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A FEW WEEKS BACK, I discussed some of the challenges with traditional long-term-care (LTC) insurance: In addition to steep and rising premiums, these policies are complex. Many policyholders have to contend with an annual renewal letter that presents a mind-numbing matrix of options.
But there’s more to it than that. Long-term care is also an emotional topic. There’s the expression that personal finance is more personal than it is finance. I’ve been reminded of that over the past few weeks, as a number of people have contacted me to share their stories about long-term care. Some have described frustrations with these policies, including rising rates and bureaucratic obstacles to making claims.
Meanwhile, others have hailed LTC policies as lifesavers for their families. As one person put it, it’s been hard enough to manage the health challenges of her husband’s disability. But with LTC coverage, at least they’ve been spared financial stress, which would have made a bad situation that much worse. As challenging as these policies can be, they can also be immensely valuable.
These days, it’s much harder to find a standalone LTC policy. That’s because, as I mentioned in my earlier article, insurers got the pricing wrong when these policies became popular in the 1980s. For that reason, if you have an older policy, it’s often worth trying to maintain it. But if you have to compromise at renewal time to minimize premium increases, this is how I would think about the choices. You could also use this as a guide if you’re shopping for a new policy.
Daily maximum. This is the fundamental element of an LTC policy. I’ve seen benefits that vary widely—from just $100 a day to more than $400. That’s an awfully wide range. Here are the factors I’d consider as you zero in on an appropriate coverage level:
Inflation protection. Some LTC policies include inflation protection that’s generous by today’s standards—as much as a 5%-a-year increase in benefits. But this option will make a policy materially more expensive. My advice: If you’re on the younger side, inflation protection is worth paying for. But if you’re older, you might forgo that option since, for better or worse, there are fewer years of inflation to worry about.
Coinsurance. Some policies offer a coinsurance option, whereby the policyholder would share the cost of care with the insurer. In exchange, the premium would be lower. Who would this help? If you look at the statistics, you’ll notice that only a small fraction of seniors incur costs in excess of $250,000—numbers range from 9% to 15%. Coinsurance would be a good option for many families in the financial middle—who might be able to afford $200,000 of care, but not $2 million.
Elimination period. This refers to the period of time before benefits kick in. Most policies have a relatively short elimination period of 100 days. But this is an area where you might compromise. Unfortunately, there’s no such thing as an LTC policy that provides a multi-year elimination period. I think that’s unfortunate because, according to Morningstar’s Benz, that’s just the type of coverage many people say they want—basically, catastrophic coverage. Insurers would like to offer it, but Benz notes that insurance regulators won’t let them. Absent that, the best you can do is to choose the longest elimination period an insurer offers.
Benefit period. This one is tricky. According to the statistics, the average long-term-care claim is about three years. But that figure is distorted because many policies cap the benefit period. As a result, policyholders contending with these caps try to wait as long as possible—and probably longer than they’d like—before claiming benefits. In other words, the average claim would be longer if insurance policies didn’t have these caps.
My advice: Try not to compromise on the benefits period. This would protect you in the case of a protracted illness. An added benefit: Premium payments cease the moment you claim benefits. If you have a long or unlimited benefits period, you could claim benefits and stop paying premiums as soon as you qualify for even a modest level of care.
If you don’t have a long-term-care policy, what are your options? As I noted, it might not be a problem if you have assets that are either very modest or very substantial. But even if you fall in the middle, all is not lost. First of all, the statistics say you might not need paid care at all. About 50% of people don’t. And if you do, you might be able to afford it out of pocket.
Beyond that, Christine Benz suggests some other strategies: If you have home equity, you could plan on a reverse mortgage. If you have a whole-life insurance policy or an annuity, an intriguing option is to swap it for a hybrid life-LTC policy using what’s known as a 1035 exchange. There is, of course, no magic bullet. But it’s worth making a plan. That way, you’ll be ready if the need arises.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
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I am confused about something. Why is it that experts often do not mention state partnership LTC policies? According to the broker I purchased my LTC policy through, these policies are designed to be a way for states to share in the ultimate cost of LTC so as to hopefully minimize the state Medicaid expenditures by the state and to minimize the personal financial cost to the individual. I may not be representative, but my policy premiums have increased at a little over the Fed’s 2% goal for inflation over a 15+ year period (while the increases have been intermittent and jarring) with a 5% inflation coverage increases. This is offset by the fact that I live in a high cost state for LTC. I have talked to several RIA’s and they have never recommended buying such a type of LTC policy or getting a reverse mortgage which seems to scare financial advisors for some reason. I figure that I have to pay my property taxes and maintain the property no matter whether I have a reverse mortgage or not. The other advantage of a reverse mortgage is that they are a nonrecourse loan, meaning that the ultimate liability for any funds used is the market value of the home when the borrower leaves.
Another option is a carefully chosen CCRC – continuing care retirement community – which is the route I’m taking. I say carefully chosen, because there are different types. You want one that guarantees not to throw you out if you run out of money. You also want one in excellent financial shape, and I would recommend non-profit rather than for-profit. In my state CCRCs have to file disclosure statements with the Department of Insurance that are available on the web, so it’s not difficult to find the data.
I found Ruth Alvarez’s book on CCRCs a useful introduction.
Excellent! Thank you.
Thank you, glad it was helpful.
We are planning to move to another state in 4-5 years. Is there any reason we should wait to purchase when we move to our permanent retirement state? Great article!
7 days and no reply! Shame on Adam.