While the thought of retirement and long-term care might seem far off, it’s important to at least research options and evaluate future needs.
Tips to find a plan that works for you
By Lekan Oguntoyinbo
Many financial advisers recommend buying long-term care insurance in your mid-50s or 60s. They say it’s a great way to build equity for a product you will likely need later in life.
Experts estimate that two-thirds of people 65 and older will need some form of long-term care in their later years. Many buy the product while they are still middle-aged because it gets more expensive as they get older. The typical long-term care insurance buyer is upper-middle class with an annual income between $100,000 and $150,000 and hundreds of thousands of dollars in assets.
"Interest rates are as integral to long-term care insurance as rain is to a farmer."
For decades, long-term care insurance has been widely regarded as a great investment for care that could cost more than $50,000 each year out of pocket in the latter part of your life. Last year, long-term care insurance companies paid out $6.6 billion to more than 264,000 people on claims, according to the Los Angeles-based American Association for Long-Term Care Insurance, an organization of agents and brokers.
But these are not the best of times for the long-term care insurance industry. Soaring premiums make the product unaffordable for many consumers, forcing some to drop it. Many insurance companies have dropped the product because it’s increasingly less profitable.
"I’ve been following the industry since 1984," says Joshua Wiener, distinguished fellow and program director, Aging, Disability and Long-Term Care, RTI International. "It’s never been as bad as it is now. The industry is definitely imploding, and the long-term viability of the industry is very much up for grabs."
Scott Kipper, Nevada’s insurance commissioner, explains that long-term care insurance products have been hampered in part by slower investment growth rates. Prior to the recession, growth rates averaged between 7% and 9%, he says. Now, they average 1% or 2%.
"The carriers missed on their assumptions," says Kipper, who also chairs the senior issues task force for the National Association of Insurance Commissioners.
"Interest rates are as integral to long-term care insurance as rain is to a farmer," adds Jesse Slome, American Association for Long-Term Care Insurance executive director.
"About 15% of people who apply for long-term care insurance are turned down Due to poor health."
Assess Care Needs. Despite the industry’s turmoil, long-term care insurance remains the only viable option for getting adequate long-term care for millions of seniors. Long-term care is designed for people who are unable to perform basic functions like dressing, bathing or getting in and out of a chair or a bed. It covers care that’s typically not covered by health insurance, Medicare or Medicaid.
It generally covers a variety of living arrangements, including home care, hospice, nursing homes and assisted living facilities. Depending on the kind of policy, it could pay for round-the-clock care from live-in caregivers or medical professionals such as therapists or private duty nurses. The biggest benefit is the cost savings. Out-of-pocket expenses for this kind of care could run in excess of $50,000 per year.
However, not everyone qualifies for long-term care insurance. Weiner estimates about 15% of people who apply for long-term care insurance are turned down due to poor health.
The policies often cost thousands of dollars per year, so it’s best to make your approach wisely. Below are tips for buying long-term care insurance.
Pick a product you’ll be able to afford even when premiums rise. "It can’t be a huge stretch for you now," Wiener says. "If you can barely afford it now, you won’t be able to afford the premiums when they’re twice as high, especially given that most people’s incomes decline when they retire. Don’t pay so much that you can’t afford a premium increase."
Make sure the policy includes a compound inflation adjustment. Wiener calls this the single most important part of the purchase. If the inflation adjustment component is not built into the policy, he says, you will get little or no value out of it when you do use it.
"Inflation on long-term care services has been about 5% a year," he says. "It’s essential that you buy a policy with compound inflation adjustment. This dramatically increases the price of the premium. Inflation protection is more expensive, but if you don’t have that protection, you might as well throw the policy down the sewer."
Get a policy that doesn’t tie you to a specific location. In a society where many seniors relocate upon retirement, this is a particularly critical point when shopping for a policy.
"You want a policy that pays wherever you are," says Steve Weisbart, Insurance Information Institute chief economist and senior vice president. "Modern policies are more flexible that way." He also says to look for policies that have spill-over provisions, which allow a buyer to use his spouse’s benefits if he exhausts all of his.
Get guidance from a seasoned specialist. "Ask how many policies they’ve sold and how many long-term care insurance companies they’re appointed with," Slome says. "Four or more makes them a specialist. Ask how long they’ve been doing this? It takes about five years to learn the nuances of this business."
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- December 2013