Long-term care insurance premiums are increasing, and policy coverages are changing. Understanding the landscape can help policyholders make informed decisions.
Purchasing traditional long-term care insurance is becoming increasingly daunting for many Americans. With annual premiums climbing and numerous policy variations, selecting the right coverage can feel overwhelming. As Tom Beauregard, founder of HCG Secure, notes, "It can be a complex and oftentimes frustrating experience."
The market and the insurance products themselves have undergone significant evolution over the years. Individuals who shaped their perceptions of long-term care insurance from the policies held by previous generations may find current options lacking. Brian Gordon, president of Murray A. Gordon and Associates, remarks that older policies were akin to "Rolls Royce policies" compared to today's offerings, which often provide less comprehensive coverage.
Long-term care insurance gained traction in the late 1970s, with a primary focus on funding care in nursing homes. However, insurers miscalculated customer needs, leading to many companies exiting the market. Today, around twelve providers still offer long-term care insurance, a significant decrease from nearly one hundred. To keep premiums manageable, policyholders may have to forego certain features; the American Association for Long-Term Care Insurance indicates, "It's very likely you'll pay more today for less plan coverage."
The Increasing Need for Care
Despite potential drawbacks, long-term care insurance remains an essential topic for discussion between individuals and financial planners. Recent government statistics reveal that individuals aged 65 or older today face approximately a 70% likelihood of requiring some form of long-term care. The average duration for such assistance is 3.7 years for women and 2.2 years for men.
The costs associated with long-term care vary significantly based on location and type of service. In the United States, the median daily cost for a home health aide is $169, with assisted living averaging $148 and a semi-private room in a nursing home costing about $260 per day. Although hiring a home health aide may seem more economical initially, 24-hour care can quickly become costly. The trend is also worrying, as care costs have been rising annually between 1.8% and 3.8% since 2004, according to Genworth's Cost of Care survey.
It's essential to note that Medicare typically does not cover long-term care expenses, while qualifying for Medicaid is a complicated process. Generally, applicants for Medicaid must have assets of no more than $2,000, although this limit can vary by state. To incentivize individuals to secure their own long-term care, many states have implemented partnership programs. These programs allow individuals with qualifying long-term care insurance policies to have a larger asset threshold when applying for Medicaid benefits.
For instance, if a person has utilized $600,000 in long-term care insurance, the state may allow them to retain up to $602,000 in assets while still qualifying for Medicaid coverage. It's advisable to check with your state's insurance department to see if such programs exist. "It doesn't cost you anything extra to get a partnership plan, and it allows you to buy a shorter policy and still feel like you have catastrophic care protected," explains Marc Glickman, CEO of BuddyIns.
Factors Influencing Premiums
Premiums for long-term care insurance are influenced largely by the insured's age, gender, and overall health at the time of purchase. Generally, younger individuals will secure policies at a lower rate. The American Association for Long-Term Care Insurance provides a price index indicating that a couple purchasing at age 55 might pay about $2,080 for two policies, each covering $165,000 in benefits. In contrast, that figure could increase to $3,750 for the same policies if purchased at age 65.
Women face unique challenges in securing affordable premiums, with rates potentially being as much as 70% higher due to their longer life expectancy and increased likelihood of filing claims. Existing health conditions also contribute to higher premiums, with certain serious health issues potentially driving up costs between 25% to 50%. Those with conditions like Parkinson's or multiple sclerosis may find themselves ineligible for coverage altogether.
Understanding Your Coverage
Most traditional long-term care policies now combine home care and facility care. Each policy includes a benefit period and a maximum daily benefit amount, chosen by the policyholder. Typically, benefit periods last between three to five years, with an average daily reimbursement cap around $150. It's important to recognize that if costs are less than the daily cap, the funds can last longer, effectively extending the coverage duration.
However, if a policyholder's daily costs exceed the cap, they must cover the additional expenses out-of-pocket, emphasizing the importance of understanding your potential total coverage, calculated as daily cap multiplied by the benefit period.
