BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

What If Long Term Care Insurance Isn't For Me?

This article is more than 8 years old.

Last month, I took some of my own advice and shopped for long term care (LTC) insurance.  The cost of long term care is like a bear lurking in the woods to most of us. Is it even likely to affect me?  If it does, how long will I need care?  And most importantly, can I afford it?  Even as a CFP® I needed help from a Long-Term Care Insurance specialist friend because the options are numerous and can be complicated.

The LTC insurance industry has had some problems lately - Since 2008 the number of insurers issuing LTC policies fell from 45 to 16, and sales of LTC policies dropped 65% from 2000 to 2010, but it’s not because people don’t want the coverage.  It’s because people are living longer and rising care costs, coupled with insurer losses on these policies in the past.  As a result, market share leader Genworth had to build extra reserves to cover higher-than-expected claims on their legacy policies.

Today’s shoppers face rising policy costs and more rejections due to pre-existing health issues.  In 2007 In 2007 most LTC policies were issued with 5% inflation riders, but by 2013 the majority of policies had 3% inflation protection, and features like lifetime benefits or policies that cover 100% of care are becoming a thing of the past.  According to this article, Genworth as recently as 2012 raised premiums on some of its older policies by up to 50%. As a result, existing buyers and policy owners have been forced to accept less coverage with fewer guarantees.

Many consumers already avoid LTC policies since they feel the coverage is “use it or lose it” and expensive, but all of this doesn’t make the need for LTC coverage go away.  Government studies show that 7 of 10 Americans will need LTC at some point with women needing 3.7 years of care on average (men = 2.2 years).  As the US average population age increases, so will the need for ways to cover this cost.

Fortunately there are alternatives to traditional LTC coverage to consider:

1)      Life Insurance with a LTC Rider - This option combines a Whole, Indexed or Universal life policy with the option to tap 2-5% of the death benefit monthly for in-home or nursing home costs, so the coverage period can conceivably last for 20 to 60 months.  These policies can come in single premium or level premium forms.  While traditional LTC is shrinking, the use of LTC riders on new or existing life policies is growing.

One benefit to this kind of coverage is that one way or another the benefits pay out - either for LTC or at death as long as the policy is adequately funded.  The underwriting tends to be less stringent than with traditional LTC and a few insurers even offer a “second-to-die policy” with LTC rider.  The downside is the coverage is limited to the policy coverage amount, so you’re on your own if the amount you purchase is too little or erodes with inflation.   And since the coverage is for both life and LTC, the premiums may be higher than other LTC options.  These kinds of policies make sense when the buyer has other financial resources to partially self-insure and likes the idea of some permanent life coverage.

2)      Short Term Care Insurance - This option resembles traditional LTC but for a shorter coverage period, usually 12 months or less.  Also called recovery insurance, it provides a daily benefit and the ability to apply unused coverage amounts beyond the last coverage day.  These policies are usually easier to qualify for than traditional LTC and require no state suitability reporting.  Since the coverage starts right away, they might make sense paired with modest-sized life or annuity policies with the LTC rider.

3)      Fixed Annuity with LTC access - If you’re a conservative investor looking at income replacement options, pairing a fixed annuity with LTC benefits allows you to invest in the annuity and use the rider to set an equal or larger LTC benefit.  The cost of these LTC riders might be less than a traditional LTC policy, and since it’s an annuity there’s no health underwriting.  The downside is the same one that all annuity investors face, and that’s today’s low interest assumptions could be locked in for a long time and returns lowered by the rider fees.  This arrangement might gain in popularity as interest rates rise, making annuities more attractive.

4)      Reverse Mortgages - it’s not hard to find the ads offering those over age 62 the ability to tap the equity in their home for such things as long term care expenses.  Though there’s no medical underwriting or premiums, these involve the eventual turning over of the home to the lender if the loan can’t be repaid at the end of the loan.  It’s also limited to the lendable equity in the home, which may not be enough to cover all long term costs.

You can always accept self-insuring against LTC costs, which is what most people do, ready or not.  The wealthy can cover the costs from savings, while those of modest means might find affording any of these products too difficult and rely on Medicaid to pick up the expense.  Those in the middle should check on the possibility of group LTC benefits through their workplace or if their state is a member of the Long Term Care Partnership Program before they dismiss the idea of traditional LTC coverage.  You can also find lots of information on LTC options at the American Association for Long Term Care Insurance website.

In my case I ended up with new life insurance with the LTC rider and was able to add the LTC rider to an existing policy, but I haven’t given up on the idea of also buying Traditional LTC coverage later.   In the end it comes down to having enough assets to both retire and handle the risks that could destroy it.  Doing a retirement estimate calculation as a practice annually will help you determine what resources you have to fund LTC coverage now and in retirement, and if partial funding of LTC through alternative coverage will work well enough for you. The earlier you start, the more successful you’ll probably be!