Options for Covering Long-Term-Care Costs

Baby boomers are facing a dilemma: At a time when long-term-care insurers are shrinking coverage, more boomers than ever are recognizing the need to protect their retirement savings from potentially devastating costs. Big players have withdrawn from the market, and those that remain are scaling back benefits, tightening eligibility and hiking premiums, especially for women.

Still, individuals in their fifties and sixties who want coverage do have some options. They can engage in strategies—from sharing benefits with spouses to reducing inflation protection—that can help them cover part of their costs in the future while keeping premiums manageable.

As boomers help their aging parents, many are experiencing firsthand the overwhelming costs of long-term care. And they want to protect their own children from these crushing responsibilities if they end up needing care themselves. "People who have had a personal experience either with a family member or a friend's parent are saying this could be an issue down the road," says Leonard Wright, a certified public accountant in San Diego, Cal.

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Indeed, the costs can be exorbitant. The median rate for a private nursing-home room is $230 a day, or $84,000 a year, according to an annual report by insurer Genworth. (Find the cost of care in your community at www.genworth.com/costofcare.) The median cost of a home health aide is $19 an hour. A stay in an assisted-living facility costs a median $3,450 a month.

Stephanie Lee, a certified financial planner at East Rock Financial Services, in San Francisco, where the annual median cost of a private nursing-home room is more than $200,000, says she raises the issue with every client. She explains that they should either buy insurance or set aside savings to cover expenses.

Couples who do not want to pay premiums for care they may never need should reserve $200,000 to $400,000 or more to cover potential care, Lee says. The amount "depends on what return they can expect on their investments, the inflation rate of long-term care for the area, and the length, type and timing of care they anticipate."

To decide on which route to take, Lee first looks at the amount of care that the couple wants to cover—say, three years in a nursing home. Then she looks at the amount of guaranteed income—Social Security and pension benefits—that could cover long-term-care costs as well as other expenses. The couple would either need enough savings or long-term-care insurance to fill in the gap. "They may decide that spending $2,500 per year on premiums for 30 years is preferable to setting aside $300,000 for care," she says.

In her calculations, Lee usually assumes that the first spouse who becomes ill will need home health care for three years, while the other spouse will need nursing-home care for three years. She also discusses the possibility of moving to a less-expensive community.

Becky Snow, 58, of Las Vegas, has experience with the high cost of care. Her father was diagnosed with Alzheimer's disease seven years ago. He lived with her for three months and then moved to a nursing home. "I took over everything because he couldn't do any of that himself," Snow says. "He was single, and I knew nothing about his financial situation."

Her father's pension didn't cover the full nursing-home tab. "We had to gradually sell off everything he owned to pay for his care," she says.

After he died two years ago, at 79, Snow started to think about what would happen if she needed care. She was divorced in 2012. She asked her 33-year-old daughter, a paramedic, to handle medical decisions if she needed help, and told her 27-year-old son that he would be in charge of her finances. "I wanted to make sure my son knew my financial situation so he could step in and not be in the dark like I was," she says.

Snow bought a Northwestern Mutual long-term-care insurance policy in 2013 and used her father’s experience as a guide when choosing how much coverage to get. She calculated the income she'd get from Social Security and other sources and how much she could afford to pay from savings. She bought a policy that will pay a daily benefit large enough to cover the balance. Because her father, like many Alzheimer's patients, needed care for five years, she bought a six-year benefit period as an extra cushion. "I hope I never have to use it, but I need to be prepared," she says.

Buying a policy is an increasingly tough decision as insurers impose higher premiums, especially on women. Features once standard are now very expensive or have been replaced with skimpier alternatives.

Women pay more. Becky Snow bought her policy just before most insurers started to charge women higher premiums than men. Genworth, the largest long-term-care insurer, announced the change about a year ago, followed by big players John Hancock, Transamerica and Mutual of Omaha. Most other companies have already moved or are expected to move to gender-distinct pricing in the next year. The reason: Women generate more long-term-care claims than men, and their claims tend to be more expensive, says Beth Ludden, vice-president of long-term care at Genworth. They are often their husbands' caregivers, but they may later need to pay for long-term care for themselves.

Many single women now pay about 50% more than single men, says Claude Thau, a long-term-care insurance consultant in Overland Park, Kan. Regulators in some states have not yet approved the changes for some insurers. (Genworth, for now, still offers unisex rates in California.) "I told my female clients that they should consider locking this in before [more insurers] switch to gender-based pricing," Lee says.

Get price quotes from several insurers. Women should also check out any policies offered by their employer because they may still use unisex rates.

One way that a married woman can save money is to buy with a spouse. Most insurers offer discounts of about 30% to couples, Thau says. Genworth, for example, charges a 55-year-old man in the best health category $2,190 a year for a policy with a $150 daily benefit that rises 5% compounded per year, a 90-day waiting period and a three-year benefit period. That policy would cost a woman $2,966 a year. But with the discount, each spouse would pay $1,854.

Couples can hedge their bets with shared benefits. For example, if each spouse gets a three-year shared-benefit policy, they have six years in coverage between the two of them. Spouses can split the coverage any way they want. Sharing benefits tends to boost premiums by about 15%—but women could end up with more than half of the coverage if they provide caregiving to an ill husband.

