Paying for Long-Term Care: How It’s Changing

As the baby boomer generation continues to age, the question of what to do about long-term care costs only becomes more important. With the national median cost of a private room in a nursing home coming to $8,365 per month, according to Genworth’s Cost of Care Survey 2018, having to pay long-term care costs can quickly drain your savings. There’s no way of knowing whether you’ll need long-term care, nor is there any way of knowing how many months or years you might need care for. Still, you should consider protecting yourself against this potentially devastating expense with long-term care insurance.

Most people don’t carry this insurance because it’s traditionally been expensive, difficult to understand and fraught with controversy over premium increases on older policies that were mispriced. In addition, it’s a product most people need to buy on their own rather than through an employer, meaning there’s no one to subsidize the cost or pick out a good policy for you. An insurance industry group estimates that only 16% of people over age 65 who ought to carry a long-term care policy actually do. 

Insurance companies are trying to change that. “If I had to summarize a single technique being employed by all the major players, it’d be a convergence around smaller benefits,” says Stephen D. Forman, CLTC, senior vice president of Long Term Care Associates, an insurance agency in Bellevue, Wash. Smaller policies are the way for insurers to reach the middle-market consumer, so insurers are offering policies with lower limits and more-flexible premium payment periods. Programs in the research and pilot stages include one that starts as a term life insurance plan during the policyholder’s earning years then transitions to long-term care insurance later in life and another designed as a flexible retirement plan, such as a 401(k) or IRA, with long-term care insurance built in, explains Forman. We could also see mandatory, universal, payroll-financed, catastrophic long-term care insurance that works as a public-private partnership, similar to how the Medicare supplement market works. 

However, those options don’t exist yet. Let’s take a look at what’s available now.

Stand-alone long-term care insurance has plummeted in popularity since the market’s peak in 2002, when 750,000 consumers bought policies.  In 2016 only 89,000 consumers bought policies – an 88% drop. Further, in 1998 through 2003, mass middle market consumers – those ages 55 to 64 with an average income of $75,000 and average assets of $100,000 – represented a larger part of the market. 

The premiums that insurers charged on those old policies turned out to be too low, and newer policies that more accurately reflected long-term care risks were so much more expensive that the pool of consumers who could afford them shrank. In addition, long-term care insurance can be difficult to understand. Few people are familiar with it and how it works.

A logical response to these problems is to develop a product that’s affordable and easier to understand. In September New York Life announced the launch of a new long-term care insurance product called NYL My Care, which the company is billing as “simplified, affordable and flexible” and marketing to middle-class consumers. It offers predesigned plans labeled bronze, silver, gold and platinum, each with a higher level of lifetime maximum benefits, monthly maximum benefits, deductibles and premiums. These plans are designed to resemble health insurance plans, with which consumers are more familiar. They use a deductible instead of an elimination period and employ coinsurance to keep premiums down. 

Source: Reproduced from “New York Life Reimagines Long-Term Care Insurance with the Launch of NYL My Care,” media release Sept. 5, 2018.

These plans can also be customized the way other stand-alone long-term care policies can, with options such as automatic compound benefits growth to protect against inflation. 

Premiums on any long-term care policy can vary considerably depending on the applicant’s age and coverage. Average premiums in 2016 were $2,480. Insurers have found that there’s a gap between this price point and what mass middle-class buyers are comfortable paying, which is around $1,100 to $1,200 per year, so we may see more products like NYL’s MyCare in the future.

Summary: Stand-Alone Long-Term Care Insurance

Good for: People who can afford both today’s premiums and potential future rate hikes of up to 50%, though the chance of significant rate hikes appears much lower on policies issued today than on policies issued in the past. 

Drawbacks: You pay annual premiums for life for a product you might never use. And if you stop paying premiums and let the policy lapse, you may get nothing back.

Hybrid life and long-term care insurance policies offer two types of insurance bundled into a single product. Premiums may be fixed for life and not subject to increase, as stand-alone policy premiums can be. Medical underwriting may be less rigorous than it is for a stand-alone LTC policy. These policies, when a continuation-of-benefits rider is added, can also be good for people who are looking for lifetime or unlimited long-term care benefits. 

Three products are described below. Some of their features are unique, while others can be found in a number of policies.

