in a life insurance policy],” says Keith Nyhan, the director of consumer services for the New Hampshire Insurance Department. On the other hand, if a senior is living on Social Security or has little to no retirement savings, more than likely he or she will be covered by Medicaid and shouldn’t purchase long-term care insurance. “The premiums are high enough that the average person cannot afford this insurance product,” adds Nyhan. It’s those somewhere in the middle who have the most to gain from long-term care insurance. “We’re looking at the upper-middle class who tend to buy this insurance, who are trying to protect themselves going forward,” he says. “In my opinion, it’s a niche product for those who can afford it.” As a general rule, some experts recommend that you spend no more than 5 percent of your income on a long-term care policy.

It doesn’t look like this type of insurance is going to get cheaper anytime soon either. Rates have gone up, mostly due to the fact that when this insurance product first came out, it was such a new field, that insurance companies priced the policies wrong. The companies assumed that more people would lapse on their policies, or would not keep them. But most have kept them, and that greater demand for money in the pool means a greater strain on insurance companies to be able to pay out, says Nyhan. “The trend nationally has been for long-term care insurance carriers to have rate increases, and these rate increases nationally look like 7 percent to 88 percent. It’s a huge range. Most increases are upwards of 30 percent.” He adds that contractually the insurance companies can do this because it’s written into the policy — which makes some consumers think that it’s all a ploy for the insurance companies to make them lapse on their policies. However, Nyhan doesn’t think that the companies have evil intents: “It’s that the original pricing models were not adequate,” he says.

Although the insurance companies have raised the rates for those who already have policies, they have also been good at working with consumers to mitigate those rate increases, says Nyhan. “One option is rather than paying a 30-40 percent increase, the consumer might consider an option to reduce the maximum payout.” For example, if a customer has a policy that was originally tapped at a $100,000 policy, they might agree to lower that to $50,000. Another option is the daily limit of care: rather than paying $250 a day, they might be able to lower it to $200 a day to avoid the rate increase. “The average daily cost a a facility is about $260, so the consumers found themselves in a situation where they were overinsured and paying for more than what they need,” says Nyhan. “By reducing the daily benefit, it brings it more in line with what they need.”

Then there’s the contingent nonforfeiture benefit, which looks something like this, says Nyhan, hypothetically speaking: the long-term care policy owner doesn’t have to pay any more premiums, but the only thing that policy owner will get is whatever they have paid in. “Think of it as a long-term care savings account,” says Nyhan. “When it runs out, it runs out.”

The silver lining in all of this, says Nyhan, is that the newer products being offered today are more realistic in their pricing assumptions. “They’re still in flux, and to say that the trend is for premiums to go up is not just realistic but a viable fact. But as the insurance companies’ experience over the past 20 years has matured, today’s products are priced better today than 20 years ago.” Still, he says, “My message to the consumer who is looking to buy today is really that they should ask very pointed questions about how the insurance is priced and what is the expectation for premium increases.”

The best time to purchase long-term care insurance is in your late 40s and early 50s, for several reasons. Rates tend to escalate dramatically once you reach age 60, mostly because the chances of you contracting certain life-threatening or debilitating diseases increases right around then. Not to mention that pre-existing conditions may be excluded from the coverage. Purchasing when you are younger is cheaper and the payouts are higher than when you are older. Also unlike health insurance or life insurance, coverage can also be outright denied if you have a chronic disease or are in poor health.

Nyhan adds that even given all of this information, purchasing long-term care insurance is a highly individualized decision best made with the assistance with someone knowledgable about the products. “Based on a lot of different factors, there’s no right or wrong answer,” he adds, but it’s a good idea to check with an insurance professional or an estate planning attorney for advice about whether to add it to their own retirement portfolio. If long-term care insurance is a good fit, shop around for the best price for the amount of coverage that you need.