Pros and Cons of Long-Term-Care Insurance

Extended care in a nursing home can drain your savings. LTC policies can be a cushion—if you’re careful

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Claire Krumpotich and her husband, John, assumed their savings would be secure if they needed extended medi­cal care in their later years, thanks to long-term-care insurance they had purchased in 1990. As they understood their Pioneer Life policies, $250,000 of future expenses for long-term care that they could not provide themselves would be covered. Now, however, the couple's sons are battling in court to get their mother's policy to cover her care in an assisted-living facility and to be reimbursed for the time she has already spent there.

The popularity of LTC insurance policies has grown since they appeared in the 1980s—more than 8 million people now have individual or group coverage—but consumer advocates and insurance regulators caution that such coverage is not a good buy for everyone. LTC policies remain confusing, they say, and the terms and features vary widely, from when benefits start and the maximum daily payout to how long benefits last and what services are covered. State insurance regulators field a steady stream of complaints from consumers over issues such as unexpected premium increases and denial of coverage.

Claire Krumpotich's policy at first performed as she and her husband had expected. A ballplayer in the 1940s for the All-American Girls Professional Baseball League (of A League of Their Own), she was diagnosed in 1999 with a nerve disorder. It soon confined her to a wheelchair, and the policy paid for a licensed caregiver to help her at home with dressing, bathing, and other daily activities. By 2006, however, Krumpotich had developed dementia and needed more attention. Her sons say they were told by their mother's case manager at Conseco, which had taken over Pioneer Life, that the policy would cover assisted-living care, and Krumpotich moved into a facility. But a month later, according to her sons, the company stated that care in an assisted-living facility was not covered and refused to pay. (Conseco declined to comment for the story, citing the ongoing litigation.) The family kept sending off the premiums, which by 2008 had risen to more than $6,500 a year from the original $470.

To fend off such unpleasant surprises, which may surface far into the future, experts stress that consumers must understand the details of what they are buying and bring a sharp eye to policies under consideration.

Deciding whether to buy at all, as with most insurance, is something of an educated guess. Are you pretty confident you could handle the cost of long-term care on your own if you needed it? Assisted-living facilities in some parts of the country charge $50,000 a year or more, and nursing homes can cost well over$100,000 a year. If not, can you afford to pay premiums now and for years to come for coverage you may never need? Many LTC purchasers, half of whom earn more than $75,000 a year, should be able to pay some costs from savings, and few families will have to pay indefinitely. Tracey Baker, a financial planner in Fairfax, Va., notes that most nursing-home stays are three years or less. A 60-year-old couple might pay a total of about $3,000 annually for two LTC policies covering $150 a day of nursing-home costs for each person for three years. The premiums would be roughly double for a couple age 70.

Premiums can be made more affordable by altering such factors as the timing and scope of coverage. A 90-day "elimination period," for example—the time that must pass before benefits kick in—would carry a far lower premium than if the policy started paying out as soon as you're eligible.

Economizing by passing up inflation protection is a bad idea, say experts. It's the only way to hedge against hikes in healthcare costs, which have been averaging 4 percent a year. An inflation rider may tie benefit increases to the consumer price index, or it may add a fixed sum (simple protection) or a fixed percentage (compound protection) each year. A 5 percent compound rider is the industry standard, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. The initial premium would be twice as high as with no rider, but the amount of coverage would double in about 15 years. It is critical to get whatever inflation protection you can afford, says Baker. It's better to have some than none.

Corrected on 12/22/09: An earlier version of this article included incorrect titles for Jesse Slome and Beth Ludden.