The first of this two-part series discusses the potential costs of long-term medical care, the reasons you should consider LTC insurance and the components of the typical long-term care plan. In part two, we delve into how to evaluate whether you’re a good candidate for LTC insurance, and how to make sure your policy is the right fit.
When it comes to purchasing long-term care (LTC) insurance, there’s no one-size-fits-all plan. Choosing the right LTC policy for you means factoring in a range of information about your life, your goals, your family’s medical history, where you expect to live in retirement, and other factors.
Getting this decision right can make or break your retirement—and your ability to leave a legacy to your family. Consider this: The median length of stay in an assisted living facility was nearly 26 months, according to a 2012 MetLife survey on long-term care costs.1 The average monthly cost for a standard level of care at these facilities was $3,550, meaning a stay of 26 months would cost more than $90,000. And those costs could rise for a higher level of care to treat issues such as Alzheimer’s disease or dementia.
The key is determining if you need coverage, and if so, what is the right level, type, and cost. Not all individuals need long-term care insurance. At one extreme, the wealthy can self-insure. At the other end, veterans and people with low income and limited resources can get government assistance through the U. S. Department of Veterans Administration and Medicaid, respectively. Most people, however, fall somewhere in the middle.
Let’s consider four very different hypothetical situations:2
Frank: Fit but frugal
Frank is a 54-year-old, who currently lives in Michigan and is in good health. He is an avid runner, his parents are well into their 80s and haven’t suffered any significant medical problems, and he expects to stay in good health throughout his retirement. Frank wants the peace of mind that LTC insurance provides so he decides to purchase LTC insurance immediately. But he still wants to be frugal. He has $600,000 saved for retirement, and wants to make sure LTC needs won’t decimate his savings. Frank also has two children, and doesn’t want to become a burden on them if he were to need LTC in the future.
To estimate the coverage he should buy, Frank starts by calculating long-term care rates in Georgia, where he plans to retire in less than a decade. (See the interactive map below to compare long-term care costs by state.) Nursing home care in a private room costs an average of $199 a day in the state—much less than the national average of $248 a day. Next, he decides to look for policies with three years of coverage, in part due to his relatively clean family medical history. Frank calculates that he’ll want his policy to pay for roughly $215,000 in care, adjusted for inflation.
To estimate the premiums he would need to pay for LTC coverage, he looks at the national average coverage on a 55-year-old single individual who qualified for preferred health discounts and notices he would need $1,720 annually for between $165,000 and $200,000 of current coverage, based on a national survey conducted in 2012 by the American Association for Long-Term Care Insurance. Because he plans on coverage to last three years, the $215,000 coverage he needs is slightly more than the national average.
Karen: High blood pressure, high anxiety
Karen is 56, lives in Boston and has accumulated nearly $1.2 million in retirement savings. But she has high blood pressure that has her worried about the care she’ll need decades down the road. What’s more, her father suffers from Alzheimer’s disease, so she has seen firsthand how much her parents have spent on his care. People diagnosed with Alzheimer’s at age 65 have a median survival rate of eight years, according to the American Association for Long-Term Care Insurance. She decides that she doesn’t want to be caught with too little LTC coverage.
Karen and her family plan to stay in Boston in retirement, so she begins shopping for LTC coverage by measuring costs in that market. Boston is an expensive place for long-term care: The average daily cost for a private room in a nursing home is $360—considerably higher than the national average. She decides that four years of coverage is appropriate, and calculates that she’d need inflation-protected coverage of nearly $525,000.
David: Healthy, wealthy, willing to self-insure
David is 62, lives in Portland, Ore., and is very healthy. He retired at age 58 after amassing nearly $5 million, and is living within his means to protect those assets. But he’s wrestled with whether to purchase LTC insurance. To help decide, he starts crunching the numbers.
David finds that nursing home care costs in Portland are roughly in line with the national average—$248 a day, or about $90,000 a year. Even with an extended stay of five years, David predicts he’d need to cover more than $450,000 either out of pocket or through insurance. He knows costs are likely to increase in the coming decades, but expects that his investments will grow too. David reviews his retirement portfolio, performs a “what-if” scenario, and decides that he could still comfortably retire even if he were to remove $450,000 from his investable assets. Doing so would allow him to self-insure against any long-term care event without putting him or his estate plans in financial jeopardy.
His decision: Forgo long-term care insurance and pay costs out of pocket if needed.
John and Mary Ann: Healthy and prepared
John is 62 years old and Mary Ann is 54 years old. They currently live in Massachusetts, and are in great health. They expect to stay in good health throughout their retirement. However, they are concerned that Mary Ann might live longer than John due to their eight-year age difference and John’s family history of Alzheimer’s. John and Mary Ann know that insurance can help protect against the unfortunate but likely situation that one of them might need nursing care as they age. They believe they have sufficient pension income and substantial savings to potentially self-insure one of them. However, leaving a legacy for their grandchildren is also important to them. As a result, they decide to purchase LTC insurance to protect themselves and their lifestyle. They have over $1,000,000 saved for retirement in addition to ample pension income, and want to make sure LTC expenses won’t decimate their savings or impact their current or future lifestyle.
To estimate the coverage they should buy for both of them, they start by calculating LTC rates in Massachusetts, where they plan to retire. Nursing home care in a private room costs an average of $360 a day in the state, more than the national average of $248 a day. Next, they decide to look for policies with three years of coverage—more than the national average of 26 months, but adding that additional 10 months of cushion onto the policy can help ease their comfort. They calculate that they will want each policy to pay for roughly $390,000 in care, adjusted for inflation.
