August 2008
Long-term-care coverage
How to decide if this pricey insurance makes sense for you
No one likes to think about having a physical or mental frailty that would cause them to need help with daily activities.
But about 70 percent of people now over age 65 will at some point require such assistance. Some might decide to hire a home
health aide, while others might choose to move into an assisted-living facility or nursing home.
Whatever the decision, long-term care can be expensive. Medicare pays for only some medically related home care and short-term stays in a nursing facility, and nothing at all for long-term care. Medicaid generally covers some home health care and most nursing-home costs, but you have to exhaust most of your personal assets before you become eligible. It also covers care in a few assisted-living facilities, but most of those costs must be paid with private funds. If you hire a home health aide, expect to pay about $29 an hour. The average monthly cost for a one-bedroom assisted-living facility in 2008 is $3,008. Costs are expected to rise at least 5 percent a year for the foreseeable future.
You might be able to cover some of these expenses with a long-term-care insurance policy. But the coverage has many drawbacks. It can be expensive, especially because you might be paying for it for decades before you use it—if you use it at all. And it often provides only limited benefits with many restrictions and conditions that might leave much of your cost unreimbursed. Some insurers have hiked premiums by double digits, forcing policyholders to drop their coverage and lose part or all of the money they had paid. Deciding whether or not you should purchase a policy, therefore, should take into account these factors as well as your estate-planning goals.
In general, the financial planners we talked with say that if you have a net worth below $200,000 to $300,000 (not including your home and depending on the cost of care in your region), an LTC policy won't be an affordable option and you will probably rely on government programs should you need long-term care. If you have assets of about $2 million or more, you should be able to pay for care yourself. If you fall in between, you're a more likely candidate for an LTC policy.
Here's how fee-only financial planners—those who don't earn commissions for selling LTC policies—help their clients decide if and when a plan is a good idea.
In your 40s
Many insurance agents aggressively promote LTC policies to people in their 40s. Their pitch is that you're a low risk at this age, so your premiums will be cheaper than if you waited another decade or two to buy. And you're likely to be healthy enough to qualify for coverage. (Like most life insurance, LTC coverage requires you to pass a medical exam.)
But the experts we talked with say there's very little reason to buy a plan at this age. You have time to ramp up your savings and prepare to pay for care out of your own assets. And although your premiums would be lower now, you're likely to be paying them for 30 or even 40 years (the average long-term-care claimant is 79), so you'll spend more over time. And there's no guarantee the premiums will stay level. If they rise sharply, you might not be able to afford them, especially after you retire, and you may have to drop the policy. "I think it's more important that clients at this age have life and disability insurance, since it's more probable that their dependents will benefit from that coverage," says Mark Berg, a financial planner in Wheaton, Ill.
In addition, a plan you sign up for now might not cover new types of care that emerge in the coming years. Many early LTC policies, for example, did not cover the cost of assisted-living facilities or care at home. "Researchers at North Carolina State are working on a variety of automated home systems that may allow you to stay in your home much longer, but of course they aren't covered by today's long-term-care insurance," says Linda Patchett, a financial planner in Chapel Hill, N.C.
In your 50s
This is probably the best time to begin reviewing your options for financing long-term care to see if a policy makes sense for you. But Tom Orecchio, a financial planner in Old Tappan, N.J., says, "We usually suggest to most people that they wait until at least their late 50s or early 60s to buy." If you expect to work to age 67 or 68 and can afford the premiums, you can buy a policy that allows you to pay it off in 10 years so you don't have to worry about funding it in retirement, he notes. But that will generally double or triple your premiums, depending on your age.
To make your decision, first consider whether or not you might be facing years of expensive care. If dementia, neurological disorders, or chronic conditions like diabetes run in your family, it raises those odds (though your family history is no guarantee of your future). If your relatives tend to live a long time, you might also want coverage. "You're less likely to have to worry about needing care down the road if most of your relatives die quickly from things like heart attacks or cancer," says Carolyn McClanahan, a planner in Jacksonville, Fla. "But if they tend to live until they're 90, chances are they eventually will need some help."
If you think you or your spouse is likely to need long-term care, start by looking at how much money you expect to have saved at retirement, and how much you expect to live on each year. Then you can get a rough idea of how much you could spend on your care or on premiums for an LTC policy. "If I have clients who will have $3 million when they retire and will live off 4 percent, or $120,000, annually, and nursing-home costs are $74,000 a year in their area, then they can plan to self-insure," Orecchio says.
If your assets will be low enough that you might need to depend on Medicaid, this is a good time to decide whether and how soon to give assets to your heirs or place them in a trust. The Deficit Reduction Act of 2005 raised the look-back period for asset transfers from 3 years to 5, meaning that assets must be given 5 years before the date you enter a nursing home and apply for Medicaid to avoid a penalty. The 2005 law also allows states to offer LTC insurance partnership plans that let families shelter some assets. This is complicated stuff, and you might want to consult an elder-law attorney to help you evaluate your options. To find one, go to the Web site of the National Academy of Elder Law Attorneys.
