Facing the Financial Unknowns of the Future
Last week, one of my friends and coworkers asked me if I knew anything about long-term care insurance. I didn't know much, but thanks to the credit union, I did know where to look for answers to her questions. The Plan It: Retire Ready Toolkit, provided free by Coosa Pines FCU, offers useful tips and tools for retirement planning and much more -- like the Q&A on long-term care insurance below.
Long-Term Care Insurance
by Eve B. Scheffenaker, Plan It contributor
As you approach retirement, you face numerous financial unknowns. Will Social Security go bust before you can collect? Are you saving enough money? Will your investment earnings be eroded by inflation? Will you, thanks to medical and public health advances, outlive your assets? And what if, as statistics predict, you need 24-hour care for at least a few years after you retire? How will you pay for that? Consider the answers to these most frequently asked questions (FAQs).
One solution, according to some financial planners and insurance agents, is to make long-term care (LTC) insurance part of your financial plan. With baby boomers and their parents flooding the marketplace, LTC insurance is an industry darling. Carriers are selling more than 500,000 policies a year.
But is long-term care insurance the panacea? Salespeople may say so. But in a 2003 study, Consumer Reports determined that "for most people, long-term care insurance is too risky and too expensive." Let’s look at some of the facts and factors, so you can begin to judge for yourself.
What is long-term care and when might I need it?
Long-term care, sometimes called "custodial care," consists of helping a person perform certain activities of daily living -- such as bathing, eating, dressing, using a toilet, getting in and out of bed, and walking. You might need long-term care after suffering a stroke, if you develop Alzheimer’s, or become too frail or cognitively impaired to take care of yourself.
Who provides long-term care?
Traditionally, long-term care is associated with nursing homes. However, long-term care is available in other settings. Home health care and community care programs provide LTC services to people in their own homes. Long-term care also is provided to residents of assisted living facilities.
How much might I have to spend on long-term care?
Today, the average cost of nursing home care is about $70,000 to $80,000 a year. In 15 years, when you or a family member might need it, the cost probably will exceed $180,000 a year. Private medical insurance and Medicare will cover little, if any of those costs. Medicaid will cover them only after you have spent down your family assets.
What expenses does long-term care insurance pay for?
LTC benefits apply only to a facility’s room and board charge. All LTC policies cover facility charges for inpatient nursing home and skilled nursing care. Many also cover home health care, community care, and assisted living facilities, though at a lower benefit rate. Some newer policies offer more generous benefits for home health care.
What expenses are excluded?
Long-term care insurance does not cover medical care such as doctor’s visits, prescription drugs, hospital care, and related expenses. Medical insurance covers these and other acute care services.
How does long-term care insurance work?
To receive benefits from your policy, you must be unable to perform some daily activities; the number and type of activities vary by policy. After you qualify, you will have to pay your expenses for a certain period before benefits start. After that, LTC insurance pays a set benefit for each day you receive covered care.
You can pick among several features to design your own coverage. For example, you can choose your benefit waiting period, daily benefit amount, and benefit payment period. Other coverage options include a cost-of-living adjustment for the benefit and a family policy shared by spouses. Each of these choices -- as well as your age when you sign up -- will affect your premium cost.
What is a "qualifying event"?
LTC benefits usually are triggered by your inability to perform certain activities. The carrier defines this requirement, and some policies make it difficult for participants to meet it by setting the bar high. To increase your odds of qualifying for benefits, get a policy that requires no more than two activities, one of which is bathing. Also look for one that includes cognitive impairment or medical necessity -- when a doctor orders LTC -- as a qualifying event.
What is the waiting period?
With LTC, your deductible is figured in days rather than dollars. You decide how many days you’ll wait before benefits start. You can cut your premium by choosing a longer waiting period and paying more of the bill yourself. But take time to weigh premium savings against your increased out-of-pocket costs.
How much does LTC insurance pay?
Daily benefits may range from $50 to $200 or more. The decision is yours. Before you decide on a benefit amount, check the average cost
of a private room in a nursing home in your area. Do the same for home health care and assisted living costs if your policy covers them -- and remember that your policy may pay only part of the daily benefit for those services.
Does the benefit amount increase over time to keep pace with inflation?
Your benefit amount will increase only if you include inflation protection in your coverage. The cost of nursing home care is expected to increase at a rate of at least 5% a year. So, although inflation protection may increase your premium, it is worth the extra cost.
How long do benefits continue?
You decide the length of the benefit payment period. Most people older than age 65 who stay in a nursing home are there for fewer than five years. If you have a chronic disease or a family history of Alzheimer’s, you may want a lifetime benefit period. Otherwise, a four- or five-year period should cover your needs. If not, it gives you time to plan for a continuing financial demand.
How does my age affect my premium cost?
The younger you are when you buy your policy, the lower your premium will be. However, if you never use the coverage -- or your carrier stops offering LTC -- you’ve paid a lot of money for nothing.
Objective experts recommend that you buy LTC insurance before age 60 only if you have a chronic condition like diabetes that will disable you over time. Otherwise, wait until you’re 60 to assess whether you need the coverage.
How does my financial situation affect my decision about getting LTC insurance?
Most sources agree that you should pass on LTC if your net worth is less than $200,000 or more than $1.5 million. The same is true if you can’t afford the premiums now or in the future. If you do pass on LTC insurance, ask your adviser about life insurance policies that allow you to use the cash value of the policy to pay for long-term care.
How do I choose a carrier?
Recently, the number of carriers offering LTC has decreased, as some smaller companies have dropped out of the market. You’ll improve your odds of having a policy in place when you need it by choosing a large company -- one with high ratings (B+ or better) for financial strength. (Several rating services
have these ratings online.) Larger firms may charge more, but have had fewer premium increases in the past.
Remember that none of these companies has a reliable claims history to base premiums on -- the policies have not been in force long enough for large numbers of buyers. When that changes, policyholders may face steep rate hikes.
Any last advice?
The best advice is: Don’t try to figure this out alone. Work only with a fee-only financial planner. His or her advice won’t be influenced by potential commissions from any policies you buy.
Insurance Rating Services
Back to Consumer News