Policyholders should weigh how much coverage they can afford against their anticipated local care costs. Tools like Genworth's online calculator allow consumers to compare rates based on their zip codes.
If financially feasible, securing inflation protection is advisable. Policyholders can opt for simple or compounded inflation protection. For example, a single 55-year-old woman in good health might pay around $1,500 annually for a policy with a $165,000 benefit pool without inflation protection. This could increase to $3,700 if 3% compounded inflation protection is added, resulting in a benefits pool of $400,500 by age 85. Experts recommend exploring various inflation protection options as many policies must offer it by regulation.
Couples could benefit from shared care provisions within their policies. This allows one spouse to utilize the benefits of the other once their own benefits have been exhausted. While this flexibility increases the premium by about 18% to 25%, it can lead to purchasing shorter term policies alongside additional shared benefit options.
Eligibility for benefits is determined by cognitive impairments or the inability to perform two of six activities of daily living (ADLs): eating, bathing, dressing, toileting, continence, and mobility. Both the policyholder's physician and the insurer may evaluate eligibility for claims. However, there is often an elimination period during which no benefits are paid. Typically, this period lasts about 90 days.
Depending on the insurer, the elimination period may be based solely on service days, meaning that sporadic care could extend the waiting period significantly. If there is informal care provided by family members, most insurers won't recognize this as part of the elimination timeframe.
Dealing with Rising Costs
ELella Dichner, a lawyer in Brooklyn, shares her experience following years of increasing premiums on her long-term care policy. After initially purchasing coverage in 2004, she faced several rate hikes and was recently presented with the option to lower her policy's benefits or duration to avoid another significant premium rise. "I'm glad we have it, but when I see it go up, I wonder if we'll ever get our money's worth," she shares, reflecting common concerns among policyholders.
Similarly, Tim Jost, a professor emeritus, recounts his jump in premiums from $750 to $1,275, and then to $1,911, highlighting the potential financial strain on policyholders. Insurers usually stop charging premiums only after a claim has been initiated, which can lead to difficult choices.
If you find yourself in a position where rising premiums threaten your policy, it's crucial to reach out to your insurer. Options may include adjusting your policy terms, such as reducing the daily benefit or extending the elimination period. In cases where affordability becomes a barrier to continuing the policy, check if your policy includes contingent nonforfeiture, which permits claim benefits up to the total premiums paid. Some states mandate this provision be included if premium increases exceed certain thresholds.
An advantage for aging policyholders is the tax relief associated with rising premiums, which increases with age. For 2022, individuals aged 51 to 60 can deduct up to $1,690 of long-term care insurance premiums, rising to $4,510 for ages 61 to 70, and up to $5,640 for those older than 70.
Exploring Hybrid Policies
When considering long-term care coverage, experts recommend reviewing features across at least four types of policies—two traditional and two hybrid. Hybrid plans, commonly structured as life insurance linked to long-term care coverage, provide a blend of benefits that can be advantageous for some policyholders. Typically, a policy would tap into the life insurance death benefit first, activating the long-term care component only once the death benefit is exhausted.
These hybrid policies offer more flexibility, often allowing beneficiaries to reclaim unused benefits, and they generally provide fixed premiums for life, which can be paid upfront or in installments over several years. However, policyholders may need to continue paying premiums if they file a claim before their payments are completed.
While hybrid policies often promise a dual function, they typically come at twice to three times the cost of standard long-term care insurance. Jesse Slome emphasizes that these policies are offering dual protection, but a straightforward life insurance policy may suffice for individuals whose primary objective is to leave an inheritance.
It’s vital to scrutinize the nuances of hybrid policies as they are not always crafted to cover long-term care needs extensively. Some may only address chronic conditions, triggering benefits under stricter conditions than traditional policies. A chronic care policy should explicitly state its limitations, and prospective buyers would do well to review a sample policy well before making a purchase.
In the end, the choice between standard and hybrid long-term care insurance should be influenced by each individual's needs, budget, and health circumstances, as well as the options available in today's market.
