For aging baby boomers, planning for long-term-care costs becomes more pressing every day. But the insurance that helps cover those costs is surging in price, while the benefits are becoming skimpier.
As costs rise, health care experts are engaging in a fierce debate about whether the coverage is worth the years of premiums. Even when people do go into a nursing home, those bills may not be as enormous as many people believe. Half of men and nearly 40% of women who use nursing-home care never have a stay exceeding three months, according to a recent study by the
The overall cost of new long-term-care coverage has jumped roughly 9% over the past year, according to the
Meanwhile, the most comprehensive benefits -- such as lifetime coverage and 5% compound inflation protection -- are now out of reach of most consumers because insurers have either stopped offering the benefits or made them unaffordable. So consumers must decide whether limited coverage is better than none at all.
New data may guide their decision. Although many consumers have traditionally thought of long-term-care policies as coverage for the catastrophic scenario of a years-long nursing-home stay, about half of new claims are for in-home care, says
Although some patients with dementia could spend many years in a nursing home, they tend to be the exception.
Wealthier people -- those with financial assets of perhaps
People with more limited assets shouldn't purchase long-term-care coverage if the premiums are not well within their budget. "If you're not comfortable that you can continue the premiums indefinitely, you shouldn't be buying," says
Most people fall somewhere in the middle: They're willing to spend a certain amount of their personal savings on long-term care but also could benefit from a more limited policy and other strategies to fill in the gaps.
Assess your risk. To find the right policy, first determine the type of risk you're trying to cover. Consider your health, hereditary conditions and longevity in your family, availability of family caregivers, and personal preferences.
If you want to remain at home and have family members who can provide some care, for example, you may want to buy a policy with a relatively low benefit level. With the national median rate for a home health aide at
Too often, Thau says, financial advisers discuss only higher benefit levels that would cover the cost of assisted living or a nursing-home stay. "You can get a small policy that can be wondrous" in terms of allowing you to remain at home without overburdening family caregivers, he says.
A policy that would cover most of the bills at a facility costs considerably more. Genworth, for example, currently charges a healthy 55-year-old married couple more than
You could use this richer benefit to cover home health costs. But the
To find the cost of home care, adult day health care, assisted-living facilities and nursing homes in your community, go to www.genworth.com/costofcare.
Cut the cost. Once you've considered the type of risk you'd like to cover, ask yourself, "how much of that risk can you transfer to the insurance company, and how much can you tolerate on your own?" Burns says. The first step is to choose a deductible, also known as the "elimination period," which is the number of days between the time you become eligible for benefits and the time the insurer starts paying.
Many policies offer a 90-day elimination period, but prepare to spend
Choosing a shorter benefit period will also cut your cost. A benefit period of three to five years "will cover the vast majority" of long-term-care needs, says
One of the most effective -- and controversial -- ways to reduce costs is to choose a lower level of inflation protection. The 55-year-old couple above, for example, could cut their annual Genworth premium roughly 60%, to
Some financial advisers fear that inflation protection of 3% or less won't keep up with rising long-term-care costs. But depending on your budget and the type of risk you're trying to cover, more limited inflation protection may make sense. The national median hourly rate for a home aide has grown only 1% annually over the past five years, according to Genworth, compared with a 4% five-year annual growth rate for a private room in a nursing home. Of course, inflation could pick up in the future when you need care.
When comparing options, consider the impact of various levels of inflation protection on the size of your benefit at the time you're likely to use care. A 60-year-old couple, for example, can together pay
Another approach: Choose a policy with a "future purchase option," which has no automatic inflation adjustment, lets you pay a lower premium today and gives you the option of boosting coverage down the road. Such a policy would cost the 60-year-old couple above
Buy early. People who determine that they want a policy have good reason to buy sooner rather than later -- ideally while in their fifties. Premiums will climb with each year you age. The 60-year-old couple above, who would pay
Buying while still in good health has become more important as insurers tighten underwriting standards. Some companies have added blood-test requirements and started scrutinizing family health history for conditions such as heart disease and dementia. One-fourth of applicants age 60 to 69 are rejected, and 44% of those age 70 to 79 are denied coverage, according to the long-term-care association. Most companies won't issue policies to people over 75, says
Married couples should consider a "shared care" rider, which allows couples to share benefits. If a husband and wife each have a three-year benefit period, for example, and the wife develops dementia and uses up three years of care, she can dip into her husband's benefits.
Single women face major challenges in the long-term-care insurance market. Because women live longer than men, insurers in recent years have begun charging single women higher premiums than single men -- often about 50% more. If possible, single women interested in coverage should purchase it through an employer, because unisex pricing is still available in the employer market. You can keep the policy when you leave your job.
Determine affordability. Premiums have been rising sharply in recent years because many assumptions insurers made when pricing policies in years past turned out to be wrong. Fewer people have dropped these policies than expected, and insurers have faced more claims than anticipated. At the same time, a long period of ultra-low interest rates has left insurers with lower investment earnings than they projected.
Insurers are allowed to raise premiums even after you buy the policy, so consumers must factor future premium increases into their budget. "People are buying policies today that won't pay off for 30 or 40 years, and there are so many unknowns," Genworth's Conklin says. "People should expect that rate increases are more normal than abnormal."
Some consumers seeking to avoid the risk of premium increases have gravitated toward hybrid products combining long-term-care insurance with life insurance. You typically pay a single upfront premium for a cash-value life insurance policy that will pay benefits early if you need long-term care or provide your heirs a death benefit if you don't need care.
But some advisers warn that this can be a very costly way of getting long-term-care coverage because consumers give up the opportunity to get market growth rates on a large lump sum of money. If you put
Forgoing coverage can also be a costly decision, in terms of quality of life. People who know they have to cover their own long-term-care costs sometimes won't spend money on travel and other frills during retirement, Thau says. Those who choose to self-insure may even be reluctant to get the care they need. "I've seen people terrified of running out of money, so they never get the necessary care," Slome says.
People who feel strongly about getting the type of care they want may find long-term-care coverage well worth the price.
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Eleanor Laise is the Associate Editor of Kiplinger's Retirement Report.