"People who see themselves primarily as victims are doomed." -- Louise Erdrich, "The Sentence"

Friday, July 11, 2014

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:

LTCNo 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 dont 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.


Dr. Kathy McCoy said...

Thank you, Tom, for a wonderfully informative look at LTC options. That has been very much on my mind lately.

My best girlfriend's husband has dementia, heart disease and partial paralysis from injuries suffered in a fall. He also weighs over 300 pounds, is difficult to handle and absolutely refuses to go into assisted living -- which their LTC policy would totally pay for vs. the part-time home care he gets now that is not completely covered by insurance. As a result, their accountant says they will be totally out of money within two years.

I have been trying to decide what our best options are. My family on both my mother's and father's sides is inclined to sudden cardiac death. Every one of my aunts, my maternal grandparents, my parents all died suddenly without prior illness, hospitalization and the like. Bob's family has more diversity in terms of death, but none ever required long term care, though his mother had about six weeks of hospice care near the end of her battle with cancer and that was covered by Medicare.

So we're still on the fence -- considering LTC, looking into continuing care communities (though the catch there is you need to move in while still healthy) and a reverse mortgage if disaster strikes. At our ages (69 and 70), the premiums would be in the range you mentioned -- if we rushed before Genworth raised its rates later this month, we might get coverage with a premium of $5,100 a year for both of us.(This is the benefit of a group policy through Northwestern University where I went to school and also worked for a time.) The quotes from Mutual of Omaha and one other were in the $6,000-7,000 per year range. That's a lot of money for us yet we realize that if either of us were to require long term care it would be catastrophic financially. So we're still thinking and running the numbers.

Your great post couldn't have come at a better time for us! Thank you! Thank you!

Anonymous said...

I thought I read a post from you a while back about LTC. Maybe I am imagining this?

We bought our policies several years ago. We hope to never need them. I don't want to be warehoused, which is what happens if you go the Medicaid route. Act while you can.

Anonymous said...

Addenda: not losing my mind, I see. My LTC costs run about $400 per month. I bought one of them when I was in my 40s and the other in my 50s. Met Life and JH. Both great and both with annual optional increases. I can always coose whether to accept or reject the increase.

stephen Hayes said...

This is good food for thought. Like many Baby Boomers, I'm headed in this direction fast.

Linda Myers said...

We've had our LTC policies for over ten years. $431 a month for me (65) and husband (71). I recently looked into replacing them with a life insurance policy with LTC. But my husband had a cardiac arrest in January so he no longer qualifies.

This is one of those expenses I resent paying for, but the idea of spending down our assets for a year or two or three until one of us dies is too anxiety ridden.

Meryl Baer said...

A difficult decision and such an important one. We have been thinking and researching, but so far not buying.

Douglas said...

You, of course, realize that insurance companies are for profit organizations and that they expect not to have to pay out more than they take (plus.. They use those premiums for investing and make even more money) and that, when you buy a policy of any type, you are betting something bad (possibly horrendous) will happen to you?

Anonymous said...

Great information! My husband and I have had LTC insurance for several years (he's 60 and I am 58). The premiums hurt but I think it is the prudent thing to do. Just like car and homeowners insurance, we hope we'll never need it, but will be grateful to have it if we do.

Olga said...

I am totally all about the ostrich plan as far as insurance--LTC the most ostrichy of all.

Rosaria Williams said...

Great post, Tom.

Banjo Steve said...

After a long discussion with our nephew-in-law (who used to train salesmen for an LTC company), we bit the bullet and discontinued our policy that we'd had for about five years. Why?

1) We read numerous frightening reviews by policyholders of many years whose yearly premiums were going up as much as 30% every couple of years - but they felt locked in because of having invested so much money in the policy for so long.

2) More readings about how, like what many HMO's do, reimbursement requests (many policies have you pay first, then ask for reimbursement), were automatically rejected - not because they were't legitimate, but in company hopes that many policyholders (or their relatives) would not go through the appeal process. Again, this is a money-making phenomena, usually far short of any kind of humanitarian aims.

3) First-hand experience with my in-law's policy; the documentation required is arduous and too-often overwhelming - another technique used to discourage making legitimate claims.

4) We decided that we had enough saved to self-insure, which my own parents chose to do - which made caring for them so much easier (though not easy, by a long shot). What a gift it was for their kids.

The only advice that I can give for those who feel the need to have and maintain an LTC plan is to talk to others beforehand on what is needed to make claims. Tenacity and perseverance by whoever is actually making the claim(s) are critical.

Unknown said...

This is a great and informative article. Tom has provided insights on the significance of having long-term care insurance in case the need for care arises. We should remember that ltci, just like any other insurance is meant to protect us from unforeseen circumstance, you buy it because you want to be assured that the money is available once you need it, instead of worrying about paying the premiums and hoped that you get to tap the benefits.
Not only he discussed about traditional long-term care insurance, he was also able to provide options like life insurance with ltc rider for those people who are afraid that they will lose all their money in case they never needed care for the rest of their lives. In addition to that, there are other alternatives for long-term care insurance, I have also discussed this at http://www.infolongtermcare.org/long-term-care-insurance-information/ and explained how these alternatives can help pay for long-term care expenses especially if you do not have one or it is too late for you to get one.

Unknown said...

i have read your post. it good and very helpfull .keep it up . it help me to take long term care insurance .

Unknown said...

LTC is something I've been looking in to. I'm not sure I believe the value exists for me. I'm not encouraged by the insurance companies drop out rate. As we all know, insurance companies are for profit enterprises, so if they can't make money, they will not stay long in the game. I'm not comfortable with a new company picking up my policy and raising rates to make them happy. And, my experience with insurance companies over the years with auto, health and business hasn't been bad, but it wasn't the most fun I've had in my life. I know if I'm laid up in the hospital or at home I will not want to wrestle the company to see my view of things and honor my claims. So, after these considerations, it's most likely not a good option. I'll just take those premium dollars and invest in something more dependable.

Lucrecia Finnegan said...

I have been trying to ignore getting older, like those dirty dishes in the sink. Unfortunately, my older friends and family have made me recognize that I need to address this issue before it is too late. I was disabled during a car accident and already have special care needs. I am able to take care of myself, but do fear the day when this is no longer true. Thanks for the clarity on how to get help with future care.

Lucrecia Finnegan @ Sherri Bailey

George said...

Tom, you hit the nail on the head. Americans can’t count on the government to help, so they need to assume responsibility for their own care. And that means planning before it’s too late.

George Lambert
Author, A Boomer’s Guide to Long-term Care

Anonymous said...

Do the affordable care act effect all health insurance?
Florida Insurance Specialists

Jr. Williams said...

I wanted to thank you for this great blog! I really enjoying every little bit of it and I have you bookmarked to check out new stuff you post.

Anonymous said...

Valuable information! Looking forward to seeing your notes posted.
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Anonymous said...

We bought LTC 14 years ago at age 42/51. Premium was $528/$733. Every 3 years, the increase was 10%. Last year, the increase was also 10% and yesterday, we received a letter stating another increase of 15% = $930/$1291 or reduce our benefits retroactively! Our original daily max rate was $120 plus inflation = current $238. For the premium to remain as last year's, we could reduce the daily max rate to $106 plus inflation = current $206 (instead of $238). We have been paying premiums for the 14 years and I don't understand how the daily rate can be reduced retroactively! My biggest concern is that we will be hit with big increases just when the need arises. Incidentally, these increases were approved by the state insurance regulatory board!!

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