Advice: Health Care
Dealing with the Turmoil in Long-Term Care Insurance
Long-term care insurance is in turmoil. We've been tracking and reporting on developments for a while. Insurers are dropping out of the market. Some insurers are increasing premiums substantially on long-term policyholders. LTCI is harder to obtain, and premiums for new policies are higher for the most part than a few years ago. There are anecdotes and some data about insurers denying claims of policyholders who are receiving long-term care.
You need a strategy to pay for long-term care and buying insurance that fits the new environment.
* Those who own LTCI generally should continue paying the premiums. Since insurers are tightening underwriting standards, you don't want to let a policy lapse unless you have new coverage or another strategy to cover LTC expenses in place. An expensive policy could be better than no coverage at all.
There are exceptions. Letting a policy lapse is a valid choice when the policy has restrictive coverage terms or the insurer has a record of denying a high percentage of claims. (Check the data with your state insurance superintendent; don't rely on anecdotes.) In these cases, you aren't likely to receive benefits under the policy so your best move could be to save the premium dollars.
* Shop for LTCI, whether or not you currently have a policy. Current policyholders should survey the marketplace to see if there is a better deal. Those without policies should consider that premiums are likely to keep rising as life expectancies increase, the cost of care rises, and insurers have to make up losses on existing policies. Low interest rates and investment returns also are increasing the cost of policies. If you wait to buy, premiums are likely to be higher. Also, since insurers are tightening their underwriting, you might not qualify for a policy if you wait to buy until after the current crisis is resolved.
Several insurers took advantage of the recent turmoil to make clear that they are not raising premiums and are looking forward to increasing their market share, such as Northwestern Mutual. By shopping around you could be pleasantly surprised by finding a reasonably-priced policy.
* Consider faster payments. Traditionally LTCI is paid with annual premiums for the life of the policy. An option with many insurers is to pay higher premiums for 10 years or so, at which point the policy becomes fully paid. This should save money long-term and avoid premium increases after the pay-up period.
* Consider unconventional policies. Some policies offer a joint policy to married couples. Unused policy benefits carry over to the surviving spouse after the first spouse passes away. This can overcome the fear that after decades of paying premiums you won't receive any benefit because you'll pass away without using long-term care. Of course, the policy could be a problem if the marriage is dissolved. Also, the first spouse to need LTC could use all the lifetime benefits and leave the second spouse without coverage.
There also are the hybrid policies I've discussed in past issues of Retirement Watch. These are life insurance or annuities that add long-term care to their contracts. These policies can be tough to understand, and you'll probably find buying a combo or hybrid policy is more expensive than buying both policies separately. Also, it's too expensive when you don't already need the life insurance or annuity. The LTC coverage under these policies usually is less than under stand-alone LTCI.
* Customize your policy. You can reduce the cost of LTCI by adjusting the policy terms, as we've reviewed in past visits. You can find details in the May 2009 and August 2008 issues.
* Broaden your plan. LTCI is only part of a plan to pay for any future long-term care. Policies have deductibles and a waiting period. Some types of care and related expenses are not covered. You need to save and invest to pay for potential LTCI even when you have LTCI. When estimating how much LTC could cost, keep in mind that when you're receiving LTC, some of your regular living expenses could be eliminated. If you're not married, for example, you probably won't need to keep and maintain your residence. You only need to fund the marginal increases in expenses.
You also need flexibility in your financial plan to allow for premium increases. Plus, you need all the key estate planning documents we've discussed in past visits, such as a health care power of attorney and living will. These documents can improve your care and reduce costs.
* Your retirement plan comes first. LTC is a contingency. Don't spend money on LTCI until after your regular retirement expenses are comfortably funded. When LTCI is purchased by someone whose retirement plan isn't fully funded, the policies usually are allowed to lapse when money gets tight.
LTCI should be considered by those too wealthy to qualify for Medicaid (those with more than $250,000 to $500,000 in assets, depending on the state) and those who aren't wealthy enough to self-insure (generally those with at least $3 million of liquid assets, though in many areas you should be more wealthy to safely self-insure). The goals of LTCI are to preserve most of your estate for your heirs and also preserve more of your independence and quality of life.
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