How to Make Long-Term Care More Affordable
We help you navigate the maze of choices to get the best deal.
The average cost of a private room in a nursing home is now about $248 per day (or about $90,000 per year), and 12 hours a day of home care costs even more, according to the MetLife Mature Market Institute. But for many baby-boomers, it takes more than the threat of financial catastrophe to be prodded into buying a long-term-care insurance policy.
"If people have experience with family members needing care, they sign up immediately," says Ted Sarenski, a CPA and personal financial specialist in Syracuse, N.Y. "But if they don't, they worry that they are throwing their money away."
Sarenski recommends to clients in their fifties that they have some form of long-term-care coverage to protect their retirement savings. Until recently, people who bought policies generally got enough insurance to cover 100% of the cost of care. But insurers boosted their rates after paying more money in claims than they expected. Rates for new policies have shot up—especially for women buying on their own—and it has become a lot more difficult to qualify for coverage if you have health issues.
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Sarenski helps his clients calculate how much of their savings they can afford to spend on long-term-care costs and still keep enough money for the other spouse to live on, possibly for decades. Then he recommends buying enough coverage to fill the gap—usually at least half of the cost of care. Fortunately, insurers are offering new options that shift more risk to you but make policies less costly.
Buy his and her policies. Several major long-term-care insurers have switched from unisex to gender-differentiated pricing. Genworth, the largest long-term-care insurer, announced the change in late 2012, and John Hancock, Transamerica and Mutual of Omaha quickly followed suit.
In many cases, single women—who tend to live longer than men and are more likely to need care—now pay about 50% more than single men, says Claude Thau, a long-term-care insurance consultant in Overland Park, Kan. The rate hikes haven't been approved yet in some states, and a few insurers still offer unisex rates, especially for policies sold through employers.
Most insurers continue to offer discounts for couples of about 30%, says Thau. For example, Genworth's couples policies give women a big break. For healthy 55-year-olds buying a policy with a three-year benefit period and a $150 daily benefit, plus 5% compound inflation protection, the cost is $2,190 a year for a single man and $2,966 for a single woman. But the price drops to $1,854 each if they buy as a couple.
Couples can also hedge their bets with a shared-benefit policy. Instead of two separate benefit periods, you share a benefit pool—three years each becomes a pool of six years that can be split between the spouses. Genworth charges $2,187 per person for a couple sharing a six-year benefit period—versus $1,854 each for a couple who buy separate three-year policies with a couples discount.
If you're a single woman, consider a policy that combines long-term-care and life insurance. With a combo policy, rates won't go up, and either you or your heirs are guaranteed a payout. For example, a 60-year-old woman who invests $100,000 in Lincoln Financial's MoneyGuard policy could get $6,627 in monthly long-term-care benefits for six years—totaling $477,144. If she dies before needing care, her heirs will get a death benefit of $159,048. (Money she uses for long-term care is subtracted from the death benefit.)
"Combination policies are a better deal for single women than they were in the past," says John Ryan, of Ryan Insurance Strategy Consultants, in Greenwood Village, Colo. He recommends getting quotes for both combo and stand-alone policies. You can buy a combo policy outright or pay for it over three or ten years.
Get inflation protection for less. In the past, most policies automatically increased benefits by 5% compounded per year. But policies with 3% or CPI-adjusted inflation protection, which trims premiums, have become more popular. For example, a 50-year-old woman who buys a John Hancock policy with a $150 daily benefit, a three-year benefit period and a 90-day waiting period would pay $3,374 per year with 5% inflation protection, compared with $1,560 for a CPI-adjusted policy. A man would pay $2,174 per year for the 5% compound policy, or $956 for one with a CPI adjustment.
Some insurers are offering policies with future purchase options, which cost less than traditional inflation-adjusted policies to start out but don't increase benefits automatically. Instead, you can boost your benefits every few years if you pay more.
When choosing an inflation option, don't simply compare premiums. Calculate how much the pool of benefits will grow to by the time you're likely to need care. A policy with a 3% inflation adjustment may not seem as good a deal when you see how much smaller the benefit pool will be when you're 80.
Some states have partnership programs that let people who buy long-term-care insurance keep more of their assets if they exhaust their long-term-care policy benefits and have to rely on Medicaid. Some states require that policies have 5% compound inflation protection to qualify for the partnership program. Contact your state insurance department (you'll find links at www.naic.org).
Buy a policy when you're still healthy. Insurers are also managing their risk by rejecting more people for health issues and making it more difficult to qualify for the best rates. A study by the American Association for Long-Term Care Insurance found that 45% of people ages 50 to 59 qualified for good health discounts, but only 30% of people ages 60 to 69 qualified.
Health requirements vary from company to company. A long-term-care specialist who works with many insurers can help you find the one that offers the best rates; you can find one at www.aaltci.org. Also shop insurers, such as Northwestern Mutual and New York Life, who work only with their own agents.
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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.