Michelle Adler, a financial advisor with Citigroup in Manhattan, says she likes a hybrid product from Lincoln National Life Insurance Company called MoneyGuard, because your premium is guaranteed and your heirs can receive a death benefit.

The product is a universal life policy with an optional long-term care acceleration-of-benefits rider. It will provide a certain amount of the life insurance policy’s death benefit to pay for covered long-term care expenses if the policyholder needs care. It has no deductible or waiting period, unlike stand-alone long-term care policies.

If you decide you don’t want to keep the policy, you can get 100% of your premiums back after five years if you purchase the Value Protection Rider. And you can purchase additional coverage to protect against inflation. Clients can start funding a policy at age 40, giving them 25 years to have a fully funded policy by retirement. Other funding options are also available. 

If the policy is exhausted through long-term care withdrawals, it provides a small death benefit of a few thousand dollars that can help with funeral expenses. Lincoln National Life Insurance Company has a superior, A+ financial strength rating from A.M. Best Rating Services.

Jason Veirs, president and owner of Insurance Experts, an independent broker that sells only life, disability and long-term care insurance, says he likes a product from OneAmerica called Asset-Care. It offers a discount to married couples who buy a policy together and a death benefit that pays heirs when the surviving spouse dies if the long-term care benefits haven’t been used. He says it is the only policy on the market that allows two insureds to be covered on the same policy. The two insureds do not even have to be married; partners or siblings can also take advantage of the joint-insured benefit. While not a new product – it’s been around since 1989 – it illustrates what a hybrid policy can do. 

The policy also offers an optional continuation-of-benefits rider that provides lifetime long-term care benefits for both covered individuals. The policy offers flexible funding options, such as paying a single premium, paying premiums for 10 to 20 years or paying premiums for life. You can leverage an asset you already have, such as a CD or the funds in a 401(k) or an IRA, to pay for the policy. 

Veirs says that he thinks this product is one of the best – if not the best – hybrid long-term care insurance products on the market today. OneAmerica has a superior, A+ financial strength rating from A.M. Best Rating Services. 

Financial advisor Richard P. Sabo, CFS, RFC, owner of RPS Financial Solutions in Gibsonia, Pa., says that one of the companies he recommends for his clients, Midland National Life, sells life insurance that allows the policyholder to withdraw 2% of the death benefit per month to pay for home health care, assisted living or long-term care costs. If you buy a $500,000 policy, you can get 2% of that, or $10,000 a month, for those types of care. The company pays the benefits directly to policyholders, so they can hire whomever they want to provide their care, including a relative. There’s no need to submit receipts for reimbursement, and you can choose to take less than the monthly maximum so that your benefits will last longer and your death benefit will be larger. The death benefit can also be accessed during life to help pay for terminal or critical illnesses, such as a heart attack or cancer.

Another company Sabo uses is Nationwide. One policy he likes is called NationwideYourLife^® No-Lapse Guarantee Universal Life with a long-term care rider. For a 69-year-old female with a standard non-tobacco rating, the rider costs an additional $2,237 over the life insurance premium. “It provides 2% a month of a $500,000 death benefit, so she is getting a lot of coverage for that small increase in premium,” says Sabo. “With traditional long-term care insurance, you buy it and the price can go up over time, and if you never use it, you lose it. So the life policy compared to long-term care insurance is a much better option if you are healthy and can get the coverage.”

With these types of policies, the amounts spent on care are subtracted from the policy’s death benefit. The remaining amount goes tax free to the policyholder’s heirs, which can help with estate planning and reducing death taxes.

The federal estate tax does not kick in unless your estate is worth more than $5.6 million per person or $11.18 million per married couple, which affects only 0.02% of estates. What affects the middle class is that untaxed retirement account assets, such as those in a 401(k), 403(b) or traditional IRA, are taxable to the heir who receives them, unless the heir is a spouse.

Without insurance, Sabo explains, “If you have $500,000 in an IRA, then it can be eaten up paying for medical costs, and if you never go into a nursing home, you still have to deal with federal income tax, possible state inheritance tax and possible state income taxes.” He says that most of the policies he sells go to people who have about $300,000 saved up and want to protect their nest egg from medical costs and death taxes. The cost of the insurance policy is a lot less than what will go to the heirs, he points out. Essentially, the insurance company helps pay the death taxes.

