LONG TERM CARE INSURANCE: Is it worth the price?

By Jane Noble
June 27th, 2013

The chances of you celebrating your 80th, 90th even 100th birthday are becoming increasingly more likely, with women still tending to live longer than their male counterparts. Advances in medicine are enabling us to survive health events and accidents like never before. As baby boomers reach retirement age, the possibility of an extended lifespan now needs to be taken into consideration as an essential part of retirement planning.  The cost of long term care can be shockingly expensive and without careful planning, assets may be depleted in order to pay the bills. At Amada, we deal with families all the time that need help for an elderly parent and want to make sure that the care received is of the highest quality; but all too frequently they have no financial plan in place because they are dealing with a crisis. The discussion inevitably turns to selling assets, the main one usually being the parents’ home.  In an already stressful situation, dealing with a property sale can be distressing. The seniors in need of care often no longer have the choice to age in their own home.

According to AARP, the present average costs for a private room in a nursing home run at $88,000 per year and these costs could triple over the next 20 years assuming a 5% rate of inflation.  Costs for a home health aide to come into the home 3 times a week run at approximately $20,000 a year. The Department of Health and Human Services estimates that 70% of Americans over the age of 65 will need some form of care. It is important to remember that Medicare does not cover long term care costs.

How can you prepare for these extra expenses?  Some financial advisers say that anyone who’s amassed or surpassed a certain amount of assets—say, at least $2 million—can afford to self-insure against the risk of needing long-term care.  The majority of people, however, won’t have enough liquid resources to pay for care when the time comes. If you are married, you also have to think about your spouse and make sure he or she has enough to live on. It makes sense to consider transferring some of the risk to a long term care insurance policy, particularly if quality of care and choice are important to you, as well as protection of your assets. A good policy can make the difference between living with dignity and having to depend on the government.

Most of the early LTC policies were written to pay for nursing home expenses only, but many policies have now been expanded to cover in-home care, assisted living, adult day care and even some skilled nursing or care management costs. Jesse Slome, executive director of the American Association for Long Term Care Insurance says that of the claims initiated industry wide in 2011, 50% went to pay for home care, 19% were for assisted living and only 31% paid for nursing-home care. This reflects the changing pattern of retirement and the desire of many seniors to stay at home as they age.

The recent financial crisis caused many companies to abandon the LTC insurance market. Low interest rates reduced the returns that insurers earned on invested premiums, making long-term care insurance less profitable for them. Many companies have increased their premiums 30% to 50% over the last five years. There has been a shift away from the unlimited lifetime benefits of past policies, toward fixed benefits. These are typically stated as daily or monthly benefit amounts that run for a certain number of years.

Premiums now seem to have stabilized as the remaining carriers price new policies to take rock-bottom rates into account.  The average annual premium for a 50-year-old buying a fairly typical policy—one that would pay a daily $200 benefit for 3 years with a 3% compound inflation option–is now $2,235 annually, according to the American Association for Long-Term Care Insurance. Many insurers give discounts to married couples on the theory that spouses help take care of one another.

So when is the best time to buy? The most important thing to remember is that you cannot buy long term care insurance once you actually need it. Chronic illness, dementia, taking of medications and other health complications can disqualify a client from purchasing. Once you have purchased however, your carrier can’t cancel your policy or raise your rates based on your personal health status. Premiums are paid until the policyholder dies or goes on claim. The American Association for Long Term Care Insurance recommends the best time to buy long-term care insurance is between ages 55 and 64. Before then, people often have competing financial commitments such as children’s college tuition.

It is important to be aware that not all expenses are covered. One common misconception is that, once an older person enters any type of retirement community for any reason, he or she can file for a claim. In reality, most policies only pay out once a policyholder needs help with at least two activities of daily living such as bathing, dressing, eating or using the bathroom. If a client develops Alzheimer’s disease, or similar debilitating illness, he or she may need assistance for many more years than are covered by insurance. Rather than considering long term care insurance as the sole source of funding for care, consumers should think of it as another pot of money that can contribute towards expenses.

Take the time to educate yourself on the subject. Read the small print of policies. Tedious as it is, it is important to know exactly what your policy covers. Some policies, for example, may only cover nursing home expenses but not in home care. Amada has years of experience dealing with LTC policies and can advise on the best policies to purchase and on how best to implement them.  Don’t hesitate to call one of our senior care advisors for a detailed discussion on the best path of action for you. You can also find further information in our Amada Guide to Finding and Affording the Best Care for your Loved One.

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