Big Insurers Are Bailing Out…What to Do Now
Buying long-term-care (LTC) coverage is supposed to ease your financial anxieties about retirement by guaranteeing that you can afford extended nursing care if needed. But lately the LTC insurance sector has been in such a state of upheaval that buying and owning a policy have been anything but reassuring.
Half of the 20 largest providers have stopped issuing policies, including giants such as Unum and MetLife. Many of the insurers that remain have been dramatically increasing premiums for new and existing policyholders. The average annual premium now is around $3,500 per year.
Helpful: Existing policyholders can remain with insurers that stop issuing new policies. Even if the issuer increases premiums, switching likely would be even more expensive because you would be signing up at a higher age.
Providers have been tightening underwriting rules, too, making it difficult for someone who has a significant health issue to obtain coverage except perhaps through very expensive “high-risk” pools. But despite the drawbacks, for many people the right kind of LTC insurance could make sense if they shop carefully. Here’s what you need to know…
WHO SHOULD BUY IT
If you have less than $300,000 in assets when you reach your 50s or 60s, you’re probably better off skipping the coverage and spending down your assets to qualify for Medicaid if you later require long-term care. If you have more than $2 million in assets, you probably can skip the coverage and just pay for any care that’s needed out of pocket unless you have a family history that suggests that a long nursing home stay is likely. But if your savings fall between $300,000 and $2 million, an LTC policy likely makes sense. If so, it’s best to obtain coverage while still in your mid-to-late 50s because insurers are dramatically tightening their underwriting standards. The older you are when you attempt to obtain coverage, the greater the odds that you will have a health problem that disqualifies you from the best rates—or from obtaining coverage at all. Buying at a younger age also means that you’ll pay a lower annual premium.
WHAT TO BUY
Today’s high premiums make it even more important to buy only coverage that you really need. Among the options…
The daily benefit. The average daily rate for a private room in a nursing home reached $239 in 2011. But that’s a national average that hides the extreme regional differences in nursing home costs. Daily rates are several times higher in some places than others.
Strategy: Use the survey of regional LTC costs available at Genworth Financial’s Web site (www.Genworth.com) to determine nursing home daily rates in the region where you would most likely receive care. Your insurance need not cover 100% of this daily amount if you would have enough assets to pay the difference out of pocket, but it should cover more than 50%—and significantly more, if possible. If you can’t afford insurance that pays at least that portion, it probably isn’t worth buying coverage at all. An extended nursing home stay would likely eat up all of your savings anyway, at which point you would qualify for Medicaid.
Maximum length of coverage. Lifetime coverage has become rare and prohibitively expensive when it is offered.
Strategy: Two to five years of coverage usually is sufficient. Two-thirds of those who enter a nursing home stay less than one year. Only 10% stay five years or longer. If you do outlive your coverage, you will have to spend down your assets and rely on Medicaid—but if you purchase a “partnership policy” (see below), you might not have to spend down your assets.
Inflation protection. Inflation has been minimal in recent years, and even nursing home bills and other LTC costs have been increasing at “only” a 4% annual rate, down from 7% previously. But don’t be fooled. If your policy does not include strong inflation protection, even 4% annual price increases could render it almost worthless decades from now when you need it.
Strategy: Opt for the best inflation protection you can afford. An inflation rider offering a compound—not simple—5% rate of inflation protection is ideal. Compound 3% inflation protection is the least you should accept.
Elimination period is the number of days of care that the policyholder must pay out of pocket before benefits begin.
Strategy: Opt for a 90-day elimination period. Insurers now charge prohibitively steep prices for policies with shorter elimination periods, and longer periods mean huge amounts must be paid out of pocket before benefits kick in.
Joint coverage. This allows married couples to purchase one policy for both partners to share—typically for much less than the cost of separate policies.
Strategy: Joint coverage usually is the best option for married people. There is some danger that couples might exhaust the policy’s coverage if both spouses require lengthy nursing home stays, but this is very unlikely.
Partnership policies. Those who exceed their policy time limits typically must pay for care out of pocket until their assets are almost completely depleted and they qualify for Medicaid LTC benefits. But if your policy is written under the public/private “partnership” program, which now is available in about 40 states, you can keep much more of your savings and still qualify for Medicaid. Your assets will be protected up to the total amount of coverage you received from your policy before you exceeded the coverage limits, which is likely to be hundreds of thousands of dollars.
Strategy: Check whether your state participates in this program. If so, strongly lean toward choosing a policy that qualifies. It’s an extra measure of asset protection at no added cost.
Hybrid option. Some insurers now offer “hybrid” policies that combine elements of LTC insurance and either life insurance or an annuity. Trouble is, the LTC insurance element of these hybrids tends to be fairly limited, and the life insurance or annuity portion can be expensive.
Strategy: Hybrid policies typically make sense only if you intended to purchase life insurance or an annuity similar to what’s included anyway…and/or you cannot pass the medical underwriting standards of a typical LTC insurance policy—hybrid policies often feature more lax underwriting.
COMPARING OFFERS
Obtain quotes from at least three LTC insurance agents or brokers. Rather than just one quote from each insurer, request a matrix of quotes at different daily benefit levels, lengths of coverage and inflation protection percentages.
Don’t just purchase the policy that offers the lowest premiums for a given level of coverage. Historically, the LTC insurers that offer the lowest premiums tend to later impose the steepest rate increases and/or decline the highest percentage of claims. Instead, ask agents for the premium increase history and claim-approval history of every LTC insurer from which you receive quotes. Your state insurance department also should be able to provide these figures.
