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Long-Term Care Insurance: It’s Not for Everyone

March 3, 2015
Insurance, Life Insurance
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Aging can be an expensive process, and few costs are more daunting than long-term care. People who need long-term care can end up spending months or even longer in a facility, and these expenses rarely are covered by standard health insurance. Government figures show that a nursing home stay costs an average of $6,200 a month, an amount that can quickly eat up retirement savings.

Affluent individuals and families may be able to afford such care and forgo long-term care insurance, while lower-income Americans probably can’t afford the insurance but may qualify for Medicaid benefits. People in the middle, especially those in their mid-50s and early 60s, face a tough choice: Buy long-term care insurance or not.

“We didn’t always worry about this … but now people live longer and can outlast their savings. Their cost of care is one of the biggest threats to their financial security, especially for middle-income people,” says Bradley Frigon, president of the National Academy of Elder Law Attorneys.

Many long-term care insurance providers exited the market over the last decade, and those remaining generally charge relatively high prices for the policies — typically $2,000 to $5,000 a year, according to Frigon. Premium levels can rise as policyholders grow older, and benefit levels may not be adequate by the time the policies are needed. For all those reasons and more, only 13% of Americans over 65 have elected to buy coverage, according to a Boston College study. But for middle-income seniors who end up requiring an extended nursing home stay, long-term care policies are one of the few ways they can protect their savings.

Long-term care insurance fills a niche

“A lot of people think, once I make it to 65, Medicare will take care of my health care bills,” says Chris Conklin, senior vice president of product development at Genworth, a major provider of long-term care policies. But, Conklin adds, “There’s a gaping hole in Medicare.”

Long-term care coverage can fill the gap, he says.

Medicare does cover some long-term care expenses. Users who have been in the hospital for at least three days may recover at a skilled nursing facility for up to 100 days afterward, with assistance from Medicare. Anything more is up to consumers or their supplementary insurance provider, if they have one.

That is typically where long-term care insurance comes in, but the policies vary widely in their benefits. Policies may cover services from home health aides, adult day care providers, assisted living facilities, nursing homes and hospice care, among others. Most require a stay of a certain length before they kick in — known as the “elimination period” — and daily benefits are often limited to a certain dollar amount. A typical plan will cover a total stay of two to five years, known as the benefit period. You can add extras, like an inflation rider that adjusts your benefits as the cost of care grows.

Medicare covers many long-term care stays

Medicare’s 100-day limit may not sound like much, but it does cover the needs of many, according to a study by Boston College’s Center for Retirement Research. Only about half of people ever use long-term care, although women, who live longer, are more likely to need it. About 58% of women and 44% of men eventually use long-term care.

Once in a facility, the average woman will spend about 500 days there, while the average man will spend about 310, the study found.

Given these findings, the authors of the study, led by economist Leora Friedberg of the University of Virginia, believe that the current low levels of long-term care policy ownership are justified. Relatively few Americans will need coverage. So how do you decide whether to insure yourself? It may come down to whether you can afford it, and whether you have assets to protect.

Long-term care insurance is expensive

Long-term care insurance isn’t cheap — but neither is long-term care. Frigon notes that premiums are high, and can rise unpredictably over time. “Does that fit within your budget for the next 10 years, 15 years?” he asks.

And buying a policy you can’t afford isn’t a good option. “If you find you can’t make the payments, you may end up not having coverage when you need it, not to mention that you’ll have lost all the money you paid in premiums. If your finances improve and you go back to buy a policy again, you’ll have to start over and get a new policy, and since you’ll be older, it will likely cost more per month,” says Dee Mahan, Medicaid program director at Families USA, a health care advocacy organization.

On the other hand, the cost of long-term care insurance can turn out to be cheap if you need an extended stay in a facility. As of 2010, a semiprivate room in a nursing home averaged $6,235 a month, according to the U.S. Department of Health and Human Services. A one-bedroom unit in an assisted living facility averaged $3,293.

That suggests that people with significant assets to protect may want to consider buying long-term care insurance.

“People who are doing a good job trying to save for retirement, that savings is really at risk unless they have long-term care insurance,” Conklin says.

He notes that insurance may be especially important for those with heirs, or for couples: “As one person’s health is declining and they need [long-term care], that can wipe out the savings of the healthy person, who may have many years left to live.”

There are few alternatives

For those who do decide to buy a plan, “something is better than nothing,” says Dawn Helwig of the Society of Actuaries. “You don’t have to buy a Cadillac policy.”

Helwig recommends opting for a policy that has a shorter elimination period, so payments kick in sooner. “That gives you time to get care paid for while you’re making other plans,” she says. Don’t worry as much about a long benefit period, she says.

Using home health aides or assisted living facilities are other, less expensive care options. If you don’t use your maximum benefit every day, you can stretch your benefit period.

Frigon agrees. “A lot of people, maybe they can use just a three-, five-year benefit,” he says. Policies that offer longer or unlimited benefit periods can be far more costly.

According to data from the American Association for Long-Term Care Insurance, only 12% of nursing home stays last five years or more.

Frigon also suggests consumers look at other potential sources of cash. “So the policy doesn’t need to be 100% of what it may cost you, because I’ve got other income coming in,” he says.

Do you need long-term care insurance?

In fact, maximizing your savings is considered a viable alternative to long-term care insurance by many.

Saving is a “second-best strategy,” says Judith Feder, professor of public policy at Georgetown University.

Individuals who are still in their working years should focus on building up adequate retirement savings before considering long-term care insurance.

“Setting up a personal savings program is very important. If that’s not feasible, you might not be able to keep up long-term care insurance premium payments in any event,” Mahan says.

Feder contends that “given the limits to its benefits, and the risks involved in the product, I question whether [long-term care insurance] ought to be a top priority. I think retirement security and taking care of your kids should be ahead of it.”

Others think disciplined saving might be a better investment than long-term care insurance in some cases, and may even cover the cost of care.

“A lot of people will say … ‘If I’m going to pay a substantial premium, what could I have done if I’d just put that money into a 401(k) or an IRA instead?’ You’ll probably end up just as well off if not better by doing it that way,” says Gerard Wedig, professor of business administration at the University of Rochester. 

But savings can be a double-edged sword. “For people who have a moderate amount of savings, that may be something that they’re willing to protect,” Wedig adds.

The Society of Actuaries’ Helwig says, “I do think [long-term care insurance] is a good, or even necessary, expense for people in the middle-income market, trying to preserve assets.”

Patricia McGinnis, executive director of California Advocates for Nursing Home Reform, is far more cautious. Long-term care policies are a good idea only in a few, specific circumstances, she says.

“If they can find a good, comprehensive policy with inflation protection, that covers home care, assisted living and nursing home care; if they can afford premiums without dipping in to their savings; and if they’re prepared for unregulated and uncapped increases in premiums,” McGinnis explains.

For now, the long-term care insurance question is a thorny one for many Americans. Though solutions are in discussion — including increased government regulation and funding, in combination with private insurance — they’re far from implementation.

“A national long-term care policy that would help people get some help before they have used all their assets would be best. But that’s not likely to happen in time to help people who are thinking about this issue now,” Mahan says.

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