Why No One Can Afford Long-Term Care Insurance (and What to Use Instead)

Finances

Long-term care insurance is expensive, but it’s not the only way to pay for elder care services. (Getty Images)

If you have an older long-term care insurance policy, chances are you’ve experienced a spike in premiums in recent years. Long-term care insurance is coverage that will pay for assisted living, nursing home care or home health care in the event you are unable to care for yourself because of a chronic condition or disability.

However, if you bought one of the earliest policies on the market, sold in the 1990s, you may find you can no longer afford premiums and you may be at risk of losing coverage at an age when you need it most.

In 2016, four companies filed paperwork to increase rates for Pennsylvania policyholders by up to 130 percent. And earlier this year, a company in New York asked for that same increase of 130 percent for its policyholders in Connecticut. In both cases, the states limited the increase to 20 and 15 percent, respectively. However, even when capped, the rate hikes may have you reconsidering the decision to buy a long-term care policy.

Long-term care insurance experts say the rate hikes seen on older policies are a result of faulty assumptions about the number of claims that would be made and how many policies would lapse. Now that insurers have decades of claims data to base their underwriting, premiums should become less volatile in the future. “Some of that risk is baked into the price now,” says Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Frisco, Texas.

Still, if you don’t think you can afford long-term care insurance, there are other options ranging from reverse mortgages to Medicaid.

Factors Pushing Insurance Rates Higher

There are a number of factors contributing to growth in long-term care insurance premiums. “The increases in recent years have been substantial because it’s a relatively new insurance product,” Krishnaswamy says.

Carriers assumed people would drop policies as they got older. However, that didn’t happen in many cases. People are living longer, but they aren’t necessarily living healthier. As a result, insurers saw higher claims than expected and many insurance companies have fled the market. Those that remain have increased premiums significantly to keep up with costs.
Compounding the problem is the fact that many people wait too long before buying a policy. The American Association of Long-Term Care Insurance says most people start planning between ages 52 and 64. Starting earlier could mean lower premiums.

Jennifer FitzPatrick, author of “Cruising through Caregiving: Reducing the Stress of Caring for Your Loved One,” decided to buy long-term care insurance eight years ago. Although only in her late 30s at the time, her line of work in assisting caregivers impressed upon her the importance of having coverage. The policy covering her and her husband costs approximately $2,400 a year, and the premiums haven’t increased since they purchased the plan.

9 Alternate Ways to Pay for Long-Term Care

Don’t count on Medicare to pay for nursing home, assisted living or ongoing home health care. Medicare benefits for that type of care are typically only available after a hospitalization or injury and for a limited duration. While Medicare isn’t an option, here are nine alternatives that are.

Short-term care insurance. These plans are similar to long-term care insurance policies, but benefits are typically capped at one year. Not only are they less expensive, but they may also be available to older seniors or those who aren’t otherwise eligible for long-term coverage.

Life/long-term care insurance. Some life insurance policies now offer benefits to cover long-term care as well. “We include, at no cost, a long-term care settlement option on our whole life policies,” says Michael Meese, a retired brigadier general and executive vice president of the American Armed Forces Mutual Aid Association, a nonprofit that provides financial products to military members, veterans and their spouses.

For AAFMAA plans, those who qualify for long-term care can receive 2 percent of their death benefit every month for up to 50 months. Other specialty policies, known as life-LTC hybrids, may have different payout schedules.

Health savings accounts. For those who have an eligible high-deductible health insurance plan, a health savings account offers a way to put money aside tax-free for medical costs, such as long-term care. They are sometimes called health IRAs, and those who have long-term care insurance can pay their premiums with money from an HSA.

Long-term care annuities. Long-term care annuities are a frequently overlooked option for covering home health, assisted living and nursing home care costs. These annuities require a hefty upfront payment, but if you need long-term care, your overall cost may be lower than what you’d spend on insurance premiums. However, don’t expect much in the way of interest as they often don’t compare to the return found on other investments.

Life Plan Communities. Previously known as continuing care communities, these arrangements have residents initially living independently. As needed, they may transition to assisted living, memory care or a nursing home operated by the community. In addition to monthly payments, Life Plan Communities require a hefty upfront payment that could translate to hundreds of thousands of dollars. However, in exchange for the higher upfront cost, members are guaranteed access to care even if they should no longer be able to pay for it.

“They are pricey based on the services they offer,” Krishnaswamy says. Beyond the health care component, many of these communities offer upscale amenities such as complimentary dining plans and gym access. Because of the cost, Krishnaswamy notes people should research their options thoroughly before selecting a community.

Veterans benefits. The Department of Veterans Affairs provides those with a service-related disability access to long-term care services. Family caregivers may also be eligible for compensation through the agency’s Aid and Attendance program.

“It’s a complex and challenging government program,” Meese says. To be eligible, veterans need to be 70 percent or more disabled, but Vietnam-era veterans who don’t have an obvious service-related disability may still qualify if they were exposed to Agent Orange and developed a health condition later in life. Meese says the best advice for anyone needing care is to contact the Department of Veterans Affairs for assistance in understanding the eligibility criteria and navigating the application process.

Home equity. Retirees without significant investments may still own a valuable asset: their house. Tapping into home equity through a line of credit, taking out a reverse mortgage or selling a house outright are some of the ways people can use their property to pay for long-term care.

FitzPatrick says some people can be hesitant to sell an asset like a house because they want to keep it in the family. However, she advises considering whether that is in the best interest of everyone. “I think everything should be on the table,” she says. “Sometimes it’s going to be better for the whole family if you get [long-term care] help.”

Pensions or Social Security. Depending on the size of your monthly payments and the amount of care you need, paying for services monthly out of a pension or Social Security benefit may be an option.

Medicaid. When all other options have been exhausted and a person’s income and assets have been depleted, the government will step in to pay for care. Medicaid won’t pay for assisted living, but it will cover nursing home care and many states also pay for home health care services for eligible people. However, states are required by the federal government to recover the cost of long-term care from estates whenever possible. That means, for example, if a parent’s home is sold after his or her death, the proceeds could go to the state instead of heirs.

Colin Meeks, a certified financial planner with Maryland Financial Advocates in Baltimore, says depleting assets to become Medicaid-eligible can be stressful. “When I see a family go through the spend-down process, it’s devastating,” he says. Couples can use Medicaid-compliant annuities to shield some assets, but upon death, any remaining benefit goes to the government to reimburse the cost of care.

Long-term care insurance premiums are expected to become less volatile in the future, but the cost still puts this coverage out of reach for many people. Fortunately, it’s not the only way to pay for elder care services. Weigh your options to find the right solution for your family, but don’t wait too long. The earlier you start saving, the more secure you’ll be later in life.

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