If your savings put you somewhere in between and you are considering an LTC policy, make sure you understand the risks and costs involved. For example, some people buy policies so they can preserve their assets for their children, assuming that they'll be able to afford the premiums. If that assumption proves false-either because the premiums rise or their income falls-they could end up dropping the policy and losing all that they'd paid into it. Some insurers let you add a clause that allows you to recoup the premiums in such cases, but that can increase your premiums by 40 to 45 percent.
When the time comes to use the policy, you might not qualify for benefits. Most LTC policies will not pay unless you are unable to perform two or more "activities of daily living"-bathing, dressing, eating, getting from a bed to a chair, remaining continent or using a toilet, and walking. You might have to be evaluated by your insurer's physician, not your own, to decide if you are frail enough. If you don't require enough assistance, in his or her opinion, you'll have to pay for care out-of-pocket.
"My mother moved into assisted living in 2000, but she wouldn't have qualified for long-term-care benefits because she was able to do things like dress and feed herself," Patchett says. "We would have had to pay $50,000 annually for six years before she would have qualified."
In addition, the policies also come with "elimination periods," which are essentially deductibles where you pay the costs before coverage kicks in. They can be anywhere from the first day to 120 days or longer. The shorter the elimination period, the more you'll pay in premiums. A policy with a 30-day elimination period that costs $2,700 annually will run $2,250 if you can pay out-of-pocket for 90 days, but you'll have to cover those additional 60 days when the time comes. The current national average for an assisted-living one-bedroom apartment is about $100 a day.
Make sure you explore other ways to leave your family money. "You may find that a life-insurance plan with a death benefit in the amount you'd like to leave your heirs is cheaper than long-term care," Orecchio says. If you choose life insurance instead, you can pay out of your savings to cover any long-term-care costs you have. If you don't deplete your assets paying for care, your heirs will get even more.
In your 60s
Most of the planners we talked with say that if you're healthy, this might be the best time to actually shop for a policy if you decide you want one. The average age at which most people sign up for LTC coverage is 61. If you wait much longer, you run into insurability and affordability issues. For example, 23 percent of policy applicants in their 60s don't pass the required physical, and 45 percent of people in their 70s fail. If you don't qualify for an individual plan, you might be able to get group coverage at work or though a professional association that offers one. Premiums will be cheaper, and you won't need to pass a medical exam.
"The downside of group plans is that they usually can't be tailored to your needs," Berg says. So the plan available to you may not be the best plan for you. A better option, he suggests, might be an individual plan that covers part of your expenses. "You can use part of your Social Security, a pension, and your savings to cover, say, half of what a nursing home charges in the area you plan to retire, and use a policy to pay for the rest."
Whatever the decision, long-term care can be expensive. Medicare pays for only some medically related home care and short-term stays in a nursing facility, and nothing at all for long-term care. Medicaid generally covers some home health care and most nursing-home costs, but you have to exhaust most of your personal assets before you become eligible. It also covers care in a few assisted-living facilities, but most of those costs must be paid with private funds. If you hire a home health aide, expect to pay about $29 an hour. The average monthly cost for a one-bedroom assisted-living facility in 2008 is $3,008. Costs are expected to rise at least 5 percent a year for the foreseeable future.
You might be able to cover some of these expenses with a long-term-care insurance policy. But the coverage has many drawbacks. It can be expensive, especially because you might be paying for it for decades before you use it—if you use it at all. And it often provides only limited benefits with many restrictions and conditions that might leave much of your cost unreimbursed. Some insurers have hiked premiums by double digits, forcing policyholders to drop their coverage and lose part or all of the money they had paid. Deciding whether or not you should purchase a policy, therefore, should take into account these factors as well as your estate-planning goals.
In general, the financial planners we talked with say that if you have a net worth below $200,000 to $300,000 (not including your home and depending on the cost of care in your region), an LTC policy won't be an affordable option and you will probably rely on government programs should you need long-term care. If you have assets of about $2 million or more, you should be able to pay for care yourself. If you fall in between, you're a more likely candidate for an LTC policy.
Here's how fee-only financial planners—those who don't earn commissions for selling LTC policies—help their clients decide if and when a plan is a good idea.
In your 40s
Many insurance agents aggressively promote LTC policies to people in their 40s. Their pitch is that you're a low risk at this age, so your premiums will be cheaper than if you waited another decade or two to buy. And you're likely to be healthy enough to qualify for coverage. (Like most life insurance, LTC coverage requires you to pass a medical exam.)
But the experts we talked with say there's very little reason to buy a plan at this age. You have time to ramp up your savings and prepare to pay for care out of your own assets. And although your premiums would be lower now, you're likely to be paying them for 30 or even 40 years (the average long-term-care claimant is 79), so you'll spend more over time. And there's no guarantee the premiums will stay level. If they rise sharply, you might not be able to afford them, especially after you retire, and you may have to drop the policy. "I think it's more important that clients at this age have life and disability insurance, since it's more probable that their dependents will benefit from that coverage," says Mark Berg, a financial planner in Wheaton, Ill.
