Long-term care insurance is designed to save you money later in life if you need medical care, such as hospice or round-the-clock assistance from nurses.
But some long-term care insurance policyholders are feeling the financial crunch because of a rise in premiums.
An estimated 7.2 million Americans held long-term care insurance policies in 2014, according to The State of Long-Term Care Insurance 2016, a report by the National Association of Insurance Commissioners and the Center for Insurance Policy and Research. An estimated 15 million Americans will need long-term care by 2050, the report notes.
Here are three things to consider about purchasing long-term care insurance.
Long-term care insurance is only getting more expensive
In 2016, insurance companies raised premiums, outraging policyholders. Customers in Pennsylvania saw a 130% increase in their premiums, and New Yorkers under Genworth’s policy faced a 60% premium increase. Federal government employees, insured by John Hancock Life and Health Insurance Co., saw their premiums rise by an average of 83%.
“The rising costs for long-term care insurance are directly linked to the rising costs of long-term care,” says James Carson, Daniel P. Amos Distinguished Professor of Insurance at the University of Georgia. “Insurers vastly underestimated costs associated with long-term care, and subsequently revised upwards their insurance premium structures, even on existing policies.”
While the increases in premiums were legal and authorized by the state, this left many policyholders unhappy, Carson says.
Since its emergence in the 1970s, expenditures in the long-term care market have grown. Less than $20 billion was spent on long-term care when it appeared in the marketplace. By 1980, these expenditures had grown to $30 billion.
Now more than $225 billion is spent on long-term care, according to The State of Long-Term Care Insurance 2016. As more long-term care is demanded, these expenses are pushed onto the insurance companies, resulting in rising incurred claims costs.
Meanwhile, Americans are living longer and spending more on health care. Americans aged 55 and up accounted for 55% of all health spending in 2014, even though they represent only 28% of the U.S. population, according to the Kaiser Family Foundation.
“Millennials should start paying attention to the looming costs associated with long-term care, and possibly also long-term care insurance, because they are going to live a really long time,” Carson says. “Health costs tend to get much larger when we get older.”
Once in retirement, the average American is expected to spend as much as $250,000 on medical expenses, says Tony Steuer, founder of the Insurance Literacy Institute, based in California.
Like any insurance, the trade-off with long-term care insurance is the leverage provided. If you can’t afford the premium and it doesn’t provide good leverage, investing in long-term care insurance might be unwise, says Steuer, also a member of the National Financial Educators Council Curriculum Advisory Board.
Timing is everything
Unlike traditional health insurance, long-term care insurance covers health services in late stages of life, alongside Medicare. Medicare may not cover all the services you need after it kicks in once you turn 65, especially if you are battling illnesses such as dementia or cancer.
For example, the U.S. Department of Health and Human Services projects that an American who turned 65 in 2016 will incur $138,000 in future long-term care expenses. About half of those costs will be paid for out of pocket, and the other half will come from private insurance and government assistance programs, such as Medicaid.
Purchasing long-term care insurance now can protect you from paying so much out of pocket at a time when medical needs are greater and often more expensive.
Long-term care insurance is most beneficial for those who can’t perform two out of six daily activities of living, such as eating, bathing, dressing, and walking. The insurance reimburses policyholders up to a preselected limit daily, so customers receive the services that get them through activities of daily living.
Services covered by long-term care insurance become more necessary as life expectancy increases and retirement funds drain.
Typically, long-term care insurance is purchased by those over the age of 50, says R. Vincent Pohl, assistant professor of economics at the University of Georgia, whose research interests include health economics.
“For a monthly premium that may depend on age and health, insured individuals get nursing home stays and other forms of [long-term care] paid for by the insurance,” Pohl says. “Long-term care insurance can only be bought before someone enters a nursing home for the first time.”
Steuer advises those who expect a need to purchase a long-term care policy after the age of 40. But purchasing long-term care insurance in your 40s also could save you hundreds of dollars in premium costs, compared to doing so in your 50s.
