Considering Long-Term Care Insurance? Here’s What You Should Know

For some people, it's easier to think about one's eventual demise than to consider the possibility of needing the kind of personal assistance that long-term care (LTC) aides and facilities provide. Even so, ignoring the possibility of needing that care doesn't make it go away.

Today, around 7.5 million Americans have not only thought about the potential value of securing LTC financial protection, but also purchased it. That figure from industry research includes both standalone LTC insurance policies and hybrid policies that combine elements of LTC and life insurance.

Lately, many owners of standard LTC policies have been forced to take a hard look at whether to maintain their coverage as premiums rise or to scale back their coverage, if not drop it altogether. The premium spikes aren't as arbitrary as they may seem. The escalations stem from the fact that many insurance companies have been losing money on LTC policies because of several miscalculations — including how many policyholders would maintain their policies long enough to claim benefits instead of allowing the policies to lapse.

LTC Basics

If you don't currently own an LTC policy and are a little sketchy on how they work, here's a quick rundown. After a waiting period, LTC benefits kick in to help pay for care when the policyholder can no longer perform various activities of daily living (ADLs). These include bathing, eating, dressing, walking, maintaining continence and using the toilet independently. Typically, assistance with ADLs financed by an LTC policy can be performed in the insured's home or an assisted living or nursing facility.

The problem with waiting too long to obtain LTC coverage, as with life insurance, is that it may be unaffordable or even impossible to buy. For example, the rejection rate is 22% for people in their 50s and 37% for the 65 to 69 age bracket. On the flip side, buying it too soon can also be a mistake because of the "opportunity cost" of paying for something you're unlikely to need for many years.

Less than one-third of LTC policies are bought before age 55; just over half are bought by people in the 55-to-65 age bracket; and fewer than one in five are bought for those age 66 and up, according to the American Association for Long-Term Care Insurance.

Don't Count on Medicare

Along with cost and a common reluctance to think about being unable to care for oneself, another major impediment to buying LTC coverage is a mistaken assumption about the role of Medicare. "Medicare doesn't cover long-term care, also called custodial care, if that's the only care you need. Most nursing home care is custodial care," according to Medicare.gov.

Medicare does, however, cover some LTC costs related to rehabilitation incurred following treatment for a medical condition.

In contrast, Medicaid provides LTC coverage, but only to people who satisfy its low-income and net worth constraints. LTC facilities aren't required to accept new residents covered by Medicaid. So-called "private pay" residents have more care options than those on Medicaid.

Cost of Care Services

So, what does LTC insurance cost? That's like asking what it takes to buy a car. It depends on many variables, such as the maximum daily benefit, the overall benefit ceiling and whether the benefits adjust for inflation. Also, as you'd expect, age, gender (women typically pay more), health history, chosen insurance carrier and other factors figure into the cost.

Whether an LTC policy is "too expensive" depends on your risk tolerance — the purpose of insurance is to reduce or eliminate financial risk — and your estimated costs of what you might have to pay for LTC without insurance. A recent survey by one of the top LTC carriers offers these annual cost averages for 2021 and 2031 projections, respectively:

• Homemaker services: $53,768; $74,427.
• Home health aide: $54,912; $76,011.
• Private room in a nursing home facility: $105,850; $146,521.

As noted above, LTC insurance premiums have been on the rise. Until recently, prospective LTC coverage buyers were often told that, while premiums could go up, the odds were against it. In addition to the increase in policy "persistency" (policyholders keeping their policies long enough to use them), a faster than expected rise in care costs has adversely affected LTC carriers. Also, low interest rates have reduced insurers' returns on their bond portfolios.

Forecast for Rising Premiums

Although it may seem as though insurance companies raise their premiums on a whim, they can't. Rather, they need to get the green light from their state regulators after proving that the increases are critical to their ability to stay in business. But LTC carriers have been succeeding, and some policy premiums have recently gone up 10% or more, with predictions of continuing double-digit increases in subsequent years.

If you own an LTC policy and are witnessing significant premium jumps, the optimistic perspective is that you may have been paying artificially low premiums in recent years, though that's not much comfort now.

To decide how to respond, take a fresh look at the assumptions you used when you made your original decision to buy the policy. If they're still valid, and you'd have to pay more to start over with a new LTC policy (assuming you could get one), you'll probably decide to stand fast and review the matter the next time you face a premium hike.

Last Words

If you don't currently own an LTC policy and are considering buying coverage, there are only a couple of things that may be perfectly clear. First, accept that premiums will likely rise at some point. Second, decide carefully whether to buy LTC insurance at all and, if so, when and at what level. Given the complexity of analyzing this type of coverage, it's wise to consult with a professional who doesn't have a vested interested in your ultimate decision.