By Richard A. McGrath, CIC, LIA
Should you buy long-term care insurance? According to researchers at Georgetown University and Pennsylvania State University, 70 percent of individuals 65 and older will need long-term care—either at home, in an assisted-living facility or at a nursing home.
At the same time, the price of long-term care insurance is increasing. A 55-year-old couple can expect to spend about $3,275 in annual premiums for $164,000 of coverage for each person, with annual premiums growing by an average of 3 percent a year.
Medicare doesn’t cover long-term care, but Medicaid is there to help people who have little money. People with assets of $2 million or more can most likely afford to pay for long-term care out of pocket, although purchasing a policy can ensure they have money to leave to their heirs.
But for people who fall between those two extremes, the decision whether to buy long-term care insurance is a tricky one. Here are six mistakes consumers commonly make when purchasing long-term care insurance.
Waiting too long to buy. For most people, the 50s are the best time to buy a policy. That’s typically when premiums are most affordable and coverage is easiest to obtain. For each year applicants in their 50s delay buying coverage, carriers typically raise premiums by 3 to 4 percent, simply because they are a year older. For every year people in their 60s wait, they can expect to pay at least 6 percent more.
Over the past decade, carriers struggling with losses on existing policies have raised the premiums on new policies an average of 4 to 8 percent a year, depending on the features.
Consider the example of a 65-year-old man who purchased $110,000 of coverage with benefits that grow 5 percent a year. To secure the same coverage 10 years earlier, at age 55, he would have paid about $1,032 in annual premiums; but, because he waited, his annual premium is now about $2,770. Assuming he lives to age 85, he will pay a total of about $55,400 in premiums—or $24,400 more than he would have spent if he bought insurance at age 55 and lived 30 years.
Those who wait also run the risk that their health may deteriorate. Carriers have become stricter about how they underwrite policies and, as a result, they reject about 25 percent of applicants between ages 60 and 69, according to the American Association for Long-Term Care Insurance (AALTCI).
Buying based on price alone. The gap between the least expensive and most expensive policies can be wide. According to the AALTCI, a 60-year-old couple can expect to pay an annual premium that ranges from $3,025 to $6,500 for $164,000 of coverage that grows 3 percent a year.
Consumers should buy long-term care insurance from a large, stable carrier with the resources to be around when the coverage is needed. Consumers should limit their shopping to large, diversified carriers with ratings of single A or higher.
Overlooking shared benefits. Fewer than half of couples purchase a rider that allows them to share benefits. But doing so is an inexpensive way to double the benefits available to one spouse. Consider a couple with two policies that each covers up to three years of benefits.
If the policies are linked and the husband needs four years of coverage, he can use his policy plus a year of his wife’s coverage. The downside, of course, is that this would typically leave the wife with only two years of benefits.
While a shared-care rider on a contract that provides five years of benefits typically boosts premiums 10 to 15 percent, it is far cheaper than buying an additional five years of coverage for both spouses. Some couples also overlook the fact that they can get discounts of as much as 30 percent when they purchase policies together.
Underestimating the impact of inflation. Inflation protection is key. If you buy long-term care insurance when you’re in your mid-50s and don’t need coverage until your mid-80s, 30 years of inflation will eat into the benefit.
Buying inflation protection can add 50 percent or more to the cost of a premium. Perhaps for that reason, 94 percent of people who buy hybrid policies, which package long-term care coverage with a life-insurance policy or an annuity, and nearly one-third with conventional policies, forego inflation protection or opt for skimpy coverage.
How much inflation protection is ideal? Consider the following comparison between policies with 3 percent and 5 percent inflation protection. Take the amount of coverage you want – for example, $360,000 over five years – and price a policy with 5 percent compound inflation protection. For a 55-year-old couple, the annual premium will be about $7,238.
Then, take that $7,238 and shop instead for a policy with benefits that grow by 3 percent, compounded each year. With such a policy, a 55-year-old couple willing to spend $7,238 a year can secure $619,560 in benefits over five years – or 72 percent more than the 5 percent policy’s initial $360,000 benefit.
Another type of inflation protection that is becoming more popular is a guaranteed-purchase, or future-purchase, option. This option allows the insured to buy inflation protection in installments over time. While initially much cheaper than policies that lock in inflation protection at the outset, premiums become significantly more expensive as the insured ages.
Failing to read the fine print. Some families with long-term care insurance policies encounter claims denials that can prevent or delay the collection of benefits. But there are ways to avoid future problems. Before buying, be familiar with the definitions and terms of the contract, so you will know when and how you can use the benefits. Most long-term care contracts pay benefits under one of two conditions: the policyholder must be unable to perform two out of six basic “activities of daily living,” such as dressing or bathing, or have a cognitive impairment, resulting in the need for substantial supervision.
These conditions are found in all tax-qualified policies, meaning the benefits won’t be taxed as income and the premiums have the potential to be deducted as medical expenses. For tax-qualified policies, which include virtually all policies sold today, a health-care professional, such as a doctor, nurse or social worker, must certify that the disability is expected to last at least 90 days.
To reduce premiums, policyholders typically choose a waiting period, or elimination period, of up to 90 days before benefits begin. Some newer policies sell waivers of this elimination period for home-based care.
In addition, some policies calculate the elimination period using a calendar-day method. This requires someone with, for example, a 90-day elimination period to wait 90 days before receiving benefits. Others use a service-day method, in which the insurer counts only the days the policyholder pays the bill for his or her care, using licensed caregivers.
Most carriers sell inexpensive riders that either convert policies to the calendar-day method or give policyholders who pay for one day of care credit for the entire week. So if a policy with the service-day approach best fits a client’s needs, simply purchasing a rider will suffice.
Some contracts mandate the use of home-care agencies with specific licenses. Policies that give beneficiaries the flexibility to hire home-care agencies, which provide help with dressing, bathing and other forms of personal care, are preferable. These agencies generally charge less and are more abundant than home-healthcare agencies, which provide skilled medical care.
Failing to compare conventional policies with hybrids. These days, affluent buyers are flocking to hybrid or combination policies, which package long-term care coverage with a life insurance policy or an annuity. While sales of traditional policies fell 23 percent to 233,000 in 2012 from 303,000 in 2007, sales of hybrids have risen sharply, to 86,000 from 15,000.
While the benefits on both types of policies are tax-free, only individuals with traditional policies can deduct their premiums. And only traditional policies can qualify for the government-endorsed Long Term Care Partnership Program, which allows those who outlive their coverage to protect some of their assets and still qualify for Medicaid. In Massachusetts, the purchase of a qualified long-term care policy will exempt their primary home from Medicaid.
Long-term care insurance is a good investment for those who can afford it – but only if they avoid these common mistakes.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at firstname.lastname@example.org.
This article is written for informational purposes only and should not be construed as providing legal advice.