NEW YORK (MainStreet)—Most of us have heard horror stories about older folks whose savings were drained by a stay in a nursing home. A lot of us also know people who have tried to stave off such devastation by purchasing long-term care insurance.
Recent stories on the shaky state of that coverage, though, have raised questions about whether these policies are a good idea. And even whether those already issued will return the benefits holders are paying for.
Experts are divided, but generally answer both questions the same way: it depends.
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It looked good at the time
For many years, private long-term care insurance was seen as affordable protection from the financial ravages that often accompany even a short-term nursing home stay. "It made sense, but only for a limited number of people," says Robert Stammers, director of investor education at the global CFA Institute for chartered financial analysts.
Critics complain the coverage has proven expensive for the benefits it provides, returning only 68 cents for every $1 paid in premiums to typical 65-year-old buyers. A life annuity, by comparison, returns 75 cents to 85 cents.
And they note that it was never really appropriate for people with few assets — and little income to pay for the policies — because Medicaid would cover their costs.
In fact, some experts believe there are so many drawbacks they warn away any potential buyers. "I wrote five years ago that private long-term care insurance can never possibly protect families from the disaster of long-term care expenses," says Joseph M. Belth, editor of the Insurance Forum newsletter and professor emeritus of insurance at Indiana University. "It violates too many principles of insurance to work."
The need is there, but the die was cast
Because Medicare pays only for short stays in nursing homes or in-home care under limited conditions, a number of insurers began selling long-term care policies to fill the gap in the 1980s and 1990s. But they sold these policies for far too little in order to gain market share, Belth and others say, while greatly underestimating just how much health care costs would rise.
The industry also never understood how desperate Americans would become to protect themselves from ruinous nursing home costs. They predicted 5% to 7% of policyholders would cancel each year without drawing benefits, while this "lapse rate" actually turned out to be less than 2%.
The result was a massive shortfall in premiums and a huge escalation in claims that ultimately drove top-flight providers like Metlife and Prudential from the business. A much smaller group of secondary providers took over, managing existing policies and selling new ones while trying to stem their own growing losses by raising premiums and cutting benefits.
This in turn has led more and more policyholders to trim voluntarily their coverage to keep payments manageable. Even worse, it has driven an increasing number of those who need to draw benefits — or, more likely, their family members — to fight their providers for coverage they thought they had. "You pay for the insurance, but come time to pay the claim, these companies will go to any length to avoid it," Belth says.
Problems increasing as solutions remain elusive
Even as these problems multiply, nearly a quarter of a million new long-term care policies are being issued every year. Some providers like Genworth Financial (which holds about one-third of all policies sold to individuals) have tried to steady the ship by requiring blood tests and other medical screening, halting the sale of lifetime benefit policies and charging women who apply individually more than men because they tend to live longer and require more years of care.
Genworth is also seeking premium increases of 25% to 50%, although some customers have reported hikes from other carriers as high as 77%.
Some states responded by adopting "rate stabilization" laws to tighten oversight, which had been sadly lacking. Additionally, Congress created a commission to develop ideas for affordable long-term insurance after President Obama's health-care overhaul dropped the coverage because it was too expensive.
But with any reforms from these and other initiatives still years away, the American Association for Long-Term Care Insurance says a 55-year-old single person buying such protection today should expect to pay about $2,065 a year for $162,000 in benefits, which include a 3% inflation-protection rider. This represents a 20% increase from last year, the trade group adds.
So what should you do?
With pressure to cover potentially debilitating costs colliding with the reality of long-term coverage, what is the best option? Some insurance agents and financial planners have begun directing clients to a type of hybrid coverage that combines life insurance with a rider that provides long-term benefits. This appeals to some, because they can leave something to their heirs if benefits go untapped, but not to others, because the benefits are generally less generous than conventional long-term policies and usually must be secured with a large single upfront payment rather than annual premiums.
For those still considering long-term policies, here are some things to think about:
  • A report from the Society of Actuaries suggests this coverage is most appropriate for people with savings between $250,000 and $2 million. Research indicates that only 5% of those 65 and older incur long-term care costs that exceed the lower level, the group says, while those whose resources top the upper limit will usually be able to pay such costs on their own.
  • Stammers of the CFA Institute says long-term coverage could be appropriate for anyone with a family history of serious ailments, as well as those who don't want to worry about potential problems or have other family members deal with them. "It could make sense for the really risk-averse," he says.
  • Long-term coverage is also a much better deal for women than men, experts say. They get back 87 cents on average for every dollar paid in premiums, while men see returns as low as 45 cents.
    • If you do decide to buy, Stammers and others suggest seeking help from a knowledgeable advisor before signing on the dotted line. "This coverage is complex and highly customizable. I don't think anyone should get a policy without first getting the advice of a professional," he says.
    Some industry watchers like the Insurance Forum's Belth, however, remain unequivocally opposed to anything in the private long-term care arena. "I'm not going to advise anyone to walk away from a policy, because they may need the benefits a week later and then where will they be?" he says.
    But if you haven't bought one, he adds, don't. Instead, determine what a good policy would cost and put that money into earmarked savings. "If you start in your 50s or 60s, you could have a bundle built up there by the time you need it," he says.