Is Long-Term-Care Insurance for You?

     Many Baby Boomers ask:  should we get Long Term Care insurance to help pay for our personal needs if, for whatever reason, we find ourselves unable to take care of ourselves?

     I related my own experience purchasing a LTC policy in two previous posts:  The Basics of Long-Term-Care Insurance and Are You Getting Alzheimer's? I'm happy to report that my medical history was apparently good enough to suit the insurance company. So I was accepted for the policy.

     I now have the dubious honor of paying a little over $2,000 a year, for the rest of my life, in the hopes that my insurance company will still be around and will agree to pay for my care if and when I need it.

     But those two posts just cover my own experience. I thought I'd go to an expert to offer a more objective, overall view of LTC.

     So I consulted Jeremy A. Kisner, president of Surevest Capital Management in Phoenix, AZ. He is a Certified Financial Planner and Chartered Retired Plans Specialist, with a degree in economics from UC Santa Barbara. He also writes an informative Weekly Insight blog that covers various aspects of personal finance and retirement issues.

     So here's what he says about LTC:

    

LTC – No Good Solutions?

You would think that with 10,000 baby boomers hitting age 65 every day, Long Term Care (LTC) insurance sales would be booming. They are not. In fact, sales of traditional LTC insurance have been declining since 2004.

Why? In part because the policies are expensive. A decent policy for a 60-year-old couple now costs in the range of $6 - $7,000 per year. Also, insurance companies have become more selective about who will qualify for a policy, since companies are only now getting a good grip on the true costs of claims. Many companies have stopped issuing policies, because they have not proved profitable. A decade ago, over 100 companies offered LTC insurance; now there are fewer than 20. Those that remain -- such as Genworth, American General, John Hancock -- are charging more and have more stringent underwriting (no, Obamacare does not help you get long-term-care insurance).

Many people who buy LTC insurance assume their premiums will remain level for the rest of their lives. But that's not necessarily true. Insurance companies do have the ability to raise rates on in-force policies. Some people have never had their rate raised. But others have seen significant increases, forcing them to reduce or even terminate their coverage.

Do You Need LTC?

A LTC event is the single biggest risk to your retirement plan. It's estimated that at some point in their lives 7 out of 10 people will require long-term care  -- non-medical care that involves helping a person eat, bathe, dress, walk. In reality, the majority of this care is provided by family members, often with a heavy emotional toll. Home health care agencies are the second most common provider of care, and the nursing home is generally considered a last resort. The costs of these options can easily run into hundreds of thousands of dollars, and Medicare does not pay. Once you have spent essentially all of your money, Medicaid will kick in, but that could leave a surviving spouse broke and virtually nothing in your estate.

If you are single, you have to spend all your non-exempt assets -- including investment accounts, savings accounts, retirement accounts and the cash value of any life insurance policy -- down to $2,000 before Medicaid will pay your bill. If you're married, the spouse can keep up to the "community spouse resource allowance" which is set by your state -- ranging from $23,448 to $117,240. Exempt assets include your wedding ring, one car, your house. 

LTC Insurance, like other forms of insurance, is designed to transfer financial risks from the individual to an insurance company for a fee. So who can benefit from the policy? People with over $2 million in investible assets tend to self-insure. They can afford the average LTC event without wiping out their life savings. People with low net worth, under $200k in investible assets, tend not to buy the insurance because the costs are too high. They will spend down whatever money they have until Medicaid kicks in. It is the folks in the middle who have the toughest decision.

What Is Your Situation?

Traditional LTC insurance makes sense if you are in decent health and have surplus income from pensions, Social Security, and other sources. The most common age at which people buy LTC insurance is 57. 

Here's how it works. First, policies do have an elimination period (typically 90 days) during which the insured has to pay out of pocket, before the insurance kicks in. Once benefits are triggered, the policy typically offers a daily or monthly maximum. If your daily maximum is $200, but your care is $250, then insurance covers $200 and you pay $50. Most policies are reimbursement policies. Indemnity policies are better because once benefits are triggered, the insurance company automatically pays the amount of your coverage (ask your LTC agent to explain the difference in more detail).

Some LTC policies only pay if you go in a nursing home. Others will also pay for at-home help, as long as you meet the requirements. Naturally the policy is cheaper if it only covers a nursing home. However, I would never recommend such a policy. Four times as many people are receiving care at home compared to the number who are in nursing homes. Some policies have 100% coverage for home health care, meaning the daily limits are the same whether you are in a nursing home or receiving help at home. Other policies may limit the at-home payment to 50%, as home health care is usually (but not always) less expensive.

Finally, many people worry about what might happen to their insurance company over the next 20 or 30 years. But insurance is possibly the most regulated industry in America. Companies have to have their product approved by every state in which they issue policies. They have to keep reserves, and they also pay into a state guarantee fund which makes good on policies if the insurance company were to go out of business. In reality, when a company gets into trouble a stronger company buys them out, sometimes with financial help from state guarantee funds. Insurance companies do occasionally fail, but I have never heard of a client not being able to collect on their life insurance, annuity or long-term care for that reason.

Are There Other Options?

 

Some people in the middle turn to hybrid products, rather than traditional LTC,  such as life insurance with a LTC Rider. These policies enable policy holders to use the death benefit while they are still alive to pay for LTC costs. There are also annuities with LTC riders that will double the monthly payout if the owner cannot perform two of six activities of daily living. Lastly, there is always the reverse mortgage, which enables homeowners to tap their home equity. Funds from a reverse mortgage could be used to pay for long term care, or to provide money for a surviving spouse.

Life insurance with an LTC rider makes sense if one of your financial goals is to leave money behind (assuming you don’t use it all up for your care). You either need funds to buy a policy or you may already have a life insurance policy with cash value that could be exchanged for one with the LTC rider. The annuity is the best option if you already have health problems and would not qualify for traditional LTC or life insurance. Annuities do not have any health underwriting.

The LTC decision is a very important part of your overall retirement plan. Many people avoid it until it is too late, because the insurance has become too expensive or medical conditions limit your choices. I strongly suggest working with a professional who can look at your entire financial picture and help you think through your options. There may not be a "perfect" choice, but with a little work, you can find the best solution for you.