To estimate the premiums they would need to pay for LTC coverage, they look at the average coverage for a 60-year-old couple who qualified for preferred health discounts and see that a typical couple would need $3,335 annually for about $340,000 of current coverage, based on a national survey conducted in 2012 by the American Association for Long-term Care Insurance. By purchasing LTC coverage as a couple, they could both receive discounted rates—provided they both qualified for preferred health discounts. However, because they desire more coverage and live in Massachusetts, they anticipate paying well above the national average.
What’s more, they might consider purchasing a shared premium policy which means that each member of the couple may receive benefits based on both spouses’ combined benefit limits. For example, if they buy a three-year shared premium policy they would have six years to split between themselves. However, by sharing the benefit period they have additional flexibility for using the policy and they could reduce their costs overall by not having to buy separate individual polices
Picking a policy that fits your needs
If you do want to consider LTC insurance, here are five steps to help make sure the policy you choose fits your personal needs.
- Know the cost of care. Think about whether you’d like to receive the care in an assisted living care facility or at your home. The costs could vary significantly, so do your homework. “Most people prefer to stay at home, but the costs will vary depending on the services provided and the time required,” says Tim Gannon, vice president at Fidelity Investments Life Insurance Company. “When assisted care and living at home are no longer options, a nursing home provides for people who require significant around-the-clock care. However, that option generally comes with the highest cost.”
- Consider your spouse. If you are married, you may want to consider long-term care insurance coverage to protect a surviving spouse. An extended long-term care event for one person could devastate a couple’s financial plan. Unfortunately, if the couple does not own long-term care insurance and one partner requires long-term care, their savings could be depleted for his or her care, leaving the second spouse without the resources to adequately cover his or her long-term care or retirement needs. This situation might force the surviving spouse into an uncomfortable and financially unstable situation.
- Review your family medical history. Certain medical issues that may trigger long-term care can be hereditary. Take Alzheimer’s disease, which the medical community believes to be at least partially genetic. Other issues that can lead to long-term care, such as heart disease, can also be passed down from generation to generation. While there’s no guarantee that you’ll end up with the medical issues that afflicted your parents or grandparents, a solid understanding of your family’s medical history can help inform your grasp of the risks you face and your decision about LTC coverage.
- Shop for coverage in your 50s. Gannon suggests shopping for LTC insurance when you’re in your 50s. That’s early enough that premiums will be relatively affordable, and you’ll be less likely to have medical issues that disqualify you for coverage than you would if you waited until you were older. If you buy a policy before retiring, make sure you take your retirement plans into account.
- Consider where you will retire. Long-term care costs can vary widely from state to state and region to region. For instance, the average cost of nursing home care is much higher in the northeast then in the south. (See above graphic).
“If you live in Massachusetts and you’re going to retire to Florida, think about the cost of care in those two areas,” says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. “If you have some reasonable expectation that you’re going to be in a different part of the country when you retire, you should take that into account when you determine your coverage.”
Finding your number
Gannon and Ewanich note that the right amount of LTC coverage varies from person to person. One way to help determine how much coverage you should buy is to research regional LTC costs and calculate how much you’d have to pay for extended care. Then consider the length of protection, whether you feel more comfortable budgeting for two to four years of benefits—weighing the premium costs against the risks you have to accept. To get an idea of how much coverage you’d like to have, ask yourself the following questions:
- Is it important that I receive at-home care?
- Does my family history indicate I am likely to need a high level of care?
At that point, an insurance agent can present you with the premiums you’d pay for a policy that provides the coverage you seek. Balance that figure against your retirement savings. “You don’t want to buy a long-term care insurance policy that eats up more of your assets than you can afford,” says Gannon. If the policy you’re reviewing represents too great a cost, consider ratcheting down that coverage to better balance your financial circumstances with your LTC needs. You may have to assume more risk, but only you can decide the right balance between protection and cost.
Planning your payments
You have several options for paying your LTC premiums: You can pay in a lump sum, over a period of several years, or every year until you die.
How you choose to pay for LTC coverage can be important, because your premium level isn’t guaranteed. It can vary from year to year, and is likely to grow steadily over time to keep pace with rising medical costs. From 2011 to 2012, the median cost for a private room in a nursing home rose 3.8%, while assisted living care costs increased 2.1%.
Beware: Some insurers can impose significant increases on policyholders with little notice. In the last few years, news outlets from the Wall Street Journal to the Chicago Sun-Times have reported that some insurers have levied premium hikes of 40% to as high as 90% on policyholders. “If you can limit the time you pay for coverage, you subject yourself to less chance of a price increase,” says Ewanich.
Of course, you’ll have to balance the desire to pay off the premium quickly with your overall financial picture. It may be tempting to pay off your LTC policy all at once, but doing so may put unnecessary strain on your finances as you approach retirement. Consider meeting with a financial advisor to weigh the merits of a faster pay-down against the impact the payments will have on your financial picture.
Making the right choice for you
Choosing the right plan doesn’t have to be a burden. Following the guidelines above can help ensure that the policy you choose is aligned with your needs and goals, and a professional advisor or insurance agent can help. The work you put into choosing the right coverage will give you confidence that your family will be protected, whatever the future may bring.