Long-term care insurance is in the news a lot these days, and what's happening now in the industry is likely to affect whether you'll want to buy it and what you'll pay for it.
However, you can't make an informed decision without a complete understanding of what long-term care insurance is and why you might want to get it. If you know a little about long-term care insurance or nothing at all, here is a primer that will give you the necessary information to help you decide what to do.
What Is Long-Term Care Insurance?
It is an insurance product that pays for healthcare expenses that your health insurance and Medicare or Medicaid will not pay. It pays for nurses or healthcare professionals to come to your home or for care at assisted-living facilities, nursing homes, adult homes or Alzheimer's centers. These days, policyholders typically start buying long-term care coverage in their late 50s or early 60s and often pay premiums for 15 years or more before making a claim. Despite this, about one out of four people who benefit from this insurance is younger than 60.
What's Happening In The Industry Right Now?
Prudential Financial recently became the latest large insurer to halt coverage of individual long-term care insurance. Since 2007, half of the 20 largest insurance companies, including MetLife, have done the same thing after realizing that they can't make as much money on long-term care insurance as they had expected. There are two reasons for this:
- Aging policyholders are making more claims and, as baby boomers age, the number of claims is expected to soar; and
- Insurance companies usually take premiums and invest them in bonds, but many of these bonds have been offering low yields, cutting into insurers' income, which they use to pay future claims.
Keep in mind that the companies that are still selling policies are raising premiums, and state insurance regulators typically allow insurers to raise rates by as much as 20 percent.
What Should You Do?
If you’re considering buying long-term care insurance, here are five tips:
- Don't Wait. If you want long-term care insurance, buy it. The younger you are, the smaller your annual premiums will be. If you're in your late 40s, expect to pay about $1,100 a year for premiums and about $1,700 a year if you're in your mid-50s. As recently as 10 years ago, most people who bought this coverage were about 65 years old. However, these days people who buy this coverage are in their late 50s.
- Prepare Yourself For Increased Scrutiny. Many insurance companies use nurses or experienced screeners to check your health. Some even check prescription drug databases to see what you're taking or have taken. If you've had a stroke, have osteoporosis, need help walking or if you have memory problems, it is highly unlikely that you will find an insurer that will sell you a long-term care insurance policy.
- Scale Back. You want this insurance to pay for all the care you'll ever need, but that probably is not realistic. Decide to reduce your coverage by lowering the daily benefit amount in your policy or by postponing the date when you receive benefits. Reducing your coverage will lower your premiums, of course, but it also means you'll end up paying a larger share of future bills.
- Decrease The Policy's Inflation Protection. Traditionally, a policy's benefits compound by five percent a year to keep up with long-term care costs. Many companies are offering 3-percent inflation increases. You can lower your premium by accepting an inflation protection decrease.
- Buy Something Else. A deferred fixed annuity can be packaged with long-term care benefits. And a life insurance policy can include a death benefit provision that allows heirs to pay unpaid long-term care expenses. (Heirs will get a payout even if you never need long term care.) There is at least one obvious pro and con to buying these hybrid products: Long-term care payouts aren't taxable, but these products often require you to make a huge lump-sum payment.
Long-term care insurance can be a great investment, especially if you need this care one day. But the industry is retrenching, and the changes being made are not friendly to consumers. If you want to buy this insurance, you very well may be forced to make compromises. Make sure that you do your homework ahead of time to get the best deal on long-term care coverage.