Long-Term Care Insurance: Higher Premiums for Shrinking Benefits

Americans have plenty of reasons to dread buying traditional long-term care insurance. The policies are expensive, with rising annual premiums and so many different elements that shopping for one is overwhelming. "It can be a complex and oftentimes frustrating experience," says Tom Beauregard, founder of HCG Secure in Goshen, Conn., which sells long-term care insurance with a focus on aging at home.

The market and the policies have also evolved over the years. In fact, anyone whose idea of long-term care insurance was shaped by the policies their parents or grandparents had may be in for a rude awakening. "They're like Rolls Royce policies compared with what we have today," says Brian Gordon, president of Murray A. Gordon and Associates, a long-term care insurance broker in Bannockburn, Ill. "But they didn't cover home health care, so that's the give and take."

When the insurance first became widely available in the late 1970s, it was used mainly to pay for care in nursing homes, but the industry overestimated the number of lapsed policies and underestimated costs and customer life expectancies. Many insurers stopped selling the coverage, and now only about a dozen companies offer it, down from approximately 100 at one time. To keep the cost affordable, you may have to skimp on some policy features, or as the American Association for Long-Term Care Insurance says on its website: "It's very likely you'll pay more today for less plan coverage."

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The Need for Care

Nevertheless, the insurance should be part of your conversation with a financial planner or broker specializing in long-term care, along with other options (see below). According to government figures, someone age 65 today has about a 70% chance of needing some type of long-term care. For women, the need for care lasts, on average, 3.7 years; for men, it's 2.2 years.

Costs vary widely depending on the type of care and the location. Nationally, the median hourly cost of a home health aide is $169 daily, compared with assisted living at $148 and a semiprivate room in a nursing home at $260 a day, according to Genworth's Cost of Care survey. A home health aide might seem less expensive than a nursing home on a daily basis but not if 24-hour care is needed. Meanwhile, the cost of all care keeps growing. Between 2004, when the survey first began, and 2020, the cost of care in all three categories increased, on average, by 1.8% to 3.8% annually.

Medicare will not cover most long-term care costs, and Medicaid is difficult to qualify for as the person needing care generally may not have more than $2,000 in assets, with the exact amount varying by state. To encourage people to pay for their own care, most states have long-term care insurance partnership programs that exempt benefits already paid by a qualifying policy when determining assets for Medicaid.

For example, if you exhausted your policy and received $600,000 in long-term care insurance benefits, the state lets you keep up to $602,000 in assets and still qualify for Medicaid. Check if your state has such a program. If it does, the state insurance department should list participating insurers. "It doesn't cost you anything extra to get a partnership plan, and it allows you to buy a shorter plan and still feel like you have catastrophic care protected," through Medicaid, says Marc Glickman, an actuary and chief executive officer of Los Angeles-based BuddyIns, which sells long-term care insurance nationwide.

Age, gender and health play a big part in the premium. The younger you are when you buy your policy, the cheaper it will be. According to the American Association for Long-Term Care Insurance and its 2022 price index, a couple that buys insurance at age 55 can expect to pay $2,080 for two policies covering up to $165,000 of benefits each. The same policies for a couple at age 65 is $3,750.

Because women tend to live longer and make more claims, their premiums can be as much as 70% more. Autoimmune diseases, hypertension, diabetes and obesity, among other things, can all push the price up 25% to 50%, assuming the applicant isn't declined, Gordon says, and people with Parkinson's, multiple sclerosis and similar neurological diseases can't qualify at all.

A Pool of Dollars

Almost all traditional policies now cover a combination of care at home and in an assisted living facility, nursing home or adult day center. The policy's benefit period and maximum daily benefit, both of which you select, determine the total amount of coverage. The benefit period is the duration when benefits are paid, but the payout amount is capped daily. The average benefit period is three to five years with an average maximum daily reimbursement of $150.

Although the benefit period can never shrink, it can run longer. If, say, you have a three-year policy with $150 max in daily benefits but only use $75 daily, the amount left over will extend the policy's duration until the money runs out. If your costs are $250 a day, you can't use up your policy faster to cover the excess spending. Instead, the benefit period remains at three years, and you need to pay any amount exceeding the daily cap out of pocket. Jesse Slome, executive director of the American Association for Long-Term Care Insurance, says to think in terms of the total dollar amount of coverage (daily cap multiplied by benefit period). "Ultimately you have a pool of dollars to use."

How much coverage to buy depends on the costs of care locally, how much of that care you can pay for yourself, and the insurance premium you can afford. You can compare rates for different types of care by zip code using Genworth's online calculator.

If you can afford it, most experts recommend getting some inflation protection. You can choose simple or compounded and the percentage. According to figures from the American Association for Long-Term Care Insurance, a single 55-year-old woman in good health can expect to pay an average of $1,500 a year for a traditional long-term care policy with a $165,000 pool of benefits and no inflation protection. That's an approximately $150 daily benefit over three years. Adding 1% of compounded inflation protection raises the annual premium to about $2,150, but at age 85, her benefits pool will be $222,400. With 3% compounded inflation protection, the premium jumps to $3,700 annually for a $400,500 pool of benefits at age 85. "All stand-alone long-term care policies have to offer inflation protection, and they usually give a number of different options," says Robert Eaton, principal and consulting actuary with Milliman in Tampa, Fla. The choices usually include inflation protection ranging from 1% to 5%.

