Long-Term-Care Insurance

LONG-TERM-CARE insurance has proven to be a problematic product, and sales have been in decline. Many insurers have dropped out of the market. Others have jacked up premiums, making coverage unaffordable for both potential and current policyholders. A 2015 study by Boston College’s Center for Retirement Research found that, among those who have long-term-care insurance at age 65, more than a third let their policies lapse, thus losing all benefits. One key reason: The premiums become too much of a financial burden.

Thinking of buying a policy? The younger you are when you buy a policy, the less likely you are to be rejected for health reasons and the lower the annual premium. But you’ll pay those premiums for more years, plus there’s more time for the insurance company to drop out of the market or tinker with the policy. One possible strategy: As you approach retirement, drop your disability and life insurance—and put those premiums toward long-term-care insurance instead.

Many folks purchase policies that will cover maybe three years of nursing home costs. Arguably, that’s the wrong approach. Using savings, you might be able to afford a year or two in a nursing home. Instead, the big risk is spending five years or more in a nursing home. With that in mind, you might purchase a policy that will pay benefits for more years but hold down costs by opting for a long elimination period, such as six months or a year, which is the initial period when you have to cover costs before the insurance company starts paying.

You’ll also need to decide what daily benefit you want, which is the maximum dollar amount the policy will pay each day you need care. To settle on the right number, think about how much you can afford out of pocket. For instance, between Social Security and portfolio income, you might be able to cover half the daily cost of a nursing home. You could then buy a policy that covers the rest. If married, consider a “shared benefit” rider that allows each spouse to use the other’s benefit if one of you runs through the maximum benefit on your individual policy.

In addition, pay careful attention to the details. For a policy to start paying, what are the triggers? Usually, you have to display cognitive impairment or need help with at least two “activities of daily living,” such as eating, bathing and getting dressed. See if the daily benefit rises each year with inflation. Find out what’s covered if you opt for in-home care or if you’re in an assisted living facility, rather than a traditional nursing home.

What if you buy a policy and the premiums rise so much that it becomes unaffordable? Rather than dropping the policy, talk to the insurer about whether you can keep the premium the same by reducing the size of the benefit. That isn’t ideal—but at least you’ll salvage some coverage after all those years of premium payments.

Next: Hybrid Policies

Previous: Nursing Home Costs

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