For Every Bad Article, There's A Good One

[Arthur Rudnick]

Long-Term Care Insurance Should Be Part of Your Financial Plan

by Michele Lerner, Mar 12th 2013 5:00AM

In the world of insurance products, long-term care insurance is a relative newcomer. It was introduced in the late 1970s, but in recent years, it has become a much more important element of retirement planning thanks to twin rises in health care costs and longevity. (Life expectancy in 1930 was just 59.7; in 2010 life expectancy for Americans was 78.7.)

Many people associate long-term care insurance with nursing homes, but it also pays for in-home care and assisted living facilities. According to the American Association for Long-Term Care Insurance, 50 percent of long-term care insurance benefits in 2011 went to pay for in-home care, 31 percent for nursing home care, and 19 percent for an assisted living facility.

How Long-Term Care Insurance Works

Each long-term care insurance policy is slightly different, but most benefits kick in based on a similar definition of "disability": either you have severe cognitive impairment or you need help with at least two daily living activities. These activities include bathing, dressing, eating or using the bathroom.

In other words, you don't just automatically receive the benefits when you think you could use some help or when you move into a retirement community. Policies are typically purchased with fixed daily benefits for a fixed period of time such as three years or five years.

Can You Cover These Costs Without It?

On an hourly, daily and monthly basis, the cost of the kinds of services covered by long-term care insurance really add up.

A 2012 MetLife Survey of Long-term Care Costs found:

• The national average monthly base rate in an assisted living community cost $3,550 in 2012.
• The national average daily rate for a private room in a nursing home cost $248; a semi-private room ran $222 per day.
• The national average daily rate for adult day services was $70.
• The national average for hourly rates for home health aides was $21.

While many people recognize the value of having insurance coverage to help pay for their care when they age, not everyone purchases it.

A 2012 Generational Research project by Financial Finesse showed that just 10 percent of people age 45 to 54 have purchased long-term care insurance, and only 16 percent of people age 55 to 64 have it.

Why are people forgoing coverage? It comes down to cost, according to the AARP.

How Much Does Coverage Cost?

Long-term care insurance can vary widely depending on your age at the time of purchase, the length and amount of coverage, and policy characteristics including whether your benefits are adjusted for inflation and the length of any waiting period before benefits are paid, among other things.

According to the American Association for Long-Term Care Insurance, the average annual premium for long-term care insurance in 2012 for a policy for a 50-year old with a daily benefit of $200 for three years of coverage and a 3 percent automatic compound inflation coverage was $2,235. Your policy can't be cancelled (except for non-payment) and premiums for long-term care insurance cannot be increased on an individual basis for your age or health reasons. Still, insurance companies can raise the premiums for an entire class of policyholders (such as everyone age 75 and older).

Obviously, the older you are when you purchase long-term care insurance, the more expensive the policy and the higher the likelihood that you will be turned down for the coverage. Underwriters look at your health records as well as mortality risk to determine your eligibility for coverage.

Some companies give you a discount if you're married because they assume spouses are likely to take care of each other longer before resorting to a nursing home.

Four Reasons You Need Long-Term Care Insurance

So how do you know if you need this kind of insurance? If you have more limited retirement savings, long-term care insurance should probably be part of your financial plan. And even if you have $2 million or $3 million in the bank for your retirement and future health care needs, don't dismiss these policies before you examine the benefits more closely. Consider, for example:

• How much longer we're living these days. The longer you live, the higher your chances of needing some type of long-term care, either in your home, in a nursing home or in an assisted living facility.
• Rising health care costs. AARP says that health care costs have historically outpaced the overall rate of inflation. If you need to live in a nursing home for more than a year or two, you could need $250,000 or more to pay for it.
• How far your retirement investments will really take you. Your 401(k) may look good when you retire at 65, but if you need to pay for assisted living or even a home health aide the income generated by your retirement investments could get eaten away very quickly. If one spouse needs to live in a nursing home but the other can stay at home, you'll need enough savings to cover two separate living expenses.
• Your family's emotional and financial health. Even wealthy families often choose to purchase long-term care insurance because the policy can make decisions about how to care for loved ones easier by giving them more options. Instead of draining their inheritance, your family members can use insurance benefits to pay for home health care or to cover some of the expense of a more costly nursing home.

