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Long-term-care insurance

Insurers are forced to boost premiums or stop selling policies

Consumer Reports Money Adviser: August 2012

Photo: Andrea Fischman

Long-term-care insurance can help pay for the assistance you might need if you become ill or disabled in the future. But recent trends in the industry might be cause for concern for both current policyholders and potential ones.

In the past five years, 10 of the top 20 insurers (by sales) have stopped selling new long-term-care policies, according to LIMRA International, an insurance industry research company. Major carriers such as MetLife and Unum are among them, and last March Prudential said it would stop selling the policies to individuals, although it still sells plans through employers and affinity groups.

If you already have a policy, chances are your premiums have increased or will soon. Genworth Financial, for example, is increasing rates for a quarter of its policyholders by an average of 18 percent. John Hancock is raising premiums an average of 40 percent for some policyholders this year. "One of my 70-year-old clients has been paying his John Hancock premiums for nine years," says John Ryan, an independent insurance broker in Greenwood Village, Colo. "He found out this February that his premium is going up 90 percent."  

Insurers are exiting the market or raising rates because they overestimated how many people would stop paying for their policies over time and underestimated the costs of long-term care. And low interest rates have made it difficult to grow the reserves they need on hand to pay claims.

New buyers will also pay more for coverage. A policy purchased this year will cost as much as 17 percent more than a comparable plan purchased in 2011, according to the American Association for Long-Term Care Insurance, an industry group. A couple of healthy 60-year-olds will pay an average of $3,335 a year for a policy that would now pay them $340,000 in benefits. "When you add the cost of a long-term-care policy to the costs of Medicare Part B, a Medicare supplement plan, and drug coverage, a retired couple could easily be looking at $700 to $800 per month just in these insurance costs," says Ryan Darwish, a fee-only financial planner in Eugene, Ore.

If you own a policy now

You have three basic choices if your premiums go up: Keep your policy and pay the higher premium, scale back coverage to reduce your costs, or drop your policy. (Some policyholders might be entitled to use the premiums they've paid if they need care in the future.)

Try to hold on to your coverage, especially if you've been paying premiums for several years. If you let your plan lapse, you might lose all the money you've paid into it. And it's unlikely you'll find a better deal by buying new coverage, because policies cost more and are more difficult to get as you get older. There's also no guarantee that a new insurer won't increase your premiums in the future.

If you can't afford a higher premium, most insurers will give you the option of paying a lower rate for a reduced amount of coverage. The table on the top of the facing page shows how much you can save by making changes in your coverage. "While not ideal, reducing your coverage is a better option than losing what you've paid into a plan," says Jacob Kuebler, a fee-only financial planner in Champaign, Ill. "Over time you can try to save more to pay out-of-pocket costs if you need care."

Consider the pros and cons of reducing your inflation protection, which increases the amount the plan will pay to help keep pace with rising health-care costs. First estimate how much you'd have to pay for care when you're in your 80s and most likely to need help. The agent who sold you your policy can help you crunch the numbers. If you're relatively young, you might need inflation protection to afford your care. If you're older, though, it might make sense to reduce or even eliminate it.

If you're unable to continue paying your premiums and your plan included a non-forfeiture rider, you'll be eligible for a reduced benefit if you need care in the future. If you declined that option, you might qualify for a policy worth the amount of the premiums you've paid if your insurer increases your annual costs by more than a certain percentage, which varies by your age when you bought the coverage. 

If you're considering buying a policy

To help figure out if you're a candidate for a policy, first you need to add up the income and assets—savings, retirement funds, pensions, Social Security, and investments—that you (and your spouse, if you have one) are likely to have for living expenses and to pay for long-term care you might some day need.

Ken Weingarten, a fee-only financial planner in Lawrenceville, N.J., says in his state retired couples who have $2.5 million or more in liquid assets can generally afford to pay for long-term care out-of-pocket, while those with less than $500,000 will probably be unable to afford the premiums on an LTC policy. "It's the people in between who are the most likely candidates for a long-term-care policy," he says. Those numbers will be lower in states where care is less expensive. To find state-by-state costs, check Genworth Financial's 2012 Cost of Care survey, at genworth.com.

If you'd like some guidance through this process, consider consulting a fee-only financial planner, who can run computer models that take into account different scenarios to help you explore your options. You can find a planner in your area on the website of the National Association of Personal Financial Advisors.

