Planning how to pay for the care you might need if you become ill or disabled as you age is a daunting task. It's not the sort of thing we even want to think about. Yet studies estimate that 35 percent to 50 percent of 65-year-olds will probably need nursing-home care in the future. The average annual cost for a private room in a nursing home is about $79,935, according to MetLife's 2009 Market Survey of Long-Term Care Costs. The average nursing-home resident moves in at age 83 and stays two to three years.
You might be motivated to buy one of the few insurance products on the market that promise to help pay for assistance: long-term-care insurance. But only about 7 million policies are in force, according to LIMRA, an insurance research and consulting group. That's less than 5 percent of the possible market.
Long-term-care insurance policies have many drawbacks, which might explain why so few consumers buy them. The coverage is complicated and pricey: The average annual premium for a 65-year-old was $2,539 in 2007. Policies can get much more expensive depending on the level of coverage you choose. What's more, you could pay premiums for decades and end up never needing the insurance.
Policyholders also have to contend with unpredictable rate hikes. Since 1990, some insurers have imposed double-digit increases, one as high as 73 percent, according to the California Department of Insurance. They include Bankers Life and Casualty Co., Genworth, MetLife, Monumental Life, Mutual of Omaha, Pennsylvania Life, Prudential, Transamerica, and UNUM. Last October one of the nation's largest providers of LTC insurance, John Hancock, announced it was planning to raise premiums an average of 40 percent. If you have a plan and can't afford a rate increase, some insurers will allow you to keep it by reducing your benefits—not a happy choice, surely, but perhaps better than losing all the money you've paid so far.
But there's still uncertainty. Your premiums could rise if your insurer decides to get out of the long-term-care business and sells its policies to another insurer. Then there's the worry that your insurance company could fail. If it's liquidated, state guaranty funds will make good on policies up to certain limits. LTC insurance policies are guaranteed up to at least $100,000 in every state, according to the National Organization of Life and Health Insurance Guaranty Associations in Herndon, Va.
What to look for in an LTC policy offers some advice on what to look for when buying individual long-term-care policies. And consumers might have a new LTC coverage option in the coming years. A section of last year's health-care reform law known as the CLASS Act (Community Living Assistance Services and Supports) has created a new type of federally administered long-term-care policy. The details are still being worked out, but the law requires the policies to be fully supported by premiums (not tax dollars) and to start enrolling people by October 2012.
Here's what we do know about the new long-term-care coverage.
The majority of the plans will be available through employers. Businesses are not required to offer them but if they do, employees will automatically be enrolled unless they opt out.
If you decide to join, you can collect benefits after paying premiums for five years, and you must have been employed for at least three of those years. Part-time workers are eligible, though they must earn enough each year to pay Social Security taxes (a threshold that is now about $1,200).
The self-employed and anyone whose employer declines to offer CLASS coverage will also be able to sign up through a plan that has yet to be determined. You won't be eligible if you're already retired, unemployed, or a nonworking spouse.
A spokeswoman for the U.S. Department of Health and Human Services told us that since these will be individual and not group plans, you should be able to keep your plan if you leave your job. But you'll have to keep paying the premiums and meet the work requirements to collect benefits.
Once you qualify for CLASS coverage, you can collect the daily benefit as long as you incur long-term-care expenses. Some non-CLASS policies, in contrast, cap the number of years or the total amount you can receive.
Your daily benefit payment (the per-day amount the plan will pay for your care) will rise with inflation. The law stipulates that the daily benefit will be no less than $50. The Congressional Budget Office, which looked at the cost of the plans, assumed a daily benefit of $75. Unless the benefit rises above those amounts, you might need additional funds to cover your costs. The 2009 national average cost of a semiprivate nursing-home room was $198, a room in an assisted-living facility averaged about $261, and the average hourly rate for a home health aide was $21.
But the CLASS plans will cover many services that aren't covered under most individual LTC plans, including homemaker services (which run an average of $19 an hour), home modifications, and transportation. Like other LTC policies, before you can collect benefits a doctor will have to verify that you need help with two or three so-called activities of daily living, such as eating, bathing, dressing, toileting, and transferring from a bed to a chair.
The CBO calculated that the program's average monthly premiums would be $123. It also estimated that only about 3.5 percent of the adult population would enroll. If more people sign up, the premiums will be lower. With fewer people in the risk pool, premiums will go up.
The California Department of Insurance estimates that the premium for group plans with inflation protection (such as the ones some employers offer now) could run $169.50 to $348.50 a month for a 60-yearold. A 50-year-old might be able to find a policy that costs less than the CLASS estimate ($103.50), although he or she could pay as much as $217.25.
Premiums for LTC insurance policies and related out-of-pocket expenses can be applied toward meeting the 7.5 percent minimum for taking medical-expense deductions on your tax return. But there are annual limits, based on a policyholder's age, for the total amount of LTC premiums that can be applied toward that minimum. The limit for people who are 51 to 60, for example, is $1,270; for those 61 to 70, it's $3,390.
The law prohibits excluding people with pre-existing conditions like diabetes, which might disqualify you for non-CLASS coverage. But you still must work for three years and pay premiums for five years.
The CBO found that the CLASS program will reduce the federal budget deficit by $72 billion by 2019. But further down the line, the plan is expected to cost more than it collects in premiums dollars. If that happens, premiums will go up.
This article appeared in Consumer Reports Money Adviser.