Long-Term Care Insurance—Can you afford it?

December 2011/January 2012 View more

NMAG1211_FinanceSeveral years ago, I wrote an article for a magazine I edited at the urging of Terry Savage, nationally known expert on personal finance (and one very fine lady). She believed that long-term care insurance (LTCI) was so important that she even permitted me to cop paragraphs from her column. So, please do not stop reading if you are under 50 years old—because long-term care insurance is an important consideration for those who are young, healthy, and able to more easily (and affordably) secure a policy without enduring increasingly stringent underwriting requirements. And honestly, it’s part of a balanced financial plan.

Here’s why: If you have financial assets you want to protect, LTCI—which, among other services, covers long-term nursing home, home and hospice care, assisted living facilities, therapist and companion services, and adult day care—helps to protect those assets. As important, LTCI frees you and your family members, who are not likely professional caregivers, from the burden of what can be an emotionally draining experience.

I can’t comprehend why so many people believe a Pandora’s box opens to unlimited health care benefits when they turn 65. So, to be clear, and contrary to popular belief, LTCI is not covered by health insurance, Medicare, or supplemental Medicare plans. Still, if you buy into the benefits LTCI can provide, it potentially will pay important “dividends” when you need them the most. According to the American Association of Retired Persons (AARP), a home-care aide can run $18 per hour, and a private room in a nursing home can mount to $74,000 per year. With figures like that—and rising each year—it doesn’t take long to run through carefully planned savings and investments if you choose to be “self-insured.”

Long-term care insurance is not inexpensive, however, and not everyone can afford the premiums forever. Still, more policyholders are holding on to their LTCI policies longer than insurers booked on, and that’s creating a financial strain on insurers. With less lapsed policies from policyholders who are living longer and claiming benefits, and with low interest rates for insurers who depend on bond income to dole out claims, the underwriters and business planning teams are probably in a tough spot. Though many state regulators must grant permission before LTCI premiums can be increased, rates have indeed jumped in recent years as insurers pass along higher expenses in the form of increased premiums.

Clearly, your individual financial picture bears on how affordable a long-term care policy is. According to AARP, one common measure is net worth, excluding your home—the amount of investments and savings you expect to have after you retire. Realistically, long-term care insurance might not be the ticket for those with lower incomes or less-than-substantial investments, but there is flexibility in cost (and coverage) provided, so you may be able to assemble a plan that meets your needs and fits your budget. That may entail purchasing a policy with reduced coverage to save money, increasing the minimum deductible or choosing to forego some benefits.

Another measure of affordability, notes AARP, is how much the insurance costs as a percentage of your expected retirement income. If premiums take up more than 10 percent of your future income, it may not be affordable. And be sure to realistically factor in rises in premiums over the life of a long-term care policy when determining affordability. Some experts recommend budgeting for a minimum 10 percent jump per decade, or if interest rates remain low, 20 percent.

Each insurance carrier has one or more “sweet spots” based on which ages and health conditions they believe are most desirable, based on their experience or future expectations. Some offer a discount for couples buying together, while others will offer a discount even when only one partner buys. Finally, it’s important to make sure that your LTHI agent represents multiple carriers, not just one, so you can do an apples-to-apples comparison from multiple insurers.