Retirement


Navigate a Course for Long-Term Care

EDITOR'S NOTE: A version of this article was originally published in the May 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.

You've finally decided to buy an insurance policy to protect your nest egg from the staggering costs of long-term care. But now insurers are pulling out of the market, while the remaining sellers are boosting costs. And if you already hold a policy, you may be facing steep premium hikes.

SEE ALSO: Special Report on Long-Term Care

Don't despair quite yet. You still have many ways to cover long-term-care costs. Several strong insurance companies continue to sell policies, and there are new strategies for reducing the premiums. Meanwhile, insurers are introducing alternatives, in particular policies that bundle long-term-care coverage with annuities or life insurance -- an option that offers a payoff whether you need care or not.

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The potential costs of long-term care are just too large for most people to ignore. In 2011, nursing-home care topped more than $87,000 a year. And home care can cost even more. "Your financial plan is not complete unless you have some kind of protection for long-term care built into it," says Peter D'Arruda, an investment adviser and president of Capital Financial Advisory Group, in Cary, N.C.

But the long-term-care insurance industry is in disarray. In setting their premiums years ago, insurers underestimated the number of people who would file expensive claims. Low returns on the insurers' investments have made it tough to make up for pricing mistakes.

In the past few years, several major long-term-care companies stopped selling new policies. MetLife left the market in 2010, and Prudential announced its exit from the individual business in March 2012. Plus, most major insurers raised rates for current policyholders at least once over the past few years. In late 2010, John Hancock announced it would ask state regulators for permission to increase rates for most policyholders by an average of 40% -- and some as high as 90%. Then Genworth asked for an 18% rate hike for one-fourth of its policyholders. These hikes are just kicking in now.

This state of affairs leaves current policyholders and prospective ones in a quandary. People who are in their fifties and sixties balk at the high prices of traditional policies. And they worry that they'll be trapped into paying ever-rising premiums. "People understand the cost and the odds because they're living it with their parents," says Mari Adam, a certified financial planner in Boca Raton, Fla. "But the problem is the long-term-care business really is in turmoil."

Here are some options to navigate this turbulent marketplace.

For current policyholders. If you're socked with a premium hike, resist the temptation to drop the policy. You'll lose all the benefits that you spent years paying for. And newer policies are much more expensive, especially now that you are older. "I've been doing long-term care since 1990, and I think I've replaced one policy in 22 years," says John Ryan, a consultant in Greenwood Village, Colo., who helps fee-only financial planners find suitable coverage for their clients.

Ryan recently compared prices for a couple who purchased long-term-care insurance policies in 2003 with a 5% inflation rider, when they were 48 and 54. Their original monthly benefit was $6,000 and increased over the nine years to be worth $9,300 a month. The combined premium before a recent rate increase was about $3,000 a year; after, it rose to $5,900. But now Ryan's clients are 57 and 63, and when he shopped around for a new policy with a $9,300 monthly benefit, the premium was $10,400 a year.

If you get a notice of a rate increase, ask about your options. You may be able to continue at your current premium by cutting back on the benefit period. Reducing a lifetime benefit period to five years still provides more coverage than the average nursing-home stay of three years. If you have a short waiting period before benefits kick in, you can lengthen it to 90 days or so.

Also consider lowering your inflation protection to 3%, from 5%. Before you make that move, find out how big a pool of benefits you would have in your eighties, when you're likely to need care. If you're in your mid sixties and likely won't need care for another 20 to 25 years, lowering the inflation protection could reduce your benefits pool by thousands of dollars. But if you're in your late eighties or older, it may make sense to reduce, or eliminate, the inflation protection rather than change the benefit period.

If you learn that your insurer is pulling out of the market, don't worry. The company is still on the hook to pay benefits. And if the company sells its long-term-care business to another insurer, that company will be required to make the payments.

Hedge your bets. Instead of buying enough long-term-care insurance to cover the full risk, you can keep the premiums more manageable by making some trade-offs. "You don't need to cover every last dollar of need, but pay for what you can. It's okay to scale back benefits," says Adam.

Rather than buying a policy that provides lifetime benefits, go with a plan that offers benefits anywhere from three to five years. Advisers also prefer "shared benefit" policies for married couples. A three-year shared-benefit policy provides a pool of six years of coverage to divvy up between spouses. If you need five years of care and your spouse needs one, you're both covered. Such a policy costs about 15% more than two separate policies with three-year benefit periods. It may be worthwhile to extend the benefit period if you have a family history of Alzheimer's disease or other long-lasting conditions.

Because you may wait 20 or more years to tap your policy, your daily benefit should keep up with rising costs. The 5% compound inflation protection is the gold standard, but some companies are offering cheaper policies that boost benefits by 3% a year. The 3% annual boost has kept up with general inflation recently, although the cost of care often rises faster than general inflation. A 55-year-old couple with a three-year shared-benefit policy that has a $150 daily benefit and 3% inflation protection starts out with a pool of coverage worth $340,000 that grows to more than $700,000 by the time they are 80.

Look carefully at the policy's home-care requirements, which can make a big difference for Alzheimer's patients and others who often receive care in their homes. Some policies pay for any caregiver who is not a family member, while others only pay for licensed caregivers who work for an agency -- who often charge a lot more per hour. (If you don't spend your maximum daily benefit every day, you can extend the benefit period.) Also, look at how the policy counts days of care toward the waiting period, which is often 60 or 90 days. Some policies start the clock as soon as your doctor certifies that you need help with two out of six activities of daily living (such as bathing or dressing) or have cognitive impairment. Others count only the days that you receive care, which can make a big difference if you only need care for a few days a week, which is the case for many Alzheimer's patients in the early years of the disease.

It's important to work with an agent who deals with many insurers, because the price differences can be huge. Consider this example offered by the American Association for Long-Term Care Insurance, a trade group: A healthy 55-year-old couple wants a policy with a $150 daily benefit, three-year shared-care benefit period, 90-day waiting period before benefits start and a 3% inflation adjustment. Insurers offer a range of prices from $2,027 to $3,574 a year.

Ryan says the major long-term-care insurance companies include Genworth, John Hancock, Mutual of Omaha, MassMutual, New York Life and Northwestern Mutual. "Make sure you give your agent as much of your medical history upfront, so the agent can match your risk with the company that can make the best offer," Ryan says. (You can find a long-term-care specialist at www.aaltci.org or by calling 818-597-3227.)

Even with these cost-saving moves, Ryan says policyholders should be prepared for a premium increase of up to 20% every five years. To cap your future premiums, you can buy a "ten pay" policy. You pay more each year, but premiums end after ten years. Make sure you ask the insurer that it won't impose new charges after ten years.

Consider a 60-year-old who wants to buy a policy from Northwestern Mutual with a three-year benefit limit, $6,000 monthly benefit, 12-week waiting period and 5% inflation protection. A person who buys a regular policy would pay $5,316 a year in premiums, compared with $11,130 a year for the ten-pay policy.

New source of money. If you already own a permanent life insurance policy or a deferred annuity, there's good news: Under a new tax law, it's now easier to move money tax-free from these products to pay long-term-care insurance premiums.

Erik Jensen, 66, is a professor at Case Western Reserve University, and his wife, Helen, 63, is a legal specialist at a law firm in Cleveland. The couple bought permanent life insurance policies in 1985, and with dividend reinvestments, the policies have built up significant cash value.

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