Summary: Hybrid Long-Term Care Insurance

Good for: People who want to make sure they’ll get something in exchange for their premium dollars and don’t like the “use it or lose it” aspect of stand-alone long-term care policies. Also, it’s good for people who want to leave money to their heirs if they can but will be okay if their heirs receive nothing due to long-term care having exhausted the policy. That being said, some policies may still pay heirs something even if that happens. For example, Nationwide’s long-term care rider offers a residual death benefit of 10% of the base policy amount, or $50,000 in the example above, minus any policy loans. 

Drawbacks: You may have to pay a lump-sum premium of tens of thousands of dollars up front to purchase a hybrid policy. The more long-term care coverage and the greater the death benefit you want, the more you need to pony up. 

It’s important to understand that for the same initial payment, different policies can pay dramatically different death benefits and monthly long-term care benefits. And you may not earn a market rate of return on your investment, representing a potentially large opportunity cost compared to what you could get by investing the money you would have put into the policy. 

Also, this type of policy may not be suitable for someone who doesn’t really need life insurance. And if your policy does not provide inflation protection on its long-term care benefits, it could be much less valuable by the time you use it than it was when you purchased it. 

Both fixed annuities and indexed annuities can come with contracts that pay extra if you need long-term care. Normally, the annuity pays one monthly benefit amount. But if you ever need long-term care, the annuity starts paying out a higher monthly benefit that’s a multiple of the premiums you’ve paid. “You put money in and it earns a fixed interest rate, but if you need to draw on it for long-term care, they double the value of the account,” says Sabo. “Therefore, instead of paying dollar for dollar for coverage, you are paying $0.50 on the dollar.”

As with any type of insurance, you are leveraging a relatively small sum to buy the possibility of a much larger benefit if you need it. Furthermore, any long-term care benefits you receive from the annuity will be tax free. “The annuities are purchased with a lump-sum deposit, so they don’t have an annual ongoing premium, but you are able to get long-term care benefits based on the amount of deposit and how the contract is set up,” says Sabo.

The following example, prepared by agent Jack Lenenberg in April 2018, shows how a long-term care annuity can work. The policy is OneAmerica’s Annnuity Care^® II. It is a single premium deferred annuity with long-term care accumulated value. For a premium of $100,000, and with compound inflation protection of 5%, a policy purchased at age 65 for a female in Illinois could provide nearly $360,000 in long-term care benefits at age 66, nearly $418,000 at age 70, nearly $514,000 at age 75, about $634,000 at age 80 and nearly $786,000 at age 85. 

Someone who purchased a policy like this one would be leveraging $100,000 into as much as $786,000, which can provide thousands of dollars per month for several years if long-term care becomes necessary. If it does not, the policy’s $100,000 cash value would go to that person’s heirs. 

Summary: Annuities with Long-Term Care Benefits

Good for: Those who could benefit from the steady monthly income an annuity provides and protection against outliving their assets and people who might benefit from simplified health underwriting. Long-term care annuities have simpler underwriting requirements than stand-alone long-term care or life insurance policies.

Drawbacks: To buy an annuity, you’ll need to have a large sum up front. And because interest rates are so low in today’s market, the annuity may not provide the best long-term care benefits. 

Finally, a drawback of long-term care policies and life insurance is that they aren’t available to individuals with serious, high-risk health conditions. You have to be healthy enough to qualify, which means you need to avoid waiting so long that you no longer qualify to buy a policy but shouldn’t buy a policy so early that you can’t afford it long term. For long-term care insurance, that usually means buying a policy sometime between ages 55 and 74.

For those who can secure a policy, long-term care insurance and other products that provide for long-term care expenses protect consumers’ desire to ensure that if they do need such care, they can afford to receive it in the location of their choosing, not in a potentially subpar Medicaid-accepting facility that might not offer the health outcomes or quality of life they desire. These products also allow people to protect their assets from the high costs of long-term care, avoid dependency and protect their living standards as they age. A policy may not cover 100% of your costs, but it can reduce them significantly.

Insurers have developed a variety of ways for consumers to protect themselves against the risk of needing expensive long-term care, from simplified stand-alone policies to hybrid life insurance and long-term care policies to annuities with long-term care benefits.

Disclaimer: None of the specific insurance products mentioned in this article are recommended by the author or by Investopedia. They are described for informational purposes to give consumers an idea of some long-term care options available in today’s market.