A Safety Net That Might Not Hold
Long-term-care insurance doesn't have many fans, but that may change
When Betty Hoff moved into an assisted-living facility in Fowler, Calif., two years ago, the 86-year-old thought she didn't have anything to worry about financially. She had a long-term-care insurance policy that would pay up to $3,000 a month for three years of nursing home, assisted living, or home care. Hoff has severe arthritis and can get around only with a walker or cane, which means she could no longer cook, clean, or do the laundry. But her insurer denied the claim. Hoff wasn't cognitively impaired, and the company said she didn't need help with enough "activities of daily living," or ADLs, to qualify for benefits.
The family turned for help to California Health Advocates, a nonprofit in Sacramento, and 18 months later Hoff's insurer began paying for her long-term care. But the experience has taken a toll beyond the $45,000 assisted-living tab Hoff paid while she and her family battled for benefits. "Worrying about this has made her weaker," says Hoff's daughter, Edna Turpin.
Keep it simple. That's not the way it's supposed to be. Long-term-care insurance is meant to put people's worries about old-age care to rest, not make them worse. If someone is cognitively impaired, as with Alzheimer's, or has difficulty performing certain daily tasks, the policy is supposed to cover care in a nursing home or other facility, or even at home, up to a certain dollar amount for a specified length of time. But the insurance is also expensive, with premiums that sometimes spike unpredictably. In addition, it's difficult to compare policies because they vary widely in every particular, from which services they cover to how benefits are calculated to what constitutes an assisted-living facility. No wonder long-term-care insurance is a tough sell. Fewer than 10 million policies have been sold in the two decades since it was first offered.
Now, however, insurers are rolling out simpler policies at more moderate prices that they hope will entice more people to buy. Lincoln Financial, for example, recently introduced a streamlined underwriting process. Instead of a full physical exam, blood work-up, and medical background check, a nurse conducts a 45-minute phone interview with the applicant, followed by a background check and cognitive testing. The whole process can be completed in a few weeks instead of a few months. Last month, John Hancock launched a policy that ties inflation protection to the consumer price index rather than the typical-and more expensive-5 percent compound inflation protection offered by many policies.
Congress has also stepped in to encourage people to buy these policies. It authorized the expansion of partnership programs that let people who buy long-term-care insurance policies and exhaust their benefits eventually qualify for Medicaid while still sheltering some of their assets (story, Page 73). Four states already have such programs-California, Connecticut, Indiana, and New York-and 22 states say they plan to put them in place in 2007, according to the Kaiser Family Foundation.
Whether these newfangled policies offer better protection is unclear, but one thing everyone agrees on is that long-term care is a looming problem that is only going to get worse as millions of baby boomers age. More than half of seniors will experience some degree of chronic physical impairment by the time they reach 85, the typical age at which people make a long-term-care insurance claim. Of course, not everyone winds up in a pricey nursing home, where the average cost of a private room in 2006 is $206 a day. For people turning 65 in 2010, more than half will never use one at all, and only 9 percent will use one for five or more years, according to the Urban Institute.
Long-term-care insurance isn't cheap: A 65-year-old who buys a three-year policy with a $150 daily benefit can expect to pay a little over $3,000 a year in premiums, according to the American Association of Long-Term Care Insurance, an industry group in Westlake Village, Calif. Someone who buys a policy at age 65 may well pay on it for 20 years before needing to claim benefits, if ever. So it's not just a question of whether you can afford the insurance now but whether you can afford it decades down the road when premiums will most likely have risen, your spouse may have died, and your overall medical costs may be much higher, says Bonnie Burns, a training and policy specialist at California Health Advocates who helped Hoff with her claim. "I always tell people to have a 20 percent cushion when planning for what they'll need," she says.
Despite the uncertainty, long-term-care insurance is appealing to some, especially affluent people who don't want to deplete their estates to cover expensive nursing home bills and people who have family histories of Alzheimer's or other lingering illnesses. If you're considering buying this insurance-whether for yourself or your parent-here are key elements to think about when choosing a policy:
Type of facility. Make sure the plan covers care in any type of facility. You or your parent may not ever want to go into a nursing home. But there may come a time-if you develop Alzheimer's or have a stroke, for example-when it is the best option.
Benefit trigger. Benefits kick in only if the policyholder is cognitively impaired or if he or she needs help with a certain number of ADLs, such as eating, dressing, and bathing. A policy that kicks in with two out of six ADLs is better than one that requires three out of five.
Daily benefit. Find out how much it costs for a nursing home, assisted living, and home healthcare. MetLife Insurance posts daily rates for states at www.maturemarketinstitute.com.
Inflation protection. It can double the cost of a premium but is critical since you're going to be paying for this insurance for years, say experts. Unless you're in your 70s or older, go for the 5 percent compounded option as opposed to a 5 percent simple inflation adjustment, which most likely won't keep pace with rising costs over the long term.
This story appears in the November 27, 2006 print edition of U.S. News & World Report.