Surviving the price of long-term care insurance

By Lynn Brenner, Family Finance
March 6, 2004

The good news is that you're going to live a very long time. The bad news is that longevity is expensive: You may have to choose between paying for your own long-term care and leaving a large financial legacy for your kids. This is the sixth in a series of articles about long-term care and estate planning.

A long-term care insurance policy seems a perfect solution for people who can't afford to pay the full cost of their future care, yet are too affluent to qualify for Medicaid. But even good policies provide less coverage than you may think, while bad policies are virtually worthless. And the insurance isn't cheap.

At best, the right long-term care policy can supplement your own savings, making good care more affordable to you. At worst, a policy may provide little or no coverage when you need it, either because of fine-print restrictions in coverage or because, at worst, the carrier has gone out of business.

A long-term care policy pays a fixed-dollar benefit, usually ranging from $150 to $500 a day, for custodial care in your own home or in a nursing home. (For a hefty extra premium, you can buy a 5 percent annual inflation adjustment.) Payments start after a waiting period -- typically 30 to 180 days -- during which you must pay for your own care. The benefit period ranges from one year to life. To qualify for payments, you must meet the policy's definition of incapacity. Typically, this means you must be unable to perform two or more "activities of daily life," such as dressing, eating or bathing.

The policy's cost depends on its features and on your age when you buy it. Premiums range from about $2,000 a year to more than $9,000. The younger you are, the less expensive a policy is. This presents a basic problem: Coverage is affordable only if you buy it many years before you expect to use it. But buying a policy years before you'll use it is risky, especially if you can't afford an inflation rider. (What will a $300 daily benefit buy in 20 years?) Some things to consider:

You may eventually want to receive a type of long-term care that doesn't currently exist and therefore isn't covered in today's policies.

Your insurer may not be around when you finally file a claim. More than 100 companies now sell long-term care coverage. Will your insurer be in the long-term care insurance business in 20 years? Or will it have sold its policies to another, less impressive company? (Insurers that already have withdrawn from this line of coverage include big names like American International Group and American Express.)

You may not be able to maintain the policy for two decades. After you buy it, your premiums won't rise based on your increasing age. But that doesn't mean they can't go up. Indeed, many policyholders have already experienced dramatic premium increases.

An insurer can raise premiums for an entire class of policyholders if its claims turn out to cost more than expected. (True, premium hikes must be approved by state regulators. But regulators are quick to OK a premium increase they believe is necessary to keep an insurer solvent enough to pay claims.) The consensus today among people selling long- term care coverage is that most policies are underpriced -- and that means most policyholders can expect their premiums to rise.

Those who can't afford to pay more will be forced to drop their policies -- and wind up uninsured, often after years of paying for coverage.

Long-term care insurance is relatively new. Insurers don't have enough statistically meaningful claims experience to price it accurately. For example, fewer people have dropped their policies than insurers originally anticipated. At the same time, many insurers' annual investment returns have been lower than they projected.

The upshot: Without premium increases, insurers will have less money than they anticipated to pay a larger- than-expected number of claims.

One way these companies can control unknown future costs is by restricting coverage in the policy's fine print -- and indeed, many policies provide much narrower coverage than policyholders realize.

One example: At-home care typically is covered only when it's provided by a caregiver from a licensed agency.

That sounds OK.

But in real life, caregivers can earn more working privately than they can working for a licensed agency. As a result, more than 80 percent of home care is now provided by private caregivers and most policies don't cover that, according to Alfred C. Clapp, Jr., president of Financial Strategies and Services Corp., a Bronxville, N.Y., firm that specializes in financial and long-term care planning. Clearly, if you decide to buy this kind of insurance, picking the right policy is essential. In my next column, I'll write about what to look for.

Copyright © 2004, Newsday, Inc.

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