Long-Term Care

Long-Term Care You Can Afford

By taking more risk, you can snag a lower premium.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, March 2010

If you're thinking about buying long-term-care insurance, here's one more reason to do it: Long-term-care costs continue to escalate. In 2009, the average annual cost of a private nursing-home room rose 3%, to nearly $80,000. Luckily, many employers are now offering long-term-care insurance as an employee benefit, and the deals tend to be better than they were even a few years ago.

Previously, group long-term-care policies asked few, if any, questions about an applicant’s health. That made group plans a good choice for people with preexisting conditions, but not so great for healthy people. Now, group policies look a lot more like individual long-term-care insurance -- but at a better price.

Bob Marzolf, 61, a high school agriculture teacher in Forest Lake, Minn., was discouraged when he shopped for a policy three years ago because a previous spinal operation triggered high premiums. When the Forest Lake school system began offering long-term-care coverage last year, he decided to try again. This time, the price was lower -- even though Marzolf was two years older. Thanks to a 5% group discount, Marzolf pays about $2,400 a year for a policy that will pay $4,800 a month (about $160 a day) in long-term-care costs for up to three years.

Both inside and outside of group plans, insurers are rolling out policies that hold down premiums by shifting some of the cost of future care to policyholders. "There is tremendous interest in looking at more-economical ways to insure for long-term events," says Beth Ludden, of Genworth. Some companies have introduced new forms of inflation protection that can slash premiums. Others are offering new strategies to hedge your bets when it comes to choosing the appropriate length of coverage.

But there is a downside. Although many of these policies will save you money, they may also squeeze your benefits. You need to know the limitations before you decide whether one of them is right for you.

Cheaper inflation protection. Because you may wait 20 years or more to tap your long-term-care policy, it's essential that the amount of your daily benefit keeps up with rising costs. Insurers have been experimenting with more-affordable ways to provide inflation protection. John Hancock's Leading Edge policy -- the type that Marzolf purchased -- adjusts the daily benefit each year based on changes in the consumer price index. That's why his policy costs up to 40% less than the company’s standard policy, which uses a 5% compound-inflation factor.

A CPI-linked policy can be risky, though. In years of high inflation you may come out ahead. In low-inflation years, however -- such as 2009 -- the cost of care may escalate, but your benefit may not (although it cannot shrink).

Insurers have also been slashing costs by offering guaranteed purchase option coverage. These policies do not automatically adjust for inflation, but you may boost your coverage every few years, regardless of your health. You will pay higher premiums for the extra benefits based on how old you are when you buy them.

The cost to purchase such a policy can start out substantially lower. A traditional policy with a 5% annual inflation adjustment may cost more than twice as much in the first year as one with a guaranteed option to bump up inflation protection in the future. But the savings may be a false economy: Purchasing additional coverage with a guaranteed option could end up costing more for less coverage in the long run.

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