Is long-term care insurance worth the price?

By Lisa Gibbs

(MONEY Magazine) -- If you have long-term-care insurance, get ready for sticker shock.

John Hancock wants to hike premiums for the bulk of its customers by an average of 40% this year; Genworth Financial (GNW, Fortune 500) is asking for an 18% increase on some policies; and other insurers are expected to follow. Meanwhile, MetLife (MET, Fortune 500) has stopped selling the insurance altogether.

What's going on? People are living longer and using more benefits than anticipated.

"Insurers miscalculated bigtime," says Cameron Truesdell, CEO of one of the largest long-term-care insurance brokerages. Rock-bottom interest rates exacerbate the problem, since insurers rely on bond income to pay claims.

In most states, regulators must approve rate hikes, so the ultimate increases probably won't be quite as bad as they look. New York, for example, has not allowed more than 15% in any year, says state actuary Earl Klayman.

Even so, there's no question that policies -- which already run into the thousands per year -- are getting pricier. Given that new reality, does it still make sense to buy? Or if you have a policy, to keep paying?

If you're thinking of buying

Long-term-care insurance protects your savings against the high cost of care at a nursing home or assisted-living facility, or help from a home health worker.

Without a policy, you'll pay out of pocket until you've nearly exhausted your assets and can qualify for Medicaid. But the insurance is expensive too -- even more so since insurers began repricing for risk.

The average new policy costs 25% to 30% more than five years ago, says Jesse Slome of the American Association for Long-Term Care Insurance (AALTCI).

A 55-year-old couple now buying three years of $150-a-day coverage that adjusts with inflation might pay $2,860 a year for a policy that cost $2,200 in 2005. Worth the investment? Here's what to ask:

Will you be able to afford it tomorrow? The rule of thumb is that premiums should not exceed 7% of your annual income. But the lesson of the recent hikes is that you can't base your decision solely on today's premiums -- you must also figure out if you'll be able to swing the costs later on.

While Klayman says that insurers are finally getting the pricing right, most experts still recommend budgeting for at least a 10% jump per decade.

Tom Hebrank, a Marietta, Ga., financial planner specializing in long-term care, adds that "if interest rates remain low another five years, there might be a 20% hike."

By those metrics, the couple mentioned earlier could owe $4,150 a year by age 85.

Can you pay for your own care? The alternative is to self-insure. Savings of more than $1.5 million should allow you to do this and still meet other retirement goals, says Rochester, N.Y., planner Jeff Feldman.

But if you can't save that much? Investing what you'd have spent on premiums starting at 55, you'd have $72,000 at 85, figuring a 5% average annual return.

That nearly covers a year in a nursing home today, but costs likely will be much higher in 30 years. And you may need care sooner than that anyway.

So if you have assets you want to protect for a spouse or heirs, the insurance may make more sense.

Should you speed-pay the premiums? Normally, policyholders pay premiums until they start making claims. But you can avoid some future premium increases by opting to pay for lifetime coverage over 10 years.

This more than doubles the annual premium, but it aligns the costs with your peak earning years. And it will likely save you money if you don't need care before your eighties, so this is an attractive option if you don't have a chronic disease or a family history of one. The higher the rate hikes, the sooner the breakeven point for the 10-pay option; see the chart.

If you have a policy

Been notified of an unbearable increase? Here's what to find out:

Can you nab a better deal? Your age at the time of purchase plays a huge role in policy pricing.

But if you bought within the past two years and haven't developed new health issues, shop around, says Sacramento financial planner Jerry Verseput. Insurers price differently for risk, and their criteria change regularly.

Can you trim coverage? Consulting firm Milliman has found that only 8% of those with three years of coverage exhaust their benefits. And switching an unlimited policy to a three-year benefit saves as much as 39%, says AALTCI; going from five years to three can save 15%.

While you don't want to mess much with the daily benefit, John Hancock notes that shifting the inflation protection from 5% a year to the consumer price index will cancel out its increase. (This may leave you on the hook for more, though, as medical costs have risen about 4% a year since 2000, vs. 2.5% for the CPI.)

If these moves don't cut the costs enough, you'll have to make a tough call: sacrifice your standard of living to keep the policy or sacrifice the policy to keep your standard of living.  To top of page

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