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Long-term Care Insurance … To Buy or not to Buy

Hoover Financial AdvisorsAugust 10, 2018

Insurance

As a self-employed woman of a certain age with absolutely no family, I recently completed copious research on long-term care insurance. Sharing what I learned may help others decide if this type of coverage is appropriate for their needs.

Long-term care insurance, which was introduced in the late 1970s, provides policyholders with peace of mind that they will be able to afford nursing home, assisted living or at-home care if it becomes necessary. Prior to the launch of this type of coverage, the burden of expense fell mainly on family members.

Traditional health insurance rarely covered long-term care. Countless people were forced to sell their homes or drain savings and investments to pay for nursing or assisted living expenses. Insurers recognized the need for long-term care insurance to combat family financial anguish over the care of their loved ones. By the late 1980s and early 1990s, this bold new coverage was in great demand, and insurers made money. All was right with the world.

And, then it wasn’t.

Americans began to live longer and longer and longer. Health care costs rose to astronomical heights. Initial premiums charged were often not enough to cover claims. Some insurers were simply not able to make good on claims. Headlines screamed that elderly people were unable to get the care they needed – and thought they had paid for. Lawsuits were filed. Congress and the General Accounting Office investigated. As a result of the initial failure to properly cost out long-term care insurance and the subsequent turmoil, only a handful of insurance companies chose to continue offering the coverage.

The companies still providing long-term care insurance are pricing it more intelligently. That, however, frequently equates to a hefty price tag for people who buy it. The good news is that isn’t always the case. According to an article in The Washington Post, many individuals are wondering if the insurance is worth the cost. The story goes on to point out that Genworth, one of the largest providers of long-term care insurance, wants to have the ability to change premiums annually, rather than imposing huge double-digit rate hikes after several years of steady rates. Although the market for long-term care insurance is going through some tough changes, it may still be a good financial move, feels the article’s author Michelle Singletary.

Another insightful take on this type of insurance comes from the March 2018 AARP Bulletin. It suggests there are five things to know about the policy. The first caution echoes The Washington Post piece concerning market failure and steep premium increases.

Secondly, the article suggests you may not need insurance, but you need a plan. It points out that if you’re taking less than 4 percent from savings each year for living expenses, perhaps you would be comfortable forgoing long-term care insurance, saving more and separating a long-term care fund from your portfolio.

The third thing to be aware of is a new hybrid policy. This is whole life insurance that a person can draw from for long-term care. Unlike traditional long-term care insurance, policies will return money to heirs even if parents don’t need long-term care. This plan is less risky and appeals to older people and/or those with no serious health issues.

On the flip side, the AARP article points out that old-school policies are cheaper. With traditional coverage, there is no money back; with hybrids, you pay extra for the return of funds. The hybrid makes sense if the alternative is depleting savings. Or, the article offers, buy another whole life policy with a large cash value.

The fifth bit of advice presented is to start shopping for insurance when you are in your 50s or 60s. Every year delayed adds more to the cost. The article exemplifies that initial premiums at age 65 are 8 to 10 percent higher than those for new customers who are 64!

I was beginning to feel smarter about this tricky type of insurance, yet still sought more information in order to make the right decision. Education & Outreach provided some facts to consider as I pondered. Simply put: Younger healthier people qualify for long-term care insurance, and they probably will pay less. Premium increases over time may break your budget. Long-term care insurance probably makes no sense for people who have difficulty paying their bills and have few assets. If someone has a strong support system, they could consider forgoing this type of insurance. Perhaps the most striking point noted in this article was the recommendation to seek advice from a financial advisor.

I did just that, and had a nice chat with Pete Hoover. He told me that when long-term care insurance first came out, clients thought it was the greatest thing since sliced bread. Everyone wanted it, but today very few of his clients are buying the policies. People are either paying for long-term care themselves and hoping the money doesn’t run out or leaving it to the state to pay. “It’s all about quality of life,” he told me.

I have yet to make a final decision, but others shouldn’t procrastinate as I tend to do. The most recent federal government projections indicate that about a quarter of Americans turning 65 between 2015 and 2019 will need up to two years of long-term care. Twelve percent will require two to five years, and 14 percent will need more than five years. At $15 an hour for 24-hour aides, annual costs could climb to $131,400. Private rooms in nursing homes exceed $100,000, and assisted living facilities are even more expensive.

The moral of this story is to address this issue early, and talk with your financial advisor. Pete or one of the insurance specialists at Hoover Financial Advisors can help you make the best decision for your needs.

Writer’s Note: In Pennsylvania, long-term health care insurance is sold by Genworth Financial, John Hancock, LifeSecure, Transamerica, Mutual of Omaha and Lincoln Financial Group.

(Information for this blog was obtained from AARP Bulletin, Education & Outreach, The Wall Street Journal and The Washington Post.)