How to Choose

Adam M. Grossman

A FEW WEEKS BACK, I discussed some of the challenges with traditional long-term-care (LTC) insurance: In addition to steep and rising premiums, these policies are complex. Many policyholders have to contend with an annual renewal letter that presents a mind-numbing matrix of options.

But there’s more to it than that. Long-term care is also an emotional topic. There’s the expression that personal finance is more personal than it is finance. I’ve been reminded of that over the past few weeks, as a number of people have contacted me to share their stories about long-term care. Some have described frustrations with these policies, including rising rates and bureaucratic obstacles to making claims.

Meanwhile, others have hailed LTC policies as lifesavers for their families. As one person put it, it’s been hard enough to manage the health challenges of her husband’s disability. But with LTC coverage, at least they’ve been spared financial stress, which would have made a bad situation that much worse. As challenging as these policies can be, they can also be immensely valuable.

These days, it’s much harder to find a standalone LTC policy. That’s because, as I mentioned in my earlier article, insurers got the pricing wrong when these policies became popular in the 1980s. For that reason, if you have an older policy, it’s often worth trying to maintain it. But if you have to compromise at renewal time to minimize premium increases, this is how I would think about the choices. You could also use this as a guide if you’re shopping for a new policy.

Daily maximum. This is the fundamental element of an LTC policy. I’ve seen benefits that vary widely—from just $100 a day to more than $400. That’s an awfully wide range. Here are the factors I’d consider as you zero in on an appropriate coverage level:

  • Cost of care in your area. Christine Benz, Director of Personal Finance at Morningstar, compiles a set of LTC statistics each year. That’s the best starting point for getting a handle on the cost of care. As you’ll see, costs vary widely from region to region. A private room in a nursing home in New York, for example, costs nearly three times what it costs in Louisiana.
  • Health outlook. No one has a crystal ball. But as you get older, this is one area where you have an information advantage relative to the insurance company.
  • Marital status. If you’re married or you have children nearby, they may be able to help you later in life, thus reducing your need for paid care.
  • Also if you’re married, it’s important to note a difference between the needs of men and women. Because husbands tend to be older than their wives and because women, on average, live longer than men, men are generally less able to provide care for their wives than the other way around. This shows up in the Morningstar statistics as well. Women account for nearly 70% of residents in long-term-care facilities and their stays are 70% longer. If you have to choose, you’d want to buy more coverage for a woman than a man.
  • LTC poses the biggest challenge for people who are in the middle financially. If you’re of very modest means, Medicaid might pick up the cost of long-term care. If you’re very wealthy, you likely wouldn’t have a problem paying the tab yourself. My recommendation: Use the statistics referenced above to estimate the cost for a multi-year stay in a long-term facility in your area. Then ask yourself how feasible it would be to cover that cost yourself.

Inflation protection. Some LTC policies include inflation protection that’s generous by today’s standards—as much as a 5%-a-year increase in benefits. But this option will make a policy materially more expensive. My advice: If you’re on the younger side, inflation protection is worth paying for. But if you’re older, you might forgo that option since, for better or worse, there are fewer years of inflation to worry about.

Coinsurance. Some policies offer a coinsurance option, whereby the policyholder would share the cost of care with the insurer. In exchange, the premium would be lower. Who would this help? If you look at the statistics, you’ll notice that only a small fraction of seniors incur costs in excess of $250,000—numbers range from 9% to 15%. Coinsurance would be a good option for many families in the financial middle—who might be able to afford $200,000 of care, but not $2 million.

Elimination period. This refers to the period of time before benefits kick in. Most policies have a relatively short elimination period of 100 days. But this is an area where you might compromise. Unfortunately, there’s no such thing as an LTC policy that provides a multi-year elimination period. I think that’s unfortunate because, according to Morningstar’s Benz, that’s just the type of coverage many people say they want—basically, catastrophic coverage. Insurers would like to offer it, but Benz notes that insurance regulators won’t let them. Absent that, the best you can do is to choose the longest elimination period an insurer offers.

Benefit period. This one is tricky. According to the statistics, the average long-term-care claim is about three years. But that figure is distorted because many policies cap the benefit period. As a result, policyholders contending with these caps try to wait as long as possible—and probably longer than they’d like—before claiming benefits. In other words, the average claim would be longer if insurance policies didn’t have these caps.

My advice: Try not to compromise on the benefits period. This would protect you in the case of a protracted illness. An added benefit: Premium payments cease the moment you claim benefits. If you have a long or unlimited benefits period, you could claim benefits and stop paying premiums as soon as you qualify for even a modest level of care.

If you don’t have a long-term-care policy, what are your options? As I noted, it might not be a problem if you have assets that are either very modest or very substantial. But even if you fall in the middle, all is not lost. First of all, the statistics say you might not need paid care at all. About 50% of people don’t. And if you do, you might be able to afford it out of pocket.

Beyond that, Christine Benz suggests some other strategies: If you have home equity, you could plan on a reverse mortgage. If you have a whole-life insurance policy or an annuity, an intriguing option is to swap it for a hybrid life-LTC policy using what’s known as a 1035 exchange. There is, of course, no magic bullet. But it’s worth making a plan. That way, you’ll be ready if the need arises.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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