One way to consider your need for long-term care insurance is to look at your family’s medical history. For example, if a parent or grandparent has Alzheimer’s or Parkinson’s disease, long-term care insurance is something to consider. Once a debilitating condition develops, you may not qualify, or it may be more difficult to find a provider.
Long-term care insurance helps you pay now for options later
In these cases, knowing about long-term care insurance and having invested in it before your health started to decline can prove to be beneficial.
Joanne Westwood, who lives in Ohio, learned the value of long-term care insurance when her father developed Alzheimer’s disease, and her stepmother, the primary caregiver, became ill.
“We needed to get [my father] in a place with consistent caregiving, and we needed to take it off of [my stepmother] because she was killing herself trying to be his caregiver,” Westwood says. “If he didn’t buy long-term care health insurance 20 years ago, we’d all be in a heap of trouble right now.”
Westwood’s father, now in his mid-80s, qualifies for Medicare, but Westwood says it isn’t enough. Medicare offered the bare minimum, not enough for him to stay in a facility without paying out of pocket.
Long-term care insurance gave the family options.
“It’s a lot of peace of mind and comfort,” Westwood says.
Westwood, 57, is now trying to purchase long-term care insurance for herself. After doing the research, she expects to pay much higher premiums than her father did 20 years ago, since she’s getting started in her late 50s and because of rising costs.
She says she wishes she had purchased long-term care insurance at a younger age. Even though you’re paying for a longer time, the premiums are much lower, she adds.
Pros & Cons of Long-Term Care Insurance
- Future medical costs will be lower. Long-term care insurance can help you pay for the health care expenses not covered by Medicare or Medicaid. One in six individuals, or 17%, will pay at least $100,000 out of pocket for future long-term care services and support, according to the U.S. Department of Health and Human Services.
- You could buy a bit of peace of mind. If you’re investing in retirement accounts, a long-term care insurance policy provides another layer of confidence that if significant medical costs arise, it won’t eat into your nest egg.
“Living longer means an increased chance of needing long-term care,” says Kerstin Osterberg, a spokeswoman for Northwestern Mutual. “It’s critically important that individuals have a financial plan in place to protect their assets and cash flow if they should need long-term care.”
- Buying a policy in your high earning years could cut the costs later on. Peak earning years for most people are in their late 30s to early 50s. You’ll pay more if you wait until your 50s, 60s, or 70s to sign up for long-term care insurance, and even risk not finding an insurer willing to give you coverage.
Because long-term care insurance premiums are based on several factors, such as age, sex, policy, and location, costs vary from person to person. Even if two people purchase insurance at the same age in the same state, they’re likely to pay different rates.
A 55-year-old male in Georgia will pay an annual premium of $2,645 to receive $200 of coverage a day over four years, according to Genworth’s long-term care insurance calculator. In comparison, a 40-year-old male in Georgia will pay $2,272.40 annually for the same policy. The Genworth calculator assumed a 90-day elimination period.
“In the world of insurance, you can almost always find someone willing to insure you. The problem then arises — is the coverage enough to support you?” says Jeremy Pierce, who has worked as a financial planner in Georgia. “In many cases, when you wait too long, that cost simply isn’t affordable.”
- You may not need to use it. Long-term care insurance requires that you pay now to have coverage when you are older. If you don’t need medical care when you are a senior, you paid for something you won’t use.
- You may not be able to meet the requirements. To use the benefit, you have to be unable to perform two of six activities, such as bathing or feeding yourself. Your health may not be poor enough to use it as a result. “It is likely that a claim won’t be made until someone reaches their 70s,” Steuer says.
- You may not be able to afford it right now. If you have student loans and other expenses that have placed you in debt, paying for a long-term care insurance premium simply may not be possible. Steuer advises those who expect a need to purchase a long-term care policy after the age of 40 and if you have assets between $1 million and $5 million. “Someone who either has less than $1 million or more than $5 million should not consider it,” he says.