Buying Tips for Long-Term Care Insurance

The cost of health care is a key wild card in any retirement plan. Out-of-pocket spending can vary widely, depending on longevity, health status, and income--even where you live makes a difference. But most estimates on retirement health-care costs don't factor in an even bigger challenge: paying for long-term care.

Experts estimate that 70% of Americans over age 65 will need some type of long-term care--though not everyone will wind up in a nursing home. Many seniors receive care in community settings or from family members at home.

But those who do need nursing home care will face potentially devastating expenses. The median annual cost of a private nursing home room is $83,950, according to the 2013 Genworth/Carescout Cost of Care survey. That's $7,490 more than in 2008 and a 4.5% five-year growth rate. The cost of in-home and community care is rising at a more moderate pace, and the cost of care varies tremendously around the country.

Here be dragons--and Americans understand this. Paying for long-term care surfaced as a top worry among workers in the 2013 Retirement Confidence Survey published in March by the Employee Benefit Research Institute. Workers are less confident about their ability to pay for medical care and long-term care than they are about meeting basic expenses.

A Troubled Industry
Their worries are not misplaced. Long-term care insurance, or LTCI, is one of the most dysfunctional parts of our health-care economy--where the bar is set fairly low. The current LTCI system is fragmented, with the struggling federal/state Medicaid program paying for about half of all care. Medicaid covers nursing home and community-based care--but only for patients who spend themselves down to indigent levels or receive Social Security disability payments. Some patients begin by paying for care out of pocket and then go on Medicaid after their resources have been exhausted.

Medicare covers up to 100 days of skilled nursing care or rehabilitation if it is ordered by a physician. Patients must have already been enrolled in Medicare Part A (hospitalization) and have been formally admitted to a hospital for at least three consecutive days. After 20 days, patients are responsible for a small co-payment.

That leaves the private LTCI market as the remaining resource, and it's not in good shape. Carriers have had trouble pricing policies for profitability; they've been especially vexed by low interest rates, which hurt bond-portfolio returns and hence their ability to fund claims. Another problem is lapse rates--the percentage of LTCI buyers who decide to drop coverage before they ever need to file a claim. Just 3% of LTCI buyers allow policies to lapse--a smart move for consumers, but one that hurts insurer profits.

Many insurers have decided the business isn't worth the trouble. The long list of carriers that have stopped writing new policies during the past two years includes
 Prudential Financial (PRU),  MetLife (MET), and  Allianz .

Meanwhile, policyholders have been hit with waves of double-digit rate hikes, which may be scaring off new buyers. Policy prices are 20% higher this year than in 2012, according to the 2013 Long-Term Care Insurance Price Index, published in March by the American Association for Long-term Care Insurance, or AALTCI.

And here's another wrinkle: The industry is rolling out differential prices based on gender for the first time. The trend is starting with the largest LTCI carrier,
 Genworth Financial (GNW), which is introducing new pricing this spring that will include higher rates for some female customers, though the timing will depend on regulatory approval.

There's an actuarial case for the move: Genworth says two thirds of its LTCI claim payouts go to female customers. (The company says gender pricing will be applied only for women applying for policies on their own--10% of its policy applicants. Genworth will continue to offer lower rates to couples purchasing joint coverage, including those that are married, or in civil or other types of partnerships. The changes won't affect current policyholders.)

The AALTCI estimates gender pricing will boost the cost of new policies for women by 20%-40%, depending on the applicant's age and benefits package. And industry experts expect gender-based pricing will be adopted by other carriers before the end of this year, for both individuals and married couples.

Buying Tips
Despite all the problems in the commercial LTCI market, it's important not to get distracted from the primary questions about managing a long-term care need. There really are only a few ways to meet a long-term care need. A family member can provide care, and that's the most common solution. But can you count on a family member when that need could be many years down the road?

You could self-insure if you're sufficiently wealthy, but you might not want to use a substantial portion of your retirement assets to pay for long-term care, when that money could be earning a return and funding retirement for your spouse when you're no longer around. 

Medicaid is an option if you're prepared to spend yourself down to an indigent level.

So, if commercial LTCI looks like a good option, keep these shopping guidelines in mind:

Shop around. LTCI rates can vary considerably from company to company. Rates also vary from state to state--and not all insurers offer policies in all states.

The AALTCI's annual survey found that a 55-year-old single individual purchasing long-term care insurance protection can expect to pay $2,065 per year for $162,000 of current benefits this year; with inflation protection, that coverage would be valued at $330,000 at age 80. The premium quote is up from $1,720 (20%) in 2012.

But prices for identical coverage varied quite a bit. The AALTCI analyzed prices from 12 insurers for singles and couples ages 55 to 65; for a 55-year-old, the highest-priced single policy cost 87% more than the lowest. And no single carrier had the lowest price across the board.

Buy what you can afford. Three years of coverage is adequate for most people who use benefits, with a 90- to 180-day elimination period (the waiting period before coverage kicks in). But more than half of policies sold in 2011 provided between two and four years of care coverage, LIMRA data show.

Adjust inflation protection. Inflation protection is critical, but it's also a big driver of premium prices. The most popular inflation rider is an automatic 5% annual increase. But some experts think 3% provides adequate inflation protection.

Be prepared to go the distance. If you do buy an LTCI policy--or already have one--future large rate hikes are a possibility. If you do face a big rate hike, don't reshop your coverage. If you've had your LTC coverage for a while, the premium almost certainly is much lower than what you'd pay on a new policy at an older
age--even with a steep rate hike thrown in. What's more, the risk that coverage will be denied due to a medical condition rises with age.

One way to cope with a large premium increase is to reduce your benefits. Your options include cutting back the daily benefit amount or increasing the elimination period--the amount of time you wait before benefits begin after filing a claim. Another option is to cut the length of time that benefits are paid.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.