TRADITIONAL LTC—or long-term-care—insurance has proven to be a problematic product. Sales have been in decline. Many insurers have dropped out of the market. Others have jacked up premiums, making coverage unaffordable for both current and potential policyholders.
Thinking about buying a policy? The younger you are when you purchase a policy, the less likely you are to be rejected for health reasons and the lower the annual premium. But you’ll pay those premiums for more years, plus there’s more time for the insurance company to drop out of the market or tinker with the policy.
One possible strategy: “dollar-cost average” by purchasing a small policy in your 40s and then adding other policies in your 50s and 60s. This will also help you diversify your exposure, hedging the risk that any single insurer goes bankrupt or raises prices. Do the premiums seem unaffordable? As you approach retirement, consider dropping your disability and life insurance, and putting those premiums toward LTC insurance instead.
When purchasing a policy, you’ll need to decide what monthly benefit you want, which is the maximum dollar amount the policy will pay each month you need care, and the total number of years you want benefits to last. To settle on the right numbers, review the cost of care in your area and think about how much you’re comfortable paying out of pocket. For instance, between Social Security and portfolio income, you might be able to cover half the daily cost of a nursing home. You could then buy a policy that covers the rest.
Many folks purchase policies that will cover maybe three years of nursing home costs. Arguably, that’s the wrong approach. Using savings, you might be able to afford a year or two in a nursing home. Instead, the big risk is spending five years or more in a nursing home. With that in mind, you might purchase a policy that will pay benefits for more years but hold down costs by opting for a long elimination period, such as six months or a year, which is the initial period when you have to cover costs before the insurance company starts paying.
If you’re married, consider a “shared benefit” rider that allows each spouse to use the other’s benefit if one of you runs through the maximum benefit on your individual policy. If you are under age 70, also consider adding an inflation rider to your policy, which increases your benefits each year to keep up with rising care costs.
In addition, pay careful attention to the details. For a policy to start paying, what are the triggers? Usually, you have to display cognitive impairment or need help with at least two “activities of daily living,” such as eating, bathing and getting dressed. Find out what’s covered if you opt for in-home care or if you’re in an assisted living facility, rather than a nursing home. Most traditional LTC policies sold today allow you to use your benefits for care at home or in assisted living facilities, but it’s good to confirm the details.
Some states offer partnership programs that make it easier to qualify for Medicaid if you purchase LTC insurance. Under a partnership program, if you purchase a traditional policy with, say, $300,000 of benefits and you exhaust those benefits paying for care, the state will let you keep $300,000 of your assets and still qualify for Medicaid assistance. Normally, you would only be able to keep a fraction of that amount. The caveat: Not all states participate in this program and, even if a program is in place, not all policies qualify. You might find that partnership-qualified policies are more expensive than nonqualified policies and thus aren’t the best value.
If you purchase a traditional policy, make sure you can afford to maintain the premiums for the long term. Most traditional policies have payments that last a lifetime, setting you up for higher monthly retirement expenses. Indeed, because premiums on traditional policies aren’t guaranteed, try to have some room in your budget for higher premiums down the road. While the probability of rate increases on policies sold today is much lower than it was for past policies, the risk is still there.
What if you buy a policy and the premiums rise so much that they become unaffordable? Rather than dropping the policy, talk to the insurer about whether you can keep the premium the same by reducing the size of the benefit. That isn’t ideal—but at least you’ll salvage some coverage after all those years of premium payments.
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