Long-term care insurance is the insurance that nobody wants to buy. And, judging from the number of insurers dropping out of the market and the billions set aside to cover policies already sold, it appears not to be a product that insurers want to sell. Yet, according to an AARP March 2018 bulletin, you have a 50/50 chance of needing long-term care at some point after age 65. Since everyone’s goal is to live well into the Golden Years — and to live those years well — long-term care insurance can make an important difference, making sure you receive excellent care while also protecting your assets. But it is not for everybody, and it comes at a cost.
What is Long-Term Care Insurance?
The broadest definition of long-term care is the daily assistance that people with long-term illnesses, chronic conditions, disabilities, or other impairments need for an extended period of time. This assistance can be as simple as help bathing, dressing, and eating. For aging people, the ability to bathe themselves is usually the first significant aspect of daily functioning that they lose.
Long-term care can be delivered at home by relatives and/or paid helpers, or it might be necessary to move into a long-term care facility where care is provided by nurses, therapists, doctors, or other professionals. According to a December 2013 AARP brief on long-term care in South Carolina, the average daily cost of nursing facilities is $175 per day. It also reported that home health aides in the state have an average daily cost of $136 for eight hours of work.
Medical insurance typically does not cover long-term care expenses, and Medicare will only cover short stays in a nursing home under certain conditions. Long-term care insurance was created in the 1970s to fill this need.
According to the previously referenced March 2018 AARP bulletin, the average cost for paying out of pocket for long-term care is $140,000, a financial risk most people have not planned for. Even so, only 7.2 million Americans have long-term care insurance.
What Does it Cover?
Not all long-term care insurance policies cover the same items. And since the future is unpredictable, knowing what kind of coverage will be needed is difficult. Thus, a policy that offers flexibility is preferable.
Long-term care insurance can cover:
• Home care
• Modifications to your home so that you can safely stay there
• Adult daycare
• Assisted living
• Respite care
• Hospice care
• Living in a nursing home
• Living in a memory care facility
• Care coordination
• Future service option, for services that are developed
Who Needs Long-Term Care Insurance?
Not everyone needs to have long-term care insurance. Some financial planners suggest that if in retirement you will only need to draw 4 percent of your savings yearly on which to live, you may be secure enough to self-fund long-term care should the need arise, although planning is necessary to set aside those funds.
Long-term care insurance is expensive, and for people for whom the premiums are out of reach, long-term care insurance makes no sense. Be confident that funds will be there to pay the premiums for a lifetime. If premiums are not paid, the policy will not stay active, and the money spent in previous years will be wasted if you lose the policy.
For people with both assets to protect and the means to pay the premiums, long-term care insurance can provide you with the care you could need while making sure that long-term costs do not drain all of your savings. And married couples may be able to save money by purchasing a joint policy.
If you have a health savings account, you may be able to use it to pay your premiums. Just be sure that you can still pay your premiums should your situation change. For instance, a job change may mean that your new employer doesn’t offer an HSA, or a new HSA may not allow funds to pay for long-term care premiums.
Most policies now on the market are sold as “tax qualified,” which means the policy holder has the ability to deduct the cost of the premiums as an itemized deduction on a tax return. In general, long-term care benefits are not taxable as income, but there are limits to what is qualified as non-taxable.
How are Policies Different?
Traditional long-term care policies require the payment of a variable annual premium for insurance that will cover expenses should long-term care be necessary, with daily limits, a waiting period before benefits would begin, and coverage that usually only lasts for three years. Nursing home stays can last longer than three years, so additional funds should be set aside for that. Some plans offer longer coverage periods but cost more. The unpredictable variable payments have seen huge price increases, which has made these traditional policies less popular.
In response, another type of policy, often referred to as a “hybrid,” has been developed. This type of policy is essentially a whole life policy that allows the policyholder to use death benefits to pay for long-term care. If long-term care never becomes necessary, or if all of the death benefit is not spent, heirs will receive the full benefit or what remains of it. This type is significantly more costly than the traditional policy, though the policyholder does get to lock in the premium rate up front. Hybrid policies can be two or three times as expensive as traditional policies.
Premiums for traditional policies have a history of increasing over time, sometimes with huge spikes. This can be problematic as income usually goes down with age, and policyholders may find themselves in the position of no longer being able to pay for the coverage expected after having invested in it in for many years or even decades. The reason for this is that people are living longer, but not necessarily healthier, and long-term care costs are skyrocketing. When insurers first offered long-term care insurance, they woefully misjudged the future. According to the AARP March 2018 bulletin, more than 100 insurers sold policies in the 1990s. Now fewer than 15 are selling them. Insurers are scrambling to make good on their policies. On Aug. 1, 2018, The Wall Street Journal reported that General Electric, which was a significant reinsurer of long-term care policies, will have to set aside $15 billion over the next seven years in order to bolster its long-term care reserves.
On July 10, 2018, a group of frustrated South Carolinians met with the S.C. Department of Insurance in Columbia to vent their grievances concerning the continuing premium price increases for long-term care insurance that they had long held. A July 10, 2018, article in Charleston’s Post and Courier quoted one Columbia resident as saying that he and his wife had bought long-term care insurance plans 12 years ago. In the past three years, they’ve seen three premium increases, one for 12.5 percent and two for 20 percent.
S.C. Department of Insurance Director Ray Farmer said in The Post and Courier article that his first priority is addressing the problem of these high-cost plans. He said that some insurance companies have asked for an 80 percent rate increase in their premiums. The largest increase he has approved has been for 20 percent. No end is in sight for these price hikes.
When is a Good Time to Purchase?
The best time to begin shopping for a long-term care policy is between age 50 to your early 60s. Each year of waiting results in higher costs. Interestingly, premiums for new customers who start coverage at age 65 are 8 to 10 percent higher than for new customers who start coverage the year before, at age 64, according to the AARP.
Another reason to buy a policy early is that younger people are healthier. It makes sense to secure insurance before potentially developing diseases or conditions that could make the policies more expensive or disqualify you from purchasing them.
Some policies come with inflation protection, so if you purchase long-term care insurance decades before you need it, the benefit would be adjusted for inflation when the time comes to use it. Check to see if this is offered to further protect your investment.
Potential Problems Getting Coverage
Policyholders with a pre-existing health condition may have to pay a higher premium or may not be able to get coverage at all. When shopping for a policy, look carefully at what is excluded. And certainly do not withhold information about your health. The insurer can deny a claim if it involves a pre-existing condition that was undisclosed.
If you have a family history of diseases such as Alzheimer’s, heart disease, or diabetes, you may want to purchase long-term care insurance at a younger age before you might develop these diseases.
Surprisingly, taking a genetic test, even one like 23andMe for an ancestry search, can affect long-term care insurance approval and the policy price. According to an Aug. 7, 2018, NPR report, “The federal Genetic Information Nondiscrimination Act does prohibit insurers from asking for or using your genetic information to make decisions about whether to sell you health insurance or how much to charge you. But those privacy protections don’t apply to long-term care policies, life insurance or disability insurance.” Bottom line: applicants for long-term care insurance must reveal if genetic testing has taken place.
Be sure to plan for what will be required for coverage to kick in and what may be excluded. Policyholders may have to be hospitalized or in a care facility for a certain number of days before receiving benefits; this stipulation may leave a policyholder covering costs in the meantime. And should help with daily activities be necessary, the policy may not start paying for that help until a specified number of days has passed after the policyholder has been certified as eligible for benefits. Policyholders should be able to choose how many days must pass before benefits are available. Be prepared by setting aside funds to cover this time period.
Some policies will require the policyholder to start the waiting period over with each incident when checking in and out of different facilities. Consider choosing coverage that requires you to satisfy the elimination period only once in your lifetime.
Surprisingly, some policies do not cover common diseases and conditions. Read carefully to be sure that Alzheimer’s, heart disease, diabetes, and certain forms of cancer are not excluded. Also, know that exclusions exist for drug and alcohol abuse, mental disorders, and self-inflicted injuries.
Choosing a Seller and an Insurance Company
Shop around and shop smart. Check with the S.C. Department of Insurance to learn which companies are approved to sell policies in South Carolina. Investigate whether or not complaints have been made against these companies.
Also, check the financial stability of the insurer to determine what kind of history it has selling long-term care policies. Good resources for this information are Moody’s Investor Services, Standard and Poor’s, and A.M. Best.
After narrowing down the search, look at the companies’ histories of premium increases. How large are the increases and how often have they occurred? Avoid becoming the next unhappy customer.
Choose an agent with training and an extensive background in selling long-term care insurance.
Before signing up for a policy, meet with a financial planner or an eldercare lawyer to consider how the policy fits into a personal overall plan; let those in the know help make the decision. They may view factors differently, could help avoid mistakes, and may find ways to improve the overall long-term care decision. Submit questions in writing to an agent and insist that he or she respond to questions in writing.
Taking care of the future is important in order to enjoy the present. Be prepared to spend much time researching long-term care options and the different policies that are offered. Families will be thankful for the legwork that went into the decision, and policyholders will have peace of mind knowing they did everything possible to prepare for their futures, whatever they hold.