How to buy. Start by figuring out how much you should be able to pay out-of-pocket for your care and how much you'd like an insurance policy to cover. If the cost of a nursing home in your area is $200 a day, for example, you might settle on a policy that pays a daily benefit of $120 and plan to pay the rest out of savings.

Couples have the option of a "shared benefit" rider that lets them both draw from a combined pool of funds instead of limiting each of them to a set amount of coverage. For example, a three- or four-year shared-benefit plan provides a pool of six or eight years of coverage they can share.

You also have to decide how long you are willing to cover your own care before the policy kicks in, known as the elimination period. Your options include 30, 60, 90, or 180 days; 90 days is common.

Consider paying extra for an inflation rider to help keep pace with the rising cost of care. But be aware that adding an inflation rider that provides a compound 5 percent increase of your benefit amount could potentially boost your premium by as much as 80 percent.

You'll pay less if you buy a policy before age 60. A plan that pays $3,000 a month for four years with a 5 percent compound inflation option and a 60-day elimination period might cost $2,815 a year for a 57-year-old healthy male. At 62, the same policy might cost $3,248 a year. "After 60, insurers figure we're like cars; our parts are older, start to break down, and cost more to fix," says Owen Malcolm, a fee-only planner in Norcross, Ga. But if you buy a policy in your 50s you could end up paying premiums—including future price hikes—for decades and never collect any benefits.

Also look into state partnership programs. These programs set minimum requirements for private insurance policies that allow you to retain some assets you otherwise would have to spend to qualify for Medicaid if your care costs exceed your coverage. For more information, go to longtermcare.gov and search for "state partnership programs."

Get at least four or five quotes from different companies that are highly rated for financial strength by leading ratings services, such as A.M. Best, Fitch Ratings, Moodys, Standard & Poor's, and TheStreet. To obtain multiple quotes, use an independent agent who works with several insurers. You can search for local agents on the website of the Independent Insurance Agents & Brokers of America.

But don't buy unless you're sure you can afford a premium that may double in the future, says Michael Kalscheur, a fee-only financial planner in Indianapolis. "If not, I'd say you should look at other options to pay for your care," he says.

Hybrid vs. traditional policies

A few insurance companies offer hybrid policies, which combine life insurance and some long-term-care coverage. You generally need to invest a lump sum, typically $50,000, which will cover either long-term-care payouts or a death benefit for your heirs. The premium will not increase over the life of the policy.

John Ryan, an insurance broker in Colorado, compared that option with taking $50,000 and investing it for an annual after-tax return of 5 percent and buying a traditional long-term-care policy with the same monthly benefit as the hybrid and a return-of-premium rider. That rider hikes the policy's cost but provides that some of the premium will be refunded if the policyholder doesn't need long-term care. He found that even if the traditional policy's rate increased by 20 percent every five years, it was still a better deal than a hybrid.

Save by cutting coverage

You can lower your premium by changing what your policy covers, and some changes have a larger impact than others. John Ryan, an independent insurance broker in Colorado, prepared this example to show how a 67-year-old could cut costs. Assume his current policy pays up to $3,000 a month, after a 90-day elimination period, for 100 percent of nursing-home, assisted-living, or home-health care. It's capped at $180,000 and includes an annual 5 percent compound rider for inflation protection. The annual premium is $3,361.74. Here are the savings for select changes.

Change in coverage

Annual savings

Eliminate inflation protection

$1,499.88

Lower annual inflation protection to 3% compound

716.87

Lower maximum monthly benefit to $2,500

560.28

Increase elimination period to 180 days

312.78

Cover only 50% of monthly assisted-living costs

201.38

Cover only 50% of monthly home-health-care costs

162.40

Cost of care varies widely

Below are the ranges of median charges for various long-term-care services in the U.S., and the compound annual growth rate for those costs over the past five years.

Type of care

Rate range

Annual increase

Licensed homemaker services*

$10 to $32/hr

1.1%

Licensed home-health-aide services*

$11 to $35/hr

1.09

Assisted-living facility
(private bedroom)**

$2,419 to $5,713/mo

5.71

Nursing home
(private room)

$4,466 to $1 9,375/mo

4.28

*Licensed homemaker provides "hands-off" care such as cooking and running errands. Licensed home-health aide assists with personal care such as bathing and dressing but does not provide medical care. **Minimum and maximum median cost by state.
Source: Genworth Financial, 2012 Cost of Care Survey.

   

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