Financial experts suggest purchasing long-term care insurance between age 55 and 64, but remember that the younger you are when you buy it, the lower your premiums will be. If you or your parents are 50 or 55, it's time to discuss your options with an insurance agent.

 

[Mr_Ed]

alright... I'm back in.

 

[TriciaS]

Ok, I believe again!

 

[djs]

Let me start by saying I have never sold (and probably never will sell) a LTC policy. I'm very open to being corrected on my comments below.....

Your policy can't be cancelled (except for non-payment) and premiums for long-term care insurance cannot be increased on an individual basis for your age or health reasons. Still, insurance companies can raise the premiums for an entire class of policyholders (such as everyone age 75 and older).

This is why I get hung up on long term care coverage. As you approach the point you need it, they can jack the rates up to the point you can't afford it, forcing a lapse just prior to when the average person would use it.

Not to say this happens, but it clearly can.

And you take a real gamble on what the costs will be in the future for care. The inflation protection is good, but since it isn't tied to the inflation on the cost of care, 20 years from now, it might not even come close.

Since most LTC candidates are probably in their mid to upper 50's (and above), these risks are mitigated to a large degree, but for someone in their 30's or 40's, it seems to me they pay for a long time to not be assured they will get what they need.

I'm open to being corrected.

Dan

 

[Mr_Ed]

Let me start by saying I have never sold (and probably never will sell) a LTC policy. I'm very open to being corrected on my comments below.....



This is why I get hung up on long term care coverage. As you approach the point you need it, they can jack the rates up to the point you can't afford it, forcing a lapse just prior to when the average person would use it.

Not to say this happens, but it clearly can.

And you take a real gamble on what the costs will be in the future for care. The inflation protection is good, but since it isn't tied to the inflation on the cost of care, 20 years from now, it might not even come close.

Since most LTC candidates are probably in their mid to upper 50's (and above), these risks are mitigated to a large degree, but for someone in their 30's or 40's, it seems to me they pay for a long time to not be assured they will get what they need.

I'm open to being corrected.

Dan

Dan,
This statement is incorrect:

Still, insurance companies can raise the premiums for an entire class of policyholders (such as everyone age 75 and older).



Any premium increase request is based upon "class" at the time of issue.

They canNOT request a premium increase for all policyholders who have attained the age of 75 or more.

But they could request, for example,

a 40% premium increase for those policyholders who were between the ages of 51 and 59 at the time of application

a 30% premium increase for those policyholders who were between the ages of 61 and 69 at the time of application

a 20% premium increase for those policyholders who were between the ages of 71 and 79 at the time of application

 

[Aefroyms]

Thanks for the share, that is a really great article.

Indiana Insurance

 

[Arthur Rudnick]

Originally posted by mr_ed

They cannot request a premium increase for everyone who has attained the age of 75 or more.

Correct, but they could request an increase on everyone who purchased a policy when they were at age 75 & higher.

They could, but I'm not sure if that's ever been done.

Dan,
You make some good points, however:

Those in their 30s & 40s are not viable targets for LTCi. Most in that age bracket are not thinking about a product that they might not use for another 40-50 years. They also have other financial priorities. They may have a couple of young kids and are saving for a college education. They may have a mortgage and 2 cars in the garage and just do have the extra income to pay for a policy.

The prime target are the baby boomers (50-65). Chances are they have parents or relatives who have experienced a LTC event and have seen the
consequences to themselves and their family in dealing with the catastrophic costs associated with providing care.

As far as losing the value of benefits over time, you're right, no one knows what the actual costs of care will be 20 or 30 years down the road. But if someone purchases a policy that covers 75% of the cost of care and adds a 5% or 3% compound inflation rider, by all industry estimates, that policy will offer adequate coverage when care is needed.

No, it's not an exact science, it's just a pretty good estimate. If a 50 year old purchases a 30-year term life policy with a $100,000 death benefit, that $100,000 is not the same in 30 years.

"As you approach the point you need it, they can jack the rates up to the point you can't afford it, forcing a lapse just prior to when the average person would use it".

I've been in the business for 18 years and have over 1,000 policyholders. Most of them have had at least 1 rate increase over the past 10 years and the amount of policyholders that lapsed their policies can be counted on 1 hand. The fact is, LTC policyholders don't let their policies lapse.