Women also should consider hybrid policies. John Ryan, a Greenwood Village, Colo., specialist in long-term-care insurance, recommends that single women compare the cost of traditional long-term-care insurance with a policy that combines long-term care and life insurance. "I've never been a real fan of combo policies, but with the new higher rates for women, the combos are looking a little better for them," Ryan says. Women tend to pay less than men for life insurance so that brings down the costs.

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With a combination policy, you usually pay a lump sum. If you don't need long-term care, your beneficiaries will receive a death benefit that is worth about 1.5 times your initial investment. If you need long-term care, the insurer will pay out about four times the initial investment. Any long-term-care benefits you use will reduce the death benefit.

For example, if a 60-year-old single woman invests $100,000 in a Lincoln Financial MoneyGuard combo policy, she would get $6,374 in monthly long-term-care benefits for six years, totaling $458,913. If she dies before needing care, her heirs would get $152,971.

This is not the type of policy to buy if you want to leave heirs a large death benefit. But unlike a traditional long-term-care policy, heirs do get some money if you never need care.

Eligibility tightens. Besides controlling risk by raising rates for women, insurers are rejecting more applicants who have medical conditions—both women and men. Lee says she recommends that her clients buy coverage "before they have any major health issues." A study by the American Association for Long-Term Care Insurance found that 12% of applicants below age 50 were rejected, as were 17% of those 50 to 59; 25% of those 60 to 69; and 44% of those in their seventies.

Also, the older you are when you purchase a policy, the higher the premium. According to the association, a 55-year-old couple who buys a policy with a $150 daily benefit, three-year benefit period and a 3% compound inflation adjustment will pay an average annual premium of $3,275, while a 65-year-old couple will pay $5,940.

Health requirements vary by company, so it pays to shop around. Long-term-care insurance specialists can help. "They'll know which insurer will give them the greatest opportunity to get a preferred or standard rate," says Mike Skiens, president of Master Care Solutions, in Portland, Ore., who works with about eight long-term-care insurers. "We can do a prequalification of that person's health and ask the insurer about the rating class" before a client applies.

You can find long-term-care specialists at www.aaltci.org. You may also want to contact a few large insurers, such as Northwestern Mutual and New York Life, which only work with their own agents.

If you've been rejected in the past, you may be able to get coverage later if your health improves, even if you had something significant like cancer surgery. "After a couple of years, once they've been symptom free, we can often issue policies," says Steve Sperka, vice-president of long-term care at Northwestern Mutual.

Benefits are cut. In the past, most policies boosted benefits by 5% compounded each year for inflation. But those promises turned out to be more expensive than insurers had expected. Now insurers are also offering cheaper policies that raise coverage by 3% a year or by changes in the consumer price index.

A healthy 55-year-old man who buys a Genworth policy with 5% compound inflation protection would pay $2,190 a year for a $150 daily benefit for three years. The same policy with a 3% adjustment would cost $1,267 a year.

Ask the insurer to compare the pools of money that would be available when you turn 85 under each policy. (The pool is the daily benefit amount times the benefit period.) With the Genworth policy, both policies start off with a pool of $164,250. In 30 years, the 85-year-old who bought the 5% policy would have a benefit pool of $676,075, compared with the $387,066 pool for the 3% policy. That means that the extra $27,690 in premiums that the policyholder paid for the 5% policy over 30 years leveraged $289,009 more in benefits than the 3% policy.

More insurers also are offering "future purchase options." These policies charge a lower premium for a daily benefit but do not raise benefits automatically each year. Instead, you have the option to increase coverage every year or every few years by paying a higher premium, which would be based on your health when you bought the policy.

This option could be a good deal for buyers who can't afford the bigger premiums for inflation protection early on—maybe you have several more years of mortgage payments. However, the premium increase will be based in part on your age when you add on the inflation protection—perhaps boosting your annual premium beyond what you would have paid if you locked in earlier.

You also could cut costs by cutting back on the benefit period. Most insurers eliminated lifetime benefits and hiked rates for a five- or six-year benefit period. But you can still cover most of the risk by buying a shorter benefit period. Northwestern Mutual's Sperka says a three-year benefit period can cost about 30% less than a six-year period. Most long-term-care claims are for care that lasts fewer than three years.

Strategies to pay premiums. You can now pay premiums with tax-free rollovers from cash-value life insurance policies or deferred annuities. With life insurance, you can transfer dividends or part or all of the cash value. With a deferred annuity, you transfer cash that's been built up, but the annuity can't be in an IRA.

Another option: If you have a health savings account, you can use that money tax free for a portion of long-term-care premiums. The annual amount is based on your age ($1,400 from 50 to 60; $3,720 from 60 to 70; $4,660 if older than 70).

Most long-term-care insurers have raised rates at least once for current policyholders. Rate hikes announced by John Hancock and Genworth a few years ago are going into effect in some states (policyholders in most other states already pay the higher rates). New York Life recently announced that it will raise rates for some current policyholders for the first time in 25 years, with an average increase of 16% primarily for people with policies issued from 1997 to 2011.

You're usually given several options if you can't afford the new premiums. Ryan first recommends reducing your benefit period from ten years or lifetime down to five or seven years (or three years for men). His second choice is to lower the monthly benefit, and the third is to change the inflation adjustment from 5% down to 3% compounded.

Don't drop the policy. You'll lose the coverage you paid for, just as you're getting closer to the age when you will need care. If you change your mind later, a new policy will cost a lot more than your current one, even if you're still healthy.

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