Learn About Long-Term Care Insurance

These policies can pick up the tab for expensive care in your old age. But are they a worthwhile investment?

By Bal Agrawal and Christine Law

When you’ve got a big expense looming—say, a child’s college education, or a dream trip somewhere exotic—a little financial planning can go along way. But many people fail to think ahead about one of the costliest life events of all: old age.

According to the U.S. Department of Health and Human Services, nearly 70 percent of Americans over the age of 65 will require long-term care at some point. And the cost can be staggering. Even occasional in-home help, which is generally the most economical option, can drain your finances fast: Home health aides run about $25 an hour in the New York Metro Area. More comprehensive care pushes the price tag even higher--the average bill for a private room in a nursing home, for example, hovers around $7,000 per month.

That’s where long-term care (LTC) insurance can be a lifesaver, or at least a quality-of-life saver. Unlike health insurance, which generally covers only short-term needs like checkups and surgery, LTC policies help people handle expenses that can last a long time, such as home aides and assisted living. “This allows you more options when you need assistance,” says Patricia Murphy, a senior vice president of wealth management with UBS, a global financial services firm. Typically, LTC coverage reimburses you for a set dollar amount per day for long-term care expenses; the amount is based on the type of policy you buy.

What’s more, many LTC policies allow you to choose the kind of care you want, who your caregivers will be, and whether their services will be administered at home or elsewhere. “You get care where you like it,” says Manhattan- and Long-Island-based investment advisor Michael Fliegelman, of Strategic Wealth Advisors Network, LLC.

Not surprisingly, then, “when we meet with new clients, we always ask first if they own an LTC policy,” says Murphy. “If not, we advise that we should explore the various long-term care policy coverage that could be available to them.” The typical customer, she says, is a person in his or her 50s who’s in fairly good health and looking to protect assets. But really, “anyone who is under age 79 should look into applying,” Murphy stresses. “You want to preserve as much of your hard-earned wealth as possible and insure your quality-of-life options going forward.”

Still, there’s plenty to weigh before you sign you up. For one thing, these policies can be pricey: According to the American Association for Long-Term Care Insurance, the average premium cost for a 55-year-old was more than $2,000 annually in 2012, the year of its latest survey. The fee may be less for younger people—but younger people may also have less income to spare. (The big price tag may be one reason why only 4.8 million Americans have long-term care insurance, although there were more than 46 million people aged 65 or older in the U.S. in 2014.) Policy premiums can also often rise over time, based on inflation or other factors. And very few plans offer lifetime coverage. The U.S. Department of Health and Human Services found on average, people’s policies reimbursed them for a little less than 5 years of long-term care, at a rate of about $160 daily.

So how do you pick the right policy for you? Murphy recommends turning to a certified financial planner for help. “He or she is knowledgeable and will consider how the policy fits into your life,” she explains. “An insurance agent may not have information that’s all-inclusive of your personal budgetary and financial picture.”

A planner can also walk you through different variations on LTC plans. For example, you can often buy an inflation rider that guarantees your benefits will rise by a certain percentage each year; though you’ll shell out a bit more, this can help keep pace with rising healthcare costs. Another type of coverage is also becoming popular, says Fliegelman: “Many people are opting for a hybrid policy—a whole-life or universal life-insurance policy with a long-term care rider,” he explains. “The death benefit can be used while the insured person is alive, for his or her long-term care.” A different kind of hybrid policy provides an allowance for long-term care, but returns the purchase price (usually paid up front) plus a slight amount above it to your survivors if you die without requiring long-term assistance. Still another strategy, less commonly used, is to buy an annuity (an investment guaranteeing the owner an annual sum at a later date) that’s earmarked for long-term care.

No matter what option appeals most, do your own homework on any potential plan. Is the insurer well regarded, and in good financial shape? “Look for a company that’s highly rated by the firms that assess insurers—Standard & Poor’s, Moody’s Investors Service, and A.M. Best,” says Murphy. And investigate whether various add-ons or options are available, including:

  • An inflationary rider – one that guarantees an increase in benefits year over year
  • A discount if your spouse buys a policy too
  • A short or nonexistent “elimination period”—that is, a waiting period before your benefits kick in
  • Shared pool benefits—in some cases, if you and your spouse buy policies together, you can use some or all of each other’s coverage if needed
  • A waiver of premium—If spouses buy a policy together and one dies without needing long-term care, the surviving spouse may be excused from paying premiums from then on. Murphy had clients with this type of policy; “the husband died before the wife, without needing care. Now she doesn’t have to pay for her policy anymore,” she says.

If you decide that long-term care insurance is right for you, sign up at the earliest age your advisors recommend it. You may qualify for a preferred rate: According to statistics from the American Association of Long-Term Care Insurance (AALTI), 67 percent of applicants aged 40 to 49 qualified for a good-health discount on their policy. Your chances of being accepted into a plan are higher when you’re younger too. AALTI found that only 11 percent of applicants aged younger than 50 were turned down by long-term care policy insurers in 2011, but 17 percent of those aged 50 to 59 were rejected, and 24 percent of those 60 to 69. Make your move while you’re still in good health, and rest assured—and insured—about your future.

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