Long-Term Insurance: Planning for Your Future

Hispanic couple discussing long-term insurance with their financial advisorThe old saying that says an ounce of prevention is worth a pound of cure has some serious relevancy to the long-term care issue.

That’s because the cost of long-term care is skyrocketing. If you’re middle-aged or older, and you haven’t prepared to meet those costs, you could get burned down the road.

Costs of Long-Term Care

Just how high is the cost of senior care, and what’s the demand for it?

According to the insurance web siteLTCTree.com,the demand for long-term care is certainly at an all-time high:

  • 75% of people 65 and older will eventually need long-term care.
  • About 80 million Americans will turn 50 over the next 18 years.
  • By 2020, due to the rapid retirement of Baby Boomers, approximately one in three workers will be faced with providing some form of long-term care for their Baby Boomer parents.

But the rising cost of senior care may induce sticker shock for older Americans. LTCTree.com also points out that the cost of a one-year stay in a nursing home, on average, is $80,850. In major metropolitan areas such as New York, that number can rise to $100,000.

Unfortunately, approximately 75% of American singles and 50% of couples spend nearly all of their retirement savings within in a year of living in a nursing home. That’s where long-term insurance can really help.

How Long-Term Insurance Works

In a word, long-term insurance is that ounce of prevention that prevents that pound of cure. By and large, any chronic or disabling condition that requires nursing care or constant supervision can trigger the need for long-term care services.

Its history is relatively fresh. Long-term insurance was introduced 30 years ago to supplement Medicare’s limited coverage for nursing home care. Today it covers a multitude of services for elders whose longevity outstrips their ability to care for themselves.

A typical policy covers nursing home services, but also home healthcare services, assisted living facilities, respite care, hospice care, adult day care, care advisory services, and medical equipment and home modifications.

That’s a full menu, which is why long-term care can be so expensive. According to the American Association for Long-Term Care’s 2009 Sourcebook, individuals seeking long-term insurance between the ages of 50 and 54 paid as little as $989 per year.

For those between 60 and 64 the lowest amount paid was $1,125. The Association pegs the average cost of long-term insurance between $1,800 and $2,000 a year, although annual costs of $3,000 or so are not uncommon the higher you go up the wealth ladder.

Consumer Protections

Long-Term InsuranceThe needs of policyholders can change in five years or even 20 years down the line. However, their insurance policies should not penalize them for maintaining their coverage for long periods of time. Most insurance plans offer a number of consumer protections that help shield older adults from cost increases that may erode the value of their insurance benefits:

Inflation Protection - This important policy feature provides protection against inflation. Without it, the value of the insurance benefits is most likely to decrease when compared to increases in long term care costs over a long period of time. Policyholders can add inflation protection to their current policies of such protection hasn’t been included already. In most cases, inflation protection allows for a five-percent increase in benefits per year, closely matching the five-year increase in costs for nursing homes and assisted living communities. Some insurance companies offer discounts for those who reduce their inflation protection to 2.7 percent per year.

Premium Rate Stability – Another important concern shared by most policyholders is whether their premiums will remain affordable as time goes on. Due to a wide variety of reasons, insurance premiums can rise to a point where policyholders are unable to continue payment, thereby causing the policy to lapse. In response to consumer concerns about premium rate increases, 24 states have adopted provisions created by the National Association of Insurance Commissioners (NAIC) to protect policyholders whose premiums have increased above a certain threshold.

Lapse Rates for Long Term Care Insurance Plans

Many older adults who choose to purchase long term care insurance may allow their policies to lapse. In most cases, such lapses are usually due to sharp increases in insurance premiums over a short time span. At least nine percent of new policyholders allow their policies to lapse during the first year purchase. Lapse rates are also relatively higher among those who purchase long term care insurance policies with lower benefits - approximately 16 percent of policies featuring a lifetime maximum benefit of less than $100,000 lapsed within the first year, as opposed to the eight-percent lapse rate for policies featuring a lifetime maximum benefit of over $250,000.

Some policies allow policyholders to retain a partial benefit in the event their policy lapses, usually in the form of non-forfeiture benefits. This type of benefit allows policyholders who have paid premiums for long periods of time to be compensated. Non-forfeiture benefits often add anywhere from 10 percent to over 100 percent to the overall cost of an average long term care insurance policy. In addition to a standard non-forfeiture benefit, there are other types of benefits that come into effect upon a policy’s lapse:

  • Return of Premium – This particular non-forfeiture benefit pays back all or part of the premiums paid by a policyholder if they drop the policy after a certain number of years.
  • Contingent Non-forfeiture – This non-forfeiture benefit comes into effect if the policyholder does not accept the insurer’s non-forfeiture benefit option. In the event that the premium rises beyond a certain amount in comparison to the original premium, the insurer may offer either a continuation of the current policy at the same price, but with a corresponding reduction in benefits, or a conversion to “paid-up” status, but with a shortened benefit period.

Important Tax Information

Long-Term InsuranceMany older adults wish to deduct the cost of their long term care from their overall tax bill. The vast majority of long term care insurance policies meet stringent federal standards that allow for federal tax treatment. This means that individuals who are covered by such insurance policies are able to deduct their premiums. Although there is a maximum limit to these deductions, the maximum limits increase with age.

Older adults who want to deduct the cost of long term care insurance must not only have medical costs that are in excess of 7.5 percent of their adjusted gross income, they must also be prepared to itemize their deductions. As it stands, relatively few taxpayers are able to take advantage of these deductions.

Is Long-Term Insurance Right For You?

What’s your best move in shopping for the long-term insurance policy that’s right for you?

First, make sure you need it. If you’re approaching retirement, and are low on cash and savings, you may not needlong-term insurance. That’s because, with low savings, you’ll qualify for Medicaid, which can cover a lot of your long-term care costs (but not all of them).

Then make a list of the pros and cons.

For example, long-term insurance can:

  • Prevent (or at least mitigate) your life savings being spent on senior care.
  • Give you leverage in choosing the senior care facility that make sense for you. If you don’t have the insurance, and can’t cover the costs, then chances are you’ll have to take whatever senior care deal that’s on the table.
  • Prevent you from having to tap your family for funds to cover your senior care costs.
  • Any premiums you pay can be deducted on your taxes (via “qualified medical expenses”).

On the other hand, long-term insurance can also:

  • Be a cost burden as you near retirement.
  • Be unnecessary, especially if you have low income.
  • Not cover all of your long-term care costs.

Like any personal financial decision, you need to do your homework and gather the data that you’ll need to make an informed decision. Past that, you’ll need to follow through with the payments every month so you’ll have no roadblocks when you need to cash in on your long-term insurance policy.

You won’t need long-term insurance soon, but chances are you will someday.

Long Term Care Insurance Resources

The following resources are available to help older adults choose the best long term care insurance plans available, as well as make other decisions that positively affect their long term care:

National Clearinghouse for Long Term Care Information
Administration on Aging
One Massachusetts Avenue NW
Washington, DC 20001
(202) 619-0724
http://www.longtermcare.gov

National Care Planning Council
PO BOX 1118
Centerville, UT 84014
(801) 298-8676
http://www.longtermcarelink.net/

AARP
601 E Street, NW
Washington DC 20049
(888) 687-2277
http://www.aarp.org

Written by senior finance expert Brian O’Connell.