Most have just sucked it up and paid the higher premium. Many have decreased their benefits, which allowed them to keep the same premium. The reason they purchased their policies 10-15 years ago are the same valid reasons they decide to continue their coverage.

I don't believe that anyone has ever said that a LTC policy is a perfect solution. But, what's the alternative other than having a serious LTC need and having to spend down an entire life's savings to pay for that care? And, where does that leave the well-spouse, who has to deal with the loss of the family assets and income?

Not a pretty picture.

 

[djs]

Don't get me wrong, I have no objections to a LTC policy, and in fact, think its a good, sound move for baby boomers to consider.

I just always have more questions than answers when I go down the LTC policy rathole (errr, I mean discussion). Someday, I should sit down with someone who really understands this stuff and get a better explanation of what the long term risks are on the policy.

If there was a policy that would cap premium increases to inflation increases, or at least something related, I think it would be a very compelling product. Maybe not financially viable for the carrier, but it would make more sense.

My concern is a few years like the late 70's and early 80's with almost runaway inflation. It could easily cause your LTC policy to come up short in benefits. How often does that happen? Often enough you have to consider it.

Okay, I'll go back under my P&C rock and stop worrying about LTC. I'll leave it to the professionals

Dan

 

[Arthur Rudnick]

originally posted by Dan

If there was a policy that would cap premium increases to inflation increases,
or at least something related, I think it would be a very compelling product. Maybe not financially viable for the carrier, but it would make more sense.

Actually, there is........
John Hancock has an inflation option that is geared to the CPI. Unlike fixed options (3% & 5%) which automatically increase by a set amount each year, with the CPI, if the Consumer Price Index goes up by 3%, the benefits increase by the same amount. If the CPI increases by 8%, so do the benefits.

The only problem that I have with that is that the Medical Index (which relfects increases in all medical costs, including LTC services) has historically been about 1% higher than the CPI.

But, the CPI option does reduce premiums substantially, compared with a set 3% or 5% option.

If you have any interest in learning about the product and how to sell it, I strongly suggest that you look into taking the CLTC course. It runs about $1,000 and is well worth it.

Learning the product and how to put together a policy is the easy part, learning how to explain it and sell it is the hard part. CLTC will teach you that.

Your P & C book is a great source for prospects. I know of many P & C agents that have added LTCi to the mix and been successful. Or, you might consider networking with a LTC specialist and split commission.

If you're not selling LTCi to your clients, someone else will be.

 

[csalter]

Don't get me wrong, I have no objections to a LTC policy, and in fact, think its a good, sound move for baby boomers to consider.

I just always have more questions than answers when I go down the LTC policy rathole (errr, I mean discussion). Someday, I should sit down with someone who really understands this stuff and get a better explanation of what the long term risks are on the policy.

If there was a policy that would cap premium increases to inflation increases, or at least something related, I think it would be a very compelling product. Maybe not financially viable for the carrier, but it would make more sense.

My concern is a few years like the late 70's and early 80's with almost runaway inflation. It could easily cause your LTC policy to come up short in benefits. How often does that happen? Often enough you have to consider it.

Okay, I'll go back under my P&C rock and stop worrying about LTC. I'll leave it to the professionals

Dan

Personally, I don't see a downside to the insurance if one buys it for the purpose intended. I bought my wife a policy when she was in her 30's and it made sense because I got a 40% discount on both of our policies. It ticks me off a little that the difference in our policies is not that much as I am in my early 50's, but at least I know I am covered and she will be covered too as we will be paid up at 10 years. Even with an annual pay, I one has a spousal rider where the policies are paid off if no one uses benefits after 10 years when one dies the other's policy is paid off. That is a good deal to me.

I have 5% inflation protection, if the cost of care increases more than the inflation protection there is nothing I can about that. However, my thinking is at least I have something as opposed to nothing. So if the cost of care in a nursing home for a year is $70,000 a year today and in 15 years it's $140,000 and my policy would only give me $120,000 that's fine, because if I had no policy I'd would either not able to be in a nursing home or or I'd be trying to pay for all of the expenses for that nursing home.

If one can afford LTCi then I believe they should buy it.