A lengthy stay in a nursing home could wipe out your savings—the national average for a shared room in a nursing home is $77,380 a year. Long-term-care insurance can protect you and your family, but the policies are increasingly expensive and not always needed.
The decision to buy a policy—something I'm grappling with now—comes down to many factors, including what assets you have to protect, whether or not you want to leave behind an estate, your ability to pay premiums for decades, and your odds of needing care in the first place. But if you end up on the side of buying insurance, you have options to keep down costs.
How to Insure Yourself for Less
Buy just enough coverage to provide a cushion. "We advise insuring for a core amount and planning on using other sources if that runs out," says Claude Thau, a long-term-care expert at Target Insurance Services in Overland Park, Kans. It's like the peace of mind you get from having a fixed annuity in retirement. You lock into enough income to cover your housing and utilities, say, and fund travel and entertainment with other savings. Even modest long-term-care insurance will cut down your out-of-pocket costs.
The cushion approach appeals to me. The Department of Health and Human Services projects that the average 65-year-old will need three years of long-term care, but about two-thirds of that time will be spent at home, with the rest in either a nursing home or assisted-living facility.
I'm leaning toward insuring for that level of coverage, knowing that if my wife or I need more care, we have sufficient assets to pay our way. That would come out of our financial legacy. But so would excess premium payments over 30 years for coverage we didn't need. I'm comfortable with that tradeoff.
Keep long-term affordability in mind. These policies have been around for decades, but only in the past five years have buyers filed claims in big numbers—exposing an underwriting disaster. MetLife, Unum, and Prudential are among dozens of insurers that have quit the long-term-care business. Others, including industry leader Genworth, have absorbed huge losses and won state approval to boost premiums on older policies to stay afloat.
New policies incorporate more realistic assumptions—and prices reflect that. "These policies have gone up so dramatically it makes them hard to recommend," says Clarissa Hobson, a financial planner in Colorado Springs.
Can you be sure double-digit premium hikes are over? Long-term-care experts say the industry is on firmer actuarial footing. "By far, the worst is behind," says Michael Kitces, director of research at Pinnacle Advisory Group.
Yet others are skeptical. "The baby boomers aren't even there yet," says Jane Gross, author of A Bittersweet Season: Caring for Our Aging Parents—and Ourselves. "What's going to happen when boomers start making claims?" Gross, 67, bought a policy in her fifties and began to regret it soon after.
Think hard about how much you need. When you shop for a policy, the variables include the daily benefit (often $100 to $200), how much the benefit goes up for inflation (3% or 5%), how long payments last, from a few years to no cap, and the so-called elimination period, or how long before insurance kicks in.
A 90- to 100-day elimination period is virtually standard (92% of policies). You can adjust the daily benefit to save, but since nursing-home costs vary widely, first check local prices to get a sense of what you might face.
Inflation protection is an important lever. For years experts recommended policies with benefits that grow 5% a year to keep pace with medical inflation, and to be safe most still do. But that option costs about two-thirds more than a 3% adjustment.
Going with 3% may be fine, says David Wolf, a long-term-care insurance planner in Spokane. The cost of in-home care and assisted living is rising less than 2% a year, he says. Nursing-home rates are going up 5% a year, but stays are shorter than they once were.
Note that while premiums are tax-deductible, the write-off is capped based on age ($1,430 in 2015 for ages 51 to 60). And they are deductible only to the extent that they, along with other medical expenses, exceed 10% of your income (7.5% if you're 65 or older).
Buy a little flexibility. Three years is the most popular benefit period. As a couple, odds are only one of you might spend more time in a nursing home. A shared benefit can help you insure against that financial catastrophe.
Rather than five years of coverage each, you buy 10 years to be split as needed—five and five, say, or two and eight. A 60-year-old couple can expect to pay about 15% more for a shared policy with six years of total benefits than for a joint policy with three years of benefits each, says Wolf, but in exchange you have a better shot at covering a single long stay in a facility.
Don't wait too long to shop. The average age of a buyer is now 57, down from 67 a dozen years ago, and it's easy to see why. Premiums go up modestly before age 55. The curve steepens after that, with the sharp turn at 65, when prices begin to rise about 8% a year, says Jesse Slome, director of the American Association for Long-Term Care.
What's more, you are fast approaching an age when your health can lead to higher premiums, if it does not render you ineligible altogether. "By 65, almost everybody has some kind of medical condition," Slome says. Once you reach your sixties, the average denial rate jumps from 17% to 25%.
Gather multiple quotes. For the same coverage, the highest-cost policies can cost twice as much as the cheapest ones, Slome says. Go with a broker who sells coverage from at least five insurers and specializes in the field. Search for an agent at aaltci.org.
Know what it takes to collect. Stalling and claims denials sometimes command frightful headlines, but just 1% of denials are without merit, the federal government reports. Still, make sure you know exactly when your claim will qualify. One common hang-up is home care. Especially with an old plan, your policy might require a licensed home health aide when all you need is less-skilled (and less costly) help with simple chores.
The Alternatives to Insurance
If you decide against a traditional long-term-care policy—or are turned down—you have other insurance options. None provide as much coverage for care. But they have the advantage of guaranteeing you cash in old age or a legacy for your heirs.
How other policies can help. Hobson likes hybrid life insurance policies, which let you draw on the death benefit to pay for long-term care, or leave it to your heirs if none is needed. But the upfront cost is steep, and the premiums are not tax-deductible.
A deferred annuity is another option. For a single premium now, you lock in guaranteed income for life at age 82 or 85, which can go toward long-term care or anything else. Or if you can afford to self-insure and want to preserve money for your heirs, you can buy a whole life policy with a death benefit equal to your assets.
The bottom line (for one). I'll probably end up in a shared policy with six or eight years of care. My wife is younger than I am. She may be able to help me if that time comes. So I will need less coverage, leaving her with more, assuming she outlives me. And by then she can sell the house if need be.
But I'm not quite sold on this either. If I invest at 8% the $7,500 a year I would spend on reasonably complete coverage, I could amass $343,214 in 20 years. That would be taxable and amount to less than half the benefit I'd enjoy with a long-term-care policy. But it would be mine no matter what. What I am sure of: I will keep weighing the options until we're settled on a plan. I won't leave either our care as we get older or our kids' inheritance to fate.