What Price Peace of Mind? With the cost of growing old so high, more Americans are counting on insurance to pay for long-term care
(MONEY Magazine) – In industry jargon, the need for long-term health care is considered "an insurable event." But for Blanche Hamilton, the need was called Mom. "There is no way to describe how awful it is to watch someone you love suffer with Alzheimer's," says Hamilton. For five years, she cared for her mother, Hazel Ford Gurganus, in her Washington, D.C. home while working full time. Even with family members, neighbors and licensed caregivers to help, it was an emotional and financial drain. Hamilton paid out of pocket for part-time help when she could, but Gurganus needed constant supervision. She would wander, leave the water running or fiddle with the knobs on the stove. Eventually, Hamilton realized that her mother was no longer safe at home. "I was terrified she was going to burn the house down."
Eleven years later, Hamilton says that if her mother had been covered by long-term-care insurance, she would have been able to afford the in-home care she so desperately wanted to provide. "We had so few options," she recalls. "I agonized over the decision to put her in a nursing home." The first facility they could afford, using Medicaid, was a disaster--her mother's leg broke after getting tangled in a bed rail. It took a year to find an acceptable facility. Not surprisingly, when Hamilton, 60, got a chance to buy long-term-care insurance through her employer last year, she snapped up a policy. Still reeling from her mother's experience, she was determined to take charge of her own insurable event. "I don't want my daughter to go through what I did," she says.
Hamilton's case--recreated in thousands of homes every year--captures the appeal of long-term-care insurance. Who wouldn't want a policy that could ensure that you'll have choices in care when you or a parent needs it? Why wouldn't you spend a few hundred or even a few thousand a year to protect against the kind of nursing-home expenses that can wipe out a lifetime of savings? Who wants to be a burden on the next generation?
Insurance can mean the difference between getting professional help at home and relying on a patchwork of family and friends. A policy can mean the difference between staying at home and having to enter a nursing home. It can mean comfortably paying for a nursing home and still having money left for your children--or draining your assets until you qualify for Medicaid.
But here's the rub. Just because you can envision a policy that will do all that doesn't mean you can afford one. Insurers have responded to consumer demand for peace of mind by bringing out products that seem to get only more complicated and expensive. Before you buy this insurance, there are many questions to ask yourself--Do I want to preserve my estate? What kind of care did my parents need?--but none is more important than whether you can pay the premiums for 20 or 30 years or more. For many people, the answer will be no. And even if you can afford it, if you're younger than 60, you should probably wait to buy coverage.
Insurers are pitching these policies hard, targeting younger buyers and lobbying Congress to allow consumers to pay premiums with pretax dollars from a health savings account. They are having success: Since 1998, sales have risen 18% a year, and now 13% of full-time workers can buy long-term-care insurance at work, up from 3% five years ago. All in all, more than 9 million of these policies have been sold over the past 20 years, according to the trade group America's Health Insurance Plans. Here's how to figure out when a policy is right for you, how to shop for one if it is--and when to walk away from a pitch.
A POLICY'S PROMISE
The most compelling argument for long-term-care insurance comes down to a few simple numbers: The average nursing-home bed costs $150 a day, or $55,000 a year (and can be twice that much in New York City or Washington, D.C.), according to the MetLife Mature Market Institute. Assisted-living facilities average $29,000 a year. Because most of those costs aren't covered by Medicare or private insurance, they can decimate your savings.
Enter long-term-care insurance. Policies pay a daily benefit ($50 to $500) over a period ranging from a year to a lifetime when you can't manage certain daily activities, from feeding yourself to bathing (other triggers include dressing and mobility). Those developing Alzheimer's and other forms of dementia typically qualify. The insurance can cover nursing homes, assisted-living facilities and home care.
Cheryl-Ann and William Madsen, 56 and 58, settled on the insurance after some jarring setbacks--William's 401(k), which was mainly in company stock, fell 65% between 2000 and 2003. Then Cheryl-Ann's job was eliminated. She's working again, they own their $400,000 house outright and their $600,000 in equities is more conservatively invested, but the shocks made them plan more carefully so that they could leave money to their two daughters and their families. Their policy pays $170 a day for 10 years for Cheryl-Ann and five years for William. The $4,000 premium is 3% of their income. "It's expensive," Cheryl-Ann concedes. "But I've seen people's life savings disappear trying to pay for care. Now we can leave assets to our kids."
THE COST OF COMFORT
Most consumers can't afford to buy such a top-shelf policy. Annual long-term-care premiums start at $500 for a 40-year-old and $1,300 for a 65-year-old. Because the policies, on average, aren't used until age 82, you'll most likely shoulder that expense for decades, including after you retire. And there's no guarantee that premiums won't go up; in fact, rising premiums may be a reason why a third of policyholders let the insurance lapse. A Kaiser Family Foundation study found that only 20% of couples between the ages of 35 and 59 can afford long-term-care insurance without shortchanging retirement savings and more urgent safety nets such as life and disability insurance.
As with much insurance, chances are you'll spend years paying for something you'll never use (or at least that's what you hope). In the case of long-term care, the odds are tough to gauge. According to AARP research, people over the age of 65 have a 68% chance of needing assistance due to a disability. But that could include minor or short-term care that the policies wouldn't cover. A 1991 study published in the New England Journal of Medicine concluded that 23% of all those who were then 65 would spend a year or more in a nursing home; only 9% would spend five or more years.
