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By Jason Stipp | 11-22-2011 12:00 AM

With CLASS Act Dismissed, What Now for Long-Term Care?

Morningstar's Christine Benz offers tips for determining if private insurance is right for you.

Jason Stipp: I’m Jason Stipp for Morningstar. The recent demise of the so-called CLASS Act has put the focus back on long-term care and the onus back on individuals to plan for these potentially hefty expenses.

Here with me to talk about some of the long-term care options and some things you should keep in mind as you are shopping for long-term care is Morningstar’s director of personal finance Christine Benz.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: The CLASS Act, can you explain what it was and what happened to it? Why didn’t it pass?

Benz: It was part of the Health Care Reform Act, and it was actually passed and included as part of the package, and it was designed to be a long-term care insurance program that had a federal mandate, and people were going to be allowed to pay into it and be able to use it instead of or perhaps supplementing private long-term care insurance policies.

The Obama administration crunched some numbers on being able to provide this particular feature of health-care reform and found that it was just cost prohibitive, and they weren’t able to move forward with it, unfortunately. So, it puts the onus on individuals, as it was in the past, to shoulder costs for long-term care.

Stipp: Especially in the fiscal environment that we are in right now at the federal level, it just wasn’t something that they thought they had the money to do right now.

So, what are some of the implications of this? I think that a lot of folks know that these are expensive propositions, long-term care, but how expensive is it? What are some of the numbers we are talking about?

Benz: Well, it really depends on your geographic locale, but the average cost of a long-term care stay per year is $75,000. The average stay length is 2.4 years, so that’s roughly $180,000 for an average stay in a long-term care facility. You can quickly see that for a lot of families, a lot of retirees, that’s a huge cost that they may not be able to shoulder themselves by invading their portfolios.

Stipp: So, given that the CLASS Act isn’t something that we can depend on, at least in the near future, what are some of the other options for investors? I know there are private means to get this insurance, but that also hasn’t been a sure thing for some folks?

Benz: It hasn't. In fact, just in the past few years, we’ve seen a number of firms getting out of the business altogether because ... their actuarial estimates of the sorts of claims they would have to pay were way too low, that they’ve actually been on the hook for way more than they anticipated.

There have been bad stories about people being dropped from long-term care policies or having their premiums hiked, and when you are retired and living on a fixed income, that’s terrible news.

So, certainly the experience that folks have had with these policies has not been universally positive, and insurers haven’t necessarily had a positive experience with offering these products, either.

Stipp: But obviously the benefits that a good, persistent long-term care policy can have are quite high. So, I think it is something that investors still would want to take a look at and consider. But what are some of the swing factors? What are some of the things that you should think through as you're trying to figure out if a long-term care policy is right for you?

Benz: Well, age would certainly be one of the big ones. So a lot of people who have determined they want to have this sort of coverage, really wrestle with when to buy it. Sometimes if folks are in their 50s, they think, "Well, maybe I’m at my peak earnings years right now; it might be a good time for me to pay on such a policy." And there are features that actually let you pay the policy in maybe 10 years, so you are done during your working years paying for that policy. That can be attractive.

The problem is by starting too early, you can have a big opportunity cost. You are paying into this policy, maybe when you’re 50 and you don't anticipate needing it until you're 80 or 85; that’s a big opportunity cost. You might have been better off investing in the market or investing in some other security rather than putting it into the long-term care insurance policy.

So, it does seem that the sweet spot for people saving for long-term-care is in the late 50s, possibly early 60s range. If you wait too long, the downside is that the policies might become cost prohibitive, because you're that much more likely to need to be covered and also you're that much more likely to become uninsurable, if you wait too long. You may be likely to develop some health condition, and then an insurance company won’t want to take you onto its books.

Stipp: There’s also a so-called sweet spot that has to do with the amount of income that you bring in. What is that and how is that calculated?

Benz: Well, a few rules of thumb that you often see. If you don't have more than $250,000 in assets, you're likely to spend down those assets during your lifetime, and you may be eligible for a Medicaid-funded long-term care stay. So, folks who are below that $250,000 threshold probably shouldn't buy a long-term care policy. They almost certainly have better uses for their cash.

People, who are over $2 million in assets on the flipside, probably don't need the policies either, because they are likely to be able to self-insure, should they need to pay for long-term care insurance costs.

It’s the people who are in between those two extremes who might find a long-term care policy most attractive, because if they're in between those two poles, they are more likely to have long-term care really gobble up a big percentage of their nest eggs.

Stipp: And what about genetics and the health of your family, how should that factor into the mix?

Benz: I think it should, and so I think if you have some debilitating condition that has occurred within your family, dementia or Alzheimer's being particularly important ones, you may want to think about purchasing long-term care insurance, particularly if you have family members with a history of early onset of those diseases.

Stipp: So let’s say that you are falling into some of those different categories that would suggest that a  long-term care policy could be good for you. We talked about that some insurers maybe have a better track record with having more persistent plans in place. Obviously, the quality of the insurer is important when you’re looking for this kind of insurance, but it’s not as easy as just picking a policy off the shelf. There are lots of other things to think about when you're in that shopping stage for a policy. What are some of those things?

Benz: Well, certainly you want to look at the claims-paying ability, the rating of the insurer, and that’s the case for purchasing any insurance policy, but you want to go with the companies that are the most highly rated from the main ratings agencies.

And then I do think, Jason, you want to do some analysis of whether this has been a friendly company for policyholders. So, is this a firm that has a history of jacking up premiums or dropping insured parties? I think you want to do a little bit of homework on how the insurer has done over the past few years.

Stipp: And there are also so-called riders or other features or benefits that can be added to these plans. What are some of those, and what are the most important ones to consider?

Benz: It can get really complicated. I would say, if you're prioritizing one, it should be that you want to have that inflation-protection element built into your policy, so you want your coverage to trend up with inflation, and as we know, health-care costs have been rising at a higher clip, a faster clip, than the broad inflation rates. So, I think that inflation-protection ability is particularly important.

And then also I think a lot of folks want a policy that will give them some flexibility in terms of the setting in which they receive their care. So, most seniors I know, most anyone I know, would like to stay in their home for as long as they possibly can be. If that's important to you, you want to make sure that your policy gives you that flexibility.

You also want to look at lifetime limits, lifetime coverage limits. Most of these policies do have some limit, and so if you want to buy that piece of mind, you want to look for one with a very high limit on what it will pay out over your lifetime.

Stipp: So, Christine, it seems like, as with any insurance, there is a certain amount of risk here in the sense that if you pay into a policy and hold that policy and then you don't need that long-term-care, that money that you've invested in the policy is just gone. Is that something that investors just have to live with?

Benz: Not necessarily. There are increasingly a new breed of products cropping up, and essentially they combine a fixed deferred annuity with long-term care insurance. So, if you end up not needing that long-term care insurance, but you do exceed your life expectancy, then that fixed deferred annuity kicks in and pays you that payout through the rest of your living years.

It's an appealing concept, but some of these policies are pretty costly. So you need to compare the cost of such a product with what you would pay to purchase long-term care on a stand-alone basis.

Stipp: So, certainly, it sounds like a lot of things for investors to consider, and these are potentially complicated investment products, but certainly one well worth thinking through.

Benz: I think so. Thank you, Jason.

Stipp: All right. Thanks, Christine.

For Morningstar, I’m Jason Stipp. Thanks for watching.

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