In addition, a plan you sign up for now might not cover new types of care that emerge in the coming years. Many early LTC policies, for example, did not cover the cost of assisted-living facilities or care at home. "Researchers at North Carolina State are working on a variety of automated home systems that may allow you to stay in your home much longer, but of course they aren't covered by today's long-term-care insurance," says Linda Patchett, a financial planner in Chapel Hill, N.C.
In your 50s
This is probably the best time to begin reviewing your options for financing long-term care to see if a policy makes sense for you. But Tom Orecchio, a financial planner in Old Tappan, N.J., says, "We usually suggest to most people that they wait until at least their late 50s or early 60s to buy." If you expect to work to age 67 or 68 and can afford the premiums, you can buy a policy that allows you to pay it off in 10 years so you don't have to worry about funding it in retirement, he notes. But that will generally double or triple your premiums, depending on your age.
To make your decision, first consider whether or not you might be facing years of expensive care. If dementia, neurological disorders, or chronic conditions like diabetes run in your family, it raises those odds (though your family history is no guarantee of your future). If your relatives tend to live a long time, you might also want coverage. "You're less likely to have to worry about needing care down the road if most of your relatives die quickly from things like heart attacks or cancer," says Carolyn McClanahan, a planner in Jacksonville, Fla. "But if they tend to live until they're 90, chances are they eventually will need some help."
If you think you or your spouse is likely to need long-term care, start by looking at how much money you expect to have saved at retirement, and how much you expect to live on each year. Then you can get a rough idea of how much you could spend on your care or on premiums for an LTC policy. "If I have clients who will have $3 million when they retire and will live off 4 percent, or $120,000, annually, and nursing-home costs are $74,000 a year in their area, then they can plan to self-insure," Orecchio says.
If your assets will be low enough that you might need to depend on Medicaid, this is a good time to decide whether and how soon to give assets to your heirs or place them in a trust. The Deficit Reduction Act of 2005 raised the look-back period for asset transfers from 3 years to 5, meaning that assets must be given 5 years before the date you enter a nursing home and apply for Medicaid to avoid a penalty. The 2005 law also allows states to offer LTC insurance partnership plans that let families shelter some assets. This is complicated stuff, and you might want to consult an elder-law attorney to help you evaluate your options. To find one, go to the Web site of the National Academy of Elder Law Attorneys.
If your savings put you somewhere in between and you are considering an LTC policy, make sure you understand the risks and costs involved. For example, some people buy policies so they can preserve their assets for their children, assuming that they'll be able to afford the premiums. If that assumption proves false-either because the premiums rise or their income falls-they could end up dropping the policy and losing all that they'd paid into it. Some insurers let you add a clause that allows you to recoup the premiums in such cases, but that can increase your premiums by 40 to 45 percent.
When the time comes to use the policy, you might not qualify for benefits. Most LTC policies will not pay unless you are unable to perform two or more "activities of daily living"-bathing, dressing, eating, getting from a bed to a chair, remaining continent or using a toilet, and walking. You might have to be evaluated by your insurer's physician, not your own, to decide if you are frail enough. If you don't require enough assistance, in his or her opinion, you'll have to pay for care out-of-pocket.
"My mother moved into assisted living in 2000, but she wouldn't have qualified for long-term-care benefits because she was able to do things like dress and feed herself," Patchett says. "We would have had to pay $50,000 annually for six years before she would have qualified."
In addition, the policies also come with "elimination periods," which are essentially deductibles where you pay the costs before coverage kicks in. They can be anywhere from the first day to 120 days or longer. The shorter the elimination period, the more you'll pay in premiums. A policy with a 30-day elimination period that costs $2,700 annually will run $2,250 if you can pay out-of-pocket for 90 days, but you'll have to cover those additional 60 days when the time comes. The current national average for an assisted-living one-bedroom apartment is about $100 a day.
Make sure you explore other ways to leave your family money. "You may find that a life-insurance plan with a death benefit in the amount you'd like to leave your heirs is cheaper than long-term care," Orecchio says. If you choose life insurance instead, you can pay out of your savings to cover any long-term-care costs you have. If you don't deplete your assets paying for care, your heirs will get even more.
In your 60s
Most of the planners we talked with say that if you're healthy, this might be the best time to actually shop for a policy if you decide you want one. The average age at which most people sign up for LTC coverage is 61. If you wait much longer, you run into insurability and affordability issues. For example, 23 percent of policy applicants in their 60s don't pass the required physical, and 45 percent of people in their 70s fail. If you don't qualify for an individual plan, you might be able to get group coverage at work or though a professional association that offers one. Premiums will be cheaper, and you won't need to pass a medical exam.
"The downside of group plans is that they usually can't be tailored to your needs," Berg says. So the plan available to you may not be the best plan for you. A better option, he suggests, might be an individual plan that covers part of your expenses. "You can use part of your Social Security, a pension, and your savings to cover, say, half of what a nursing home charges in the area you plan to retire, and use a policy to pay for the rest."
Posted: August 2008 — Consumer Reports Money Adviser issue: August 2008