Couples may want to consider shared care. This provision lets one spouse, who has used up the benefits in their own policy, tap the other spouse's benefits. "You [might] get six years for each person and then another six years that two people can share," says Glickman. Some policies may offer a third pool of money that each spouse can dip into after exhausting their own separate coverage. Shared care adds about 18% to 25% to the premium, Gordon says, but it also means you can buy policies with shorter terms, knowing that you have different benefit pools to work with.

Benefits are triggered once you have a recognized cognitive impairment or can't do two of six activities of daily living without help: eating, bathing, dressing, toileting, continence and mobility. Either your own doctor or the insurer's own health professional does the assessment, certifying the claim. But just because the benefits are triggered doesn't mean the policy pays out straight away. All policies have an elimination period, the time between when a claim is filed and when it starts paying benefits, usually 90 days.

Insurers calculate this period differently. Some companies use a service day waiting period and count only the days you receive paid care. Others count from the day you become eligible, known as a calendar day waiting period. If you only receive three days of care a week and the policy has a 90-day elimination period that counts only service days, it could take seven months before the insurance kicks in, Gordon says. Most insurers don't count informal care from family members as part of the waiting period. Gordon notes that you may be able to buy an enhanced elimination rider that counts one day of care a week as seven days.

Extending the elimination period beyond 90 days lowers the annual premium, but Gordon says, if you're struggling to pay premiums, "the last thing you want to do is incur additional costs upfront." At the same time, he adds, "I don't want anyone to pay for premiums at the top of their budgets because they do go up."

Managing Rising Premiums

That's what happened to Ellen Dichner, a lawyer in Brooklyn. She purchased a traditional long-term care policy for her husband and herself through her employer's insurance broker in 2004, when they were in their 50s. The couple's premiums have risen several hundred dollars over the years. Recently, when the premium was about to increase again, the insurer asked if she would prefer to cut her policy's duration or maximum daily benefit instead.

Because her daily benefit of about $600 is high, she is considering reducing that limit to avoid a premium increase, something experts say is the smart way to go. "I'm glad we have it, but when I see it go up, I wonder if we'll ever get our money's worth" says Dichner, who has paid $50,000 in premiums so far. Tim Jost, a professor emeritus at Washington and Lee University School of Law in Lexington, Va., says his semiannual premium for a policy he bought about 20 years ago was $750 for many years. Then it went from $750 to $1,275, and this year it's increasing again to $1,911.

Insurers only stop charging the annual premium once a claim is made. If your premiums have risen to the point where you are in danger of letting the policy lapse, contact the insurer. You may be able to ask for a shorter policy length, lower daily benefit or a longer elimination period. If the rate increase means you can't afford the policy anymore, check if it provides contingent nonforfeiture. That allows you to collect care benefits up to the amount of premiums you have already paid. Some states require policies to contain contingent nonforfeiture if premiums rise by a certain percentage.

Uncle Sam also eases the pain of rising premiums with a tax benefit that gets more generous the older you are. In 2022, people ages 51 to 60 can deduct up to $1,690 of long-term care insurance premiums as a medical expense; the amount is $4,510 for those 61 to 70, and $5,640 for anyone older.

Hybrid Long-Term Care Policies Do Double Duty

Experts say you should be shown the features of four policies -- two traditional and two hybrid -- before buying long-term care coverage. Hybrid policies offer an alternative to a traditional long-term care plan. The most common type of hybrid is a life insurance policy linked to long-term care insurance. Typically, the life insurance's death benefit is tapped first to pay for long-term care; once the death benefit is exhausted, the long-term care portion of the policy kicks in.

Unlike traditional long-term care insurance, hybrid policies have more flexible benefits, and beneficiaries get their money back for any partial or unused benefits. Best of all, the premiums are fixed for life and can be paid as one lump sum or over five to 20 years, says Brian Gordon, president of Murray A. Gordon and Associates, a long-term care insurance broker in Bannockburn, Ill. A policyholder who makes a claim before the premiums are paid off may have to continue paying premiums or see the benefits reduced.

Hybrid long-term care policies typically cost two to three times more than traditional coverage. "They're doing double duty," offering both life and long-term care insurance, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. But "if your true need is life insurance in order [to] leave something to your beneficiaries, then you should buy life insurance and separate long-term care insurance," Gordon says.

Slome cautions that some hybrid policies only cover chronic illness, triggering coverage under far more limited circumstances than the two-activities-of-daily-living standard used for long-term care insurance. That could mean a big difference in how and which claims are paid. A chronic care policy is required to state in the contract that it is not a long-term care policy. Slome suggests consumers ask for a generic copy of the policy as verification before buying.

One type of insurance is not necessarily better than the other, says Marc Glickman, CEO of Los Angeles-based BuddyIns, which sells traditional and hybrid policies nationwide. His extended family own both types of insurance. It's whichever policy meets the buyer's "needs, budget and health, combined with what is available in the market, that offers the best value."