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New Strategies Limit
LTC-Insurance Costs
More couples are turning to pooled benefits to
make long-term-care insurance affordable
February 2006
THERE’ S GOOD NEWS and bad news
when it comes to buying long-term-care
insurance this year. First, the good news:
Most states now have laws making it
tough for insurers to raise rates in the future on policies
they’re selling now. Now the bad news: As states
have cracked down on future premium hikes, insurers
have boosted the price of new policies by 20% to
40% over the past few years. The price of plans with
longer benefit periods—especially ones guaranteeing
lifetime payouts—has jumped dramatically. John
Hancock, one of the big three long-term-care insurers,
now charges a 55-year-old $4,900 a year for a
policy with a $200 daily benefit, a 5% compoundinflation
adjustment, a 60-day waiting period and
lifetime benefits.
Budget stunning, yes. But having long-term-care
insurance is still the best way for most of us to protect our retirement savings from the devastating costs
of long-term care. According to the MetLife Mature
Market Institute, the cost of one year in a nursing
home now averages almost $75,000. And that’s in
today’s dollars. If you’re 55 now, the annual cost
could top $250,000 a year by the time you’re 80,
when you’re more likely to need care. And with the
hourly rate for a home health aide averaging $19
nationally, round-the-clock care in your home can be
even more expensive.
It’s frighteningly easy to imagine how bills of that
magnitude could tear through retirement savings,
leaving a spouse or heirs with very little money, and
yourself with fewer options for care if you end up on
Medicaid. Long-term-care insurance can cover those
costs and protect your retirement savings. And
despite the premium increases, several strategies can
help make the policies affordable.
Fit Premiums Into Your Budget
Shortening the benefit period can reduce your premiums
significantly. Choosing a plan that would pay
benefits for a maximum of ten years rather than lifetime
benefits on the John Hancock policy cited previously
would reduce the premiums by more than
$1,000 per year—down to about $3,700. A five-year
benefit period would cost about $2,900, and a threeyear
benefit period would cost $2,230.
It’s generally better to reduce the benefit period
rather than extend the waiting period before benefits
begin or cut the daily-benefit amount, because those
moves would increase your out-of-pocket costs significantly
from the outset. A 60-day waiting period, the
most common, would require you to pay $12,000
before benefits kicked in, if your care cost $200 per
day. A 90-day waiting period would push out-ofpocket
costs to $18,000, and a 180-day wait could
mean shelling out as much as $36,000 before benefits
kick in. Just how much would you save by taking on
the risk of going from a 90-day to a 180-day waiting
period? Only $200 a year in premiums.
Save With a Shared-Care Policy
Most people end up buying a 60-day waiting period
and a three-year benefit period because the odds are
low that you’ll need care for more than three years—
the average nursing-home stay is about 2.6 years. A
recent study by Milliman, an actuarial consulting
firm, found that most people receiving long-termcare
insurance benefits fall into two categories: either
they need care for a short time or for a very long
time. The study found that only 7% to 8% of 70-
year-old claimants need care for more than five years.
The ones who still were receiving benefits after
five years tended to continue to need care for two
more years (males) or four more years (females). So a
very small percentage of people need care for a very
long time. You’d still meet that need—and lower
your premiums significantly—by dropping from a
lifetime benefit to a ten-year period.
But there’s an increasingly popular way for married
couples to reduce the benefit period and their
cost: a shared-care policy. Most companies now offer
this shared benefit, which gives couples a pool of
money to work with. If both husband and wife buy a
three-year policy and one only needs care for one year,
for example, that leaves five years of benefits for the
other spouse. The policies usually cost about 10%
more than a regular policy with the same benefit
period (the price difference varies depending on the
ages of the husband and wife), but having the pool of
assets tends to give people the confidence to buy a
shorter benefit period—even if one spouse has a family
history of needing care for a long time.
“Because the insurance companies are pricing the
unlimited coverage so high, a great compromise is to
go with five years each with a shared feature, so the
husband and wife have a ten-year pool of money,”
says John Ryan, of Ryan Insurance Strategies Consultants
in Greenwood Village, Colo., who advises financial planners about insurance issues.
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