Last Updated: October 12, 2009
It's not necessarily easy to predict whether you might need long-term care when you age. But you can evaluate whether long-term care insurance might make sense or not. That's especially important given the results of a recent survey released by MetLife, which revealed that Americans' knowledge of long-term care isn't all that great.
Most know what long-term care is and how much it costs, but they fall short when it comes to knowing how many people will need it and how they will pay for it. What's more, the MetLife study revealed that most are not taking appropriate steps to protect themselves from potentially catastrophic expenses.
According to the MetLife Long-Term Care IQ Survey:
- Just about four in ten (36%) know that 60% - 70% of 65-year-olds will require long-term care services at some point in their lives.
- Just over one-third know that most long-term care services are received at home. While the number of respondents answering correctly (37%) increased since the 2004 survey (18%), awareness is low overall.
- Older people (over 60) are more knowledgeable about long-term care than younger people (40 to 49).
- Fewer than half (45%) are aware that one in five American households care for an adult family member or loved one.
- Few are taking action to protect themselves from such potentially catastrophic expenses; only 18% know long-term care insurance rates are based on age, but almost nine in ten (87%) are aware that a comprehensive long-term care policy covers home, assisted living and nursing home care.
Given the results of that study, it's quite possible that you might need to learn more about long-term care insurance. Here's what FPA member, Eva Levine, CFP®, suggests that you know at a minimum:
Do you need long-term care? You need to look at your age, the health history, available resources to pay for the premium, marital status, family structure (children or no children, possible care givers availability), care preference (at home or nursing home care), etc. to determine the exact need for long-term care. As the prevailing opinion is that most people need long-term care, the next issues to consider are how much, when should you purchase it, and what kind of policy. You should also look at the alternatives to long-term care insurance.
How much policy to buy and when to buy it? These are totally individual choice questions, as there are always tradeoffs. Long-term care policies are cheaper if bought at a younger age, but premiums are paid for a longer time. If high coverage is not affordable, or if you have other resources to cover long-term care expenses, then consider lower coverage for long-term care expenses. Some policies may allow you to increase coverage later on with no additional underwriting. As premiums continue to rise over time, you can consider a limit-pay policy, which accelerates the total payment, to contain the overall costs.
What kind of long-term care policy should you buy? As there are innumerable policies out there now, you really need to do your homework. As indicated, there are many new products that combine long term care with other insurance. People who are reluctant to purchase long-term care insurance because they may not need it can pay a little more for a return of premium rider, so that they can recover all the premiums paid.
Which insurance company should you buy your policy from? As a general practice, you should check the financial stability of a company before purchasing any insurance product. Check with the state insurance commission office for the latest information on each company, or go to www.thestreet.com, which provides a rating report on each insurance company (on the home page, scroll to the bottom, click view directory, click insurance screener.) Read all documents and the terms of the policy before buying. The cheapest policy may not be the best for you.
What are the alternatives to long-term care? There are facilities such as Continuing Care Retirement Communities (CCRCs), where future costs for skilled nursing and assisted care can be ascertained and contained through a package deal. The upfront costs for the CCRC may be high, but the overall costs for long-term care may be lower. Even if long-term care insurance may not be necessary, it is still advisable to consider some long-term care insurance, such as getting a policy that covers part of the total care, like $100/day, instead of $300/day to reduce the premium.
Other alternatives to long-term care are reverse mortgages and programs like shared appreciation, which also utilize the equity in the home for long-term care. Reverse mortgages are very expensive, and should be used as the last resort. You should check out programs like the equity sharing program offered by companies like REX & Co., which are more reasonable than the usual reverse mortgages. Mortgage refinancing or a home equity line of credit (HELOC) are possible alternatives, but may not be practical due to the debt service, and may be difficult to get for the elderly on limited incomes. The key is that there must be substantial equity in the home.
Another alternative is cash value in a life insurance policy. If the client has a cash value policy with substantial account value in it, the client can tap into that for long-term care. The withdrawal may even be tax free as a policy loan. Some policies have a living benefit or long-term care rider, which allows withdrawal for long-term care needs.
Long-term care insurance integrated with deferred annuities is another alternative. This hybrid product is a single premium annuity that allows withdrawal from the account value for long term care. When the money in the annuity is depleted, the long term care benefit extension would kick in and payments will continue for a specified term. Under the Pension Protection Act, long-term care payments from an annuity are tax free. Underwriting for this hybrid product is easier than for a life insurance or a stand-alone long-term care policy. The drawback is that coverage may be limited to a specific term. For people who prefer lifetime coverage, a stand-alone long-term care policy may be better.
A financial planner can help you learn more about long-term care insurance. Find a financial planner who's right for you.