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Andrew Silton: Evaluating the benefits, problems with long-term care insurance

About 2 in 3 people over the age of 65 will need long-term care during their lifetime. Whether it’s assistance in the home or assisted living, many of us will require services that aren’t covered by Medicare and that can quickly add up into the hundreds of thousand of dollars.

For the past several decades, major insurance companies have been marketing long-term care insurance policies as the solution. In recent months, I’ve heard from readers asking me to write about long-term care insurance.

Conceptually, long-term care insurance is a great idea for people who fall between those with a lot of money and those who are Medicaid eligible. In theory, the insurance premiums collected from a broad cohort of people over a long period of time ought to produce a safety net for those people who eventually require services. However, theory and reality are two different things.

I’m sure you’ve talked to an elderly person who is thankful to be collecting a hundred dollars or more per day to defray the costs of home health aides or a nursing home. However, that person probably has no idea how much in premiums they paid in over the years, or how much that policy would cost today. If you aren’t acquainted with someone like that, you may have seen a television advertisement with a similar theme. Undoubtedly, there are cases where the benefits turned out to be well worth the premiums, particularly for folks who bought policies 20 years ago.

Read the fine print

However, long-term care insurance has turned out to be a problematic product. Even if the premiums are reasonable, all too often beneficiaries discover that insurance carriers are slow to acknowledge or pay claims. In many instances, the fine print creates exclusions or conditions that exasperate people when they eventually seek reimbursement. Many other policyholders have learned the hard way that premiums can rise dramatically. What began as a reasonably priced policy can become expensive, especially for retirees on a fixed income.

Health-related inflation has also led to some unpleasant surprises. Even people who purchased insurance with an inflation adjustment have found that their policies fall short, because long-term care costs have risen more quickly than their policy benefits. Still others wind up with major expenses during their retirement years that aren’t health-related. Having devoted their extra income to a long-term care policy, they don’t have the money for major house repairs or other large outlays. In other words, long-term care is a potential problem for many people as they age, but many of the existing insurance products fall short of addressing the problem.

Before you consider long-term care insurance, I’m inclined to suggest deferred annuities and maximizing contributions to traditional retirement programs. At least with an annuity you have a much better idea of what you are going to get in the form of payments. You know how much it is going to cost to obtain those payments, and you can use those payments for any expense, not just long-term care.

Admittedly, this is not a perfect solution, and may well leave a gap when it comes time to incur the extraordinary expense of a nursing home or 24/7 care in the home. However, there are just too many risks involved in the long-term care insurance products to make them attractive even for people who do a good job looking for the most affordable rates. To reiterate, I’m not suggesting that long-term care isn’t a potentially big economic problem for many people. I’m just not seeing enough evidence that the product works.

Begin early

If you are going to consider long-term care insurance, you must make sure you are not operating out of fear. If an insurance broker is trying to scare you into buying a policy, find another broker. People wind up paying too much in premiums for too little coverage because they buy the product based on fear. Only the broker wins in this situation, as he ends up with a nice commission, and you wind up trapped in an inadequate insurance product.

Second, demand that the insurance broker prove his case. What are the likely premiums over the next 10 or 20 years? What kind of a simple annuity could you have purchased in lieu of the insurance? What’s the difference in premiums if you consider higher levels of inflation protection on the policy? What are the exclusions, limitations, and deductibles (known as the elimination period) on the policy? Even if you don’t completely understand all of the mathematics, make the broker lay them all out. If he can’t provide specific answers, it’s another sign that you’re talking to the wrong broker.

If you are still interested in long-term care insurance, begin early. Much like life insurance, premiums are much more reasonable for people in their 40s and 50s than those who take out policies in their 60s.

Even so, it’s worth repeating that premiums aren’t fixed. If the insurance company isn’t making enough money or pays out more in claims than it anticipated, premiums are going to escalate. Many policyholders have experienced this phenomenon in the last few years.

Rising premiums

In purchasing a policy, you want to focus on one that protects you from a catastrophe. A policy that pays $150 per day for a year or so doesn’t get the job done. It’s the outlay of $300 or more per day over extended periods of time that will wipe out your retirement savings. Obviously, this type of policy is expensive. However, some of this expense can be managed by lengthening the elimination period from the standard 90 days to 180 days or more. It’s much like increasing the deductible on a health insurance policy. While no one likes to pay out-of-pocket expenses, most of us can afford to pay thousands of dollars. It’s the bigger amounts that wipe us out.

If premiums are jumping, should a person drop the policy and look for a better deal? The answer is probably, no. Chances are there isn’t a better deal with another carrier. If you drop coverage, you’re likely to be left with a policy that merely pays you back the amount of your premiums. Moreover, if you’ve owned the policy for more than a couple of years, starting again will cost more because you’ve aged. If you can no longer afford the premiums, it might be best to reduce the benefit. For example, you might elect to drop the daily benefit from $300 to $250 per day or decrease the inflation adjustment. The idea is to make the best of a bad situation.

The potential need for long-term care is a scary proposition, and for many middle-class folks there isn’t a great solution. As Bette Davis originally said, and my mom says all the time, “Getting old is not for sissies.”

Andrew Silton’s Meditations on Money columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/

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