People who consider buying long-term-care insurance to cover future nursing home or in-home care costs often focus on a single key issue—is it worth the high price? But even if long-term-care coverage is worth the cost for you, there are many additional crucial questions that you must ask about this costly and complex product before buying—otherwise you might wind up paying for a policy that does not cover your long-term-care needs as well as you expect. Seemingly small details buried in a policy’s fine print could have a massive impact on how well the insurance provides for your care decades later. Consumers often overlook or don’t understand these details, leading to painful mistakes.
The challenge has become even more difficult in recent years. Leading long-term-care insurers, including MetLife and Unum, have stopped selling this kind of coverage…premiums have been rising, sometimes dramatically, for both new and existing policies…and new products that combine long-term-care insurance with life insurance offer a potentially appealing option—and a new source of confusion.
Seven potentially costly consumer mistakes and how to avoid them…
Mistake: Buying a policy that you won’t be able to afford in retirement. A typical long-term-care insurance policy might cost a 55-year-old man around $2,000 a year. But the greatest challenge isn’t fitting those premiums into your budget when you obtain the policy, typically in your 50s or early 60s (or even later than this, with higher premiums)—the problem is fitting them into your retirement budget down the road. Compounding the problem, insurers often increase the premiums of existing policies, sometimes by as much as 40% to 60%. Many people end up dropping no-longer-affordable policies just as they approach an age when they are increasingly likely to require care.
What to do: Speak with a fee-only financial planner about fitting the premiums into your projected retirement budget—not just your current budget—before buying coverage.
And consider buying a hybrid life insurance/long-term-care insurance policy. With these, you pay up front for a life insurance policy rather than pay annual premiums that likely would stretch into your retirement. If you require long-term care, the policy provides benefits like a long-term-care policy does—and if you die without ever requiring long-term care, your heirs receive a death benefit, as they would with a conventional life insurance policy. These do require a hefty up-front investment, however—the average buyer plunks down around $130,000.
Helpful: If you already have a policy that has become prohibitively expensive during retirement, do not drop the coverage without first investigating options for limiting the policy’s premiums by reducing benefits.
Important: People who have less than $100,000 saved for retirement typically are better off skipping long-term-care insurance and relying on Medicaid to pay for any future nursing home stays. Those with more than $500,000 saved that could be spent on long-term care may be better off paying out of pocket.
Mistake: Buying a policy that overly restricts your care options. Some policies cover only certain types of care—in-home care but not nursing home care, for example. Other policies cover all types of care but not equally—the maximum daily benefits for in-home care might be 50% of the per-day maximum for nursing home care, for example.
What to do: As far as you can afford, choose a policy that provides strong benefits for all types of care, including nursing home care, assisted-living care and home care.
Mistake: Misunderstanding waiting periods. Modern policies have various types of “elimination periods”—a specified number of days (often 90) that the policyholder must pay for long-term care out of pocket before benefits kick in. “Calendar day” elimination periods simply count 90 days from when care begins…while “service day” elimination periods count only days when care actually is provided. Example: If you receive in-home care every other day, a 90-day service-day elimination period actually will last 180 days.
What to do: If you compare two similarly priced policies, the one with the calendar-day elimination period is a better buy than the one with the service-day elimination period, all else being equal.
Mistake: Ignoring limits on the type of care provider you can hire. Some policies will pay for in-home care only if you hire a state-certified care provider and/or work through an agency licensed by the state. That could prevent you from hiring someone you know and trust, such as a family member or a caregiver recommended by a trusted friend. And it could cause major headaches if your state does not license home-care agencies at all.
What to do: Favor policies that are not restrictive about who can supply in-home care.
Mistake: Ignoring important inflation-protection details. To be effective for you, a policy must protect against climbing long-term-care costs. Without an annual cost-of-living adjustment (COLA) of at least 3%—preferably 5%—the policy is unlikely to cover anything close to the full cost of your care 20 or 30 years down the road. Unfortunately, even consumers who understand the importance of inflation protection often fail to notice crucial nuances in how this inflation protection is worded in their contracts.
Some contracts use compound COLAs…others use simple COLAs (explained below).
Some policies offer COLAs but do not include them for the basic price. Policyholders must pay an additional fee—potentially a very substantial one—to get the inflation protection that they thought was included in their policy when they signed the contract.
What to do: Although for some people low cost is most important, generally favor policies that don’t charge extra for inflation protection…and that use compound COLAs, which add up much faster than simple COLAs. For example, a policy with a $200 daily benefit and a 5% simple COLA will pay a maximum of $450 per day 25 years later…while a similar policy with a 5% compound COLA will pay a maximum of $677.27 a day—a difference of nearly $83,000 per year in potential benefits.
Mistake: Overlooking subtle differences in benefit caps. A policy that caps benefits at $200 per day is not similar to one that caps them at $6,000 per month, even though $6,000 divided by 30 days equals $200. A monthly cap of a given amount provides far more flexibility, and potentially far more reimbursement, than a daily cap. If, for example, you require in-home care costing $400 every other day, a policy with a $6,000 monthly benefit cap would pay more or less the whole thing—15 of those $400 visits per month would equal $6,000. But a policy with a $200 daily cap would pay only half of each $400 visit for a total of just $3,000 in monthly coverage.
What to do: Favor policies that have monthly benefit caps over policies that have daily ones, all else being equal. Carefully read the section of the policy describing benefit limits—in addition to the overall benefit cap, some policies have caps covering specific types of services.
Mistake: Not understanding how disabled you must be to receive benefits. Policies generally provide benefits only when the policyholder requires assistance with a specified number of “activities of daily living.” These include bathing, dressing, eating, toileting and transferring (such as from a bed to a wheelchair).
What to do: Lean toward a policy that provides benefits when you require assistance with two activities. It can be significantly more difficult to receive benefits when this figure is higher—many people require assistance with dressing and bathing long before they require assistance with a third activity.
Also: Favor policies that specifically include dementia coverage even when the policyholder does not yet meet the policy’s activity triggers.