Given that math, you could choose to self-insure by saving more, or plan to spend down assets. If stockpiling more money is your choice, you'll need to beef up savings well beyond what you're putting away for retirement. If it becomes necessary, Judy Rosenberg, 70, would rather spend down assets. After seeing her mother pay $21,000 in premiums and get $14,000 of nursing-home costs covered before her death, she decided the insurance "was a rip-off." Single, retired and healthy, with three grown children, Rosenberg lives in her Brookline, Mass. home of 44 years, which she estimates is worth $1.5 million to $2 million. If she goes into a nursing home, her kids will sell the house to cover costs, she says. Her annual income from a pension, Social Security and dividends is about $55,000--enough, she says, to handle less expensive home care. Last year, when she had knee-replacement surgery, she paid $100 a day for an aide, she says, "and that was fine with me."
MAKING THE CHOICE
Before you make any decision about a policy, examine your finances and goals using the checklist on page 120 as a guide. Planners say you're a candidate if your assets at retirement are between $200,000 and $1.5 million. Less, and you can't afford the coverage; more, and you may be able to pay for care without it. You're also a candidate if you want to protect an estate or have a medical history that puts you at higher risk for nursing-home care--a parent with Alzheimer's, say. Or you may feel you simply don't have the discipline to save enough money for long-term care on your own.
The next step is to take a hard look at whether you can truly afford this policy, especially when your income in retirement drops just as health-care costs such as prescription drugs go up. Insurers throw around a rule of thumb that no more than 7% of income should go toward premiums, but others find even that unrealistically high. As Mark Merlis, a health-care analyst who has consulted for Kaiser, points out, Americans 65 and older already spend 98% of their after-tax income, with 12.5% going to Medicare premiums. "I don't see that elderly households have a lot of slack," he notes. Martin Weiss of insurer rating agency Weiss Ratings suggests that "if you're going to pay premiums from savings, it's too expensive."
Sharp rate hikes (as much as 40% in a year) have been a problem with this 20-year-old product. "For the first 10 years, nobody knew how to price it," says Enid Kassner of the AARP Public Policy Institute. Even if insurers are doing a better job now, build in a cushion. "I recommend that people plan on the premium going up 10% every 10 years," says Marilee Driscoll, a former insurance agent and author of The Complete Idiot's Guide to Long Term Care Planning.
The last question is when to buy a policy. It's tempting to think you're better off buying when you're young and premiums are low. And that's what insurers would like you to think. However, many planners argue that around age 60 is a better time to make the purchase, because while premiums rise with age, they don't really spike until age 65. The fear of being uninsurable isn't a reason to buy young either. Between the ages of 60 and 64, 79% of people would pass underwriting screens, according to Kaiser.
The other reason to buy at 60, not 40, is that when you're 40 years away from needing long-term care, it's hard to imagine what your retirement income will be, what care options will exist and what policies will offer. A decade ago, long-term-care policies didn't cover assisted living, for example. While you can update your coverage, you may have to raise your premium to do so.
A FITTING POLICY
Once you determine that long-term-care insurance suits your needs, picking a policy can be as daunting as figuring out whether you need coverage in the first place. Don't worry about all the bells and whistles. Just focus on these five variables.
INSURER. Because you're buying a product that you don't expect to need for decades, you want a rock-solid company. There are several services that rate the financial health of insurers. A.M. Best (ambest.com), Moody's (moodys.com) and Standard & Poor's (standardandpoors.com) share their ratings with consumers for free. Weiss Ratings (weissratings.com) sells a $45 guide that includes in-depth policy details, prices and safety ratings on most of the insurers in any given zip code (shipping and handling of $4.95 is waived for MONEY readers; 800-289-9222). Weiss recommends insurers with a rating of B+ or above, which is considered "strong."
BENEFIT PERIOD. Most people who use long-term-care insurance draw on it for 2 1/2 years; only 9% require it for more than five years. So a three- to five-year benefit period is adequate--and may be 40% cheaper than one that lasts 10 years.
ELIMINATION PERIOD. You can begin drawing on your coverage immediately after you qualify, or 30, 60, 90 or 120 days later. Extending this so-called elimination period from 30 to 90 days can save you 10% to 20% on your premiums. And if you can shoulder costs for 90 days, you can afford a bigger daily benefit.
DAILY BENEFIT. To settle on a realistic daily amount, find out how much nursing homes, home-care agencies and assisted-living facilities in your area charge and then assume 5% annual price increases. As you might expect, the higher the daily benefit you choose, the higher the premium you pay. A policy from John Hancock for a 62-year-old couple living in Phoenix, with a three-year benefit period, would cost $1,556 a year for a $100 daily benefit (including a 5% simple inflation feature); raise the daily amount to $160 and the premium shoots up to $2,490.
Whatever per-day figure you choose, don't assume that it will cover all your bills. According to an analysis of current claims data by research firm Life Plans, insurance payouts cover only 70% of nursing-home expenses. Pick a policy that reimburses only home-care assistance and your premium shrinks 20% to 40%.
INFLATION PROTECTION. You'll hear a lot about the need for inflation protection. This feature is costly but critical. A simple inflation option, sufficient for someone buying coverage after age 60, means that a policy will adjust every three to five years; that can add 30% to your premium. Compound inflation, which adjusts annually, adds 15% to 20% on top of that amount.
You'll also hear about lots of other features as well, from premiums that are returned if you drop the policy to plans where you pay the entire premium within 10 years so that you can cover the expense in your peak earning years. But while sales pitches for presumably new and improved policies may sound intriguing, the truth is that a plain-vanilla long-term-care policy is all that most people really need. Your insurance agent may not want to hear it, but sometimes less really is more.