Can You Afford a Long-Term Care Policy?
“The problem with long-term care insurance is that anybody who can afford it doesn’t need it and anybody who needs it can’t afford it.”
Long-term care insurance customers got a shock last year when renewal notices arrived. In Pennsylvania, for example, long-term care insurance premiums increased by as much as 130%, with annual rates reportedly exceeding as much as $8,000 for some policies. Long-term care refers to services like nursing homes, assisted living, adult day care and home care. Medicare does not cover most long-term care services, and costs have grown so high that long- term insurance has become unaffordable for retirees who aren’t millionaires.
To pay claims, insurers count on premiums and the investments they make with those premium dollars. Typically they invest in only the safest of bonds, but these days interest rates are so low that those bonds are paying practically nothing and there’s no indication that will change soon. The result has been that most long-term care insurers have left the business. The companies who remain are drastically raising premiums on old policies. Customers who can’t afford the premiums wind up losing their policies and the benefits they’ve paid for within a few years of when they really need the coverage.
About 70% of today’s 65-year-olds will need some form of long-term care in the future. But even people fortunate to have one or more willing caregivers at some point are likely to need more care than can safely be provided at home. Here are a few alternatives to discuss with your financial advisor:
- Self-funding. Many financial advisors favor self - insuring, but this works best for people who have large enough savings, or who are still working and are disciplined savers. It may mean saving longer and living very frugally to build up your savings. According to Genworth Financial, the average annual cost of a private room in a nursing home in 2016 is $92,376 — and $43,536 for assisted living. Adult day care can run $17,676. The average length of time spent in a nursing home is about 2.5 years.
- Life insurance with a long-term care rider. These are specialty policies that pay out some portion of the death benefit in long-term care coverage. They feature fixed premiums, which help avoid the steep unexpected price hikes of long-term care insurance, and there may be some tax advantages you should discuss with your tax advisor. If you already own a life insurance policy, you may be able to exchange it for one with a long-term care rider.
- Annuity with a long term-care rider. Thanks to recent tax changes, money invested in a deferred annuity with a long-term care rider can be used tax-free to pay for long-term care defined under the contract. Medical underwriting for these products are less stringent than long-term care, and may make them more feasible for older individuals who don’t qualify for long-term care. For those who don’t need the long-term care, policy holders can redeem the accumulated value of the annuity. Annuities however, require a big upfront premium of $50,000 or more and the money can be locked up from 5 to 10 years with steep penalties for withdrawals.
Long-term care products and savings strategies can be complicated, so consult a professional financial advisor, or get legal and tax advice, before signing the contract. To learn more about the costs of long-term care, try the Cost-of-Care calculator at www.genworth.com.
Sources: “Why No One Can Afford Long Term Care Insurance,” Maryalene Laponsie, U.S. News.com, March 10, 2016. “Another Big Long-Term Care Insurance Premium Hike,” Howard Gleckman, Forbes, August 1, 2016.
