The Good Old Days of LTC Coverage
LTC insurance is a lot like other types of insurance. What you buy depends upon how much coverage you want and what you are willing or able to pay.
When LTC insurance was new on the market, lots of insurers got into the LTC business without really understanding how to properly price the policies. The earlier policies, it turns out, were priced too low to really cover the benefits being paid out by the insurers. Here’s why:
- People were living much longer than anticipated. As a result, LTC policies were paying disproportionate benefits relative to the premiums received. That couldn’t last for long, and many LTC insurers were unable to keep up the pace.
- The increasing incidence of cognitive dementia and Alzheimer’s disease, both of which require very lengthy periods of LTC. This continues now and demonstrates both the need for a product like LTC and the difficulty in pricing it. For example, in 2010, the prevalence of dementia among the U.S. population aged 70 or over was 14.7% with the average cost per person estimated to be $56,300 per year; the total annual societal costs due to dementia are expected to double between 2010 and 2040. As for Alzheimer’s disease, which is a subset of dementia, a 1998 study estimated that 25-33% of all LTC claims (by frequency), and 40-50% of all LTC claims (by total cost) will be related to Alzheimer’s. (Managing the Impact of Long-Term Care Needs and Expense on Retirement Security Monograph, Society of Actuaries, 2014)
How to Buy Long-Term Insurance
We’ve previously discussed the kinds of services that LTC insurance covers. We are not equipped to offer financial advice and do not purport to do so. However, some financial advisors recommend the following type of analysis to help decide whether, and how, to buy LTC insurance:
- Couples with about $2.5 Million or more in liquid assets can generally afford to pay for their own long-term care out-of-pocket. Of course, if there are ongoing medical conditions or other financial circumstances that have to be addressed, this general rule may not apply. Thus, it is very fact-specific.
- Couples with less than $500.000 may not be unable to afford the premium for LTC insurance over the long term. The people in between those two amounts are the most likely to buy LTC insurance, although those numbers will vary by state as some are less costly than others.
- The people who may be a good fit for LTC insurance should figure out how much they will probably be able to pay out-of-pocket and how much they want a LTC insurance policy to pay. As an example, if a nursing home costs $200/day, they may decide, based on the cost of the policy and how much cash they have, on a policy that pays $120/day; they would pay the balance from savings.
- Many companies offer a “shared benefit” rider to a LTC policy. This permits the couple to draw from a shared pool of benefits rather than limiting each to a specific daily benefit. With this rider, if one spouse dies, the survivor would have the benefit of being able to draw from the remaining pool of benefits (subject to the terms of the policy).
- LTC policies offer different “elimination periods.” An LTC elimination period is a period of time before the policy starts paying benefits and during which you, the insured, are responsible for the payment of care. You are essentially “self-insuring” for that period of time. The elimination period is often 30, 60, 90 or 120 days. A longer elimination period usually correlates with a lower premium, much like a higher collision deductible on automobile insurance correlates with a lower collision premium.
- Consider buying an “inflation rider.” This will help the basic benefit keep up with inflation. There will be an additional premium charged for this.
- LTC insurance is sold to individuals or through a group plan offered by an employer. Coverage can be purchased for a fixed period of time, such as one or six years, or to last a lifetime.
- If you are considering an individual policy, the premium will usually be less if you buy it before age 60. However, you may be paying premiums for a longer time so there will be a financial tradeoff.
- It is absolutely critical that LTC insurance, like any other insurance policy, be issued by an insurance company that is authorized (licensed) to issue that form of insurance in your state. You can get confirmation of that by contacting the Department of Insurance in your state.
- It is also critical, especially if you are buying LTC insurance individually (that is, not through a group), that you get guidance from a licensed insurance professional who regularly deals with LTC insurance. You may also want to involve your accountant or other financial professional in the evaluation.
Do the Research and Get Help
Get at least four or five quotes from different companies that are highly rated for financial strength by leading ratings services, such as A.M. Best, Fitch Ratings, Moody’s, and Standard & Poor’s. To obtain multiple quotes, use an independent agent who works with several insurers. You can search for local independent agents on the website of the Independent Insurance